Pay higher taxes to get access to financing?

Question

Does anyone intentionally report higher taxable income (and obviously pay higher taxes) so they can qualify for financing, such as heloc or business line of credit?

I understand there are alternative methods such as hard money, private money, and seller financing, and I do use private money and hard money as well.  I sold my small business and my wife quit her corporate job several years ago and we are now rehabbing full time in Orange County.  We've been deducting everything last few years and paying lower taxes.

We have ton of equity in our primary house but I'm concerned we're not proving enough income.  Also, our local business bank have a line of credit product for rehabbers but we're been rejected for same reasoning of not enough income in our tax returns.

These other options will be great alternatives.  Should we just bite the bullet and pay hefty taxes to get access to these options?

Thanks in advance,

Jimmy Hong

www.blueapexinvestments.com

Brandon Hall · Answer

@Jimmy Hong

What you are describing is called Bank and Tax fraud. Businesses that hold themselves to a high integrity standard tend to succeed over the long run vs. those who don't. Where do your business practices stand on the ethical scale?

https://www.irs.gov/uac/Examples-of-Financial-Institution-Fraud-Investigations-Fiscal-Year-2013

Edit: You should be able to explain things like Section 179 expenses and depreciation/amortization. Those should come out of the NOI, at least a competent banker will understand to pull them out. Hope this helps.

Matthew Kreitzer · Answer

Are you:

A) Reporting more income than you are earning?

or

B) Failing to claim certain deductions for the income?

If former, IRS agents are on their way. If latter, you may have a duty to disclose such to the loan processors. Loan fraud is a thing. Consult local attorney.

Linda Weygant · Answer

@Matthew Kreitzer and @Brandon Hall have hit the nail on the head.  What you are proposing is fraud.

Jimmy Hong · Answer

Thanks @C Meddy.

Hi @Bryan Hancock, that makes a lot of sense.  I've been communicating with my accountant on my goals and he seems to understand.  I'll report back with updates.  Thanks for your input.

Bryan Hancock · Answer

It probably depends on what is best for your overall business.  Paying less in taxes will DEFINITELY get you more dough now.  Paying more in taxes MAY reduce your financing costs.  My bias would be toward minimizing taxes while maximizing after-tax income.  The former activity may not be optimal overall.

Necessity is the mother of all invention.  Learn the securities laws and build a track record.  With these tools in your chest you can minimize your taxes and raise money on your own such that what the banks think is less of a concern.  We do both and we still end up doing strange things on our balance sheet we normally wouldn't do if it wasn't necessary to satisfy the banks.  What you need to work on is what is best overall for both your access to low-cost funds and minimizing your taxes.  Most CPAs only understand the tax minimization part and don't do a whole lot of work with helping clients with other needs related to financing, capital budgeting, etc.  So I'd take anything they say with a grain of salt.

Your access to capital to finance your business should not be held hostage by the banks, but if lowering your cost of capital delivers more value for you than saving on the taxes you may consider paying more.  Just keep in mind that the lower cost of capital is hoped-for and not a lock.  The banks are notorious for asking for things and then not delivering on financing.

C Meddy · Answer

I understood what you were asking Jimmy and it was a good question. I also agree with what Colleen F says.

Jimmy Hong · Answer

@Colleen F., yes that's exactly what I mean.  Thanks for advice and sorry I was not very clear on my question.

Colleen F. · Answer

I think what you mean is  do you skip things like a home office deduction because even though you use it for business it is part of the house anyway. or some other business expenses that are part of your life anyway.   At this point you seem to be saying you are meticulous about accounting for deductible expenses and it is potentially costing you better financing rates?

I haven't done this but I am sure the tradeoff isn't going to put you where you want to be.  The money will go to taxes instead and you will still pay these expenses. The only option really is to increase your profit.  Lower real expenses or increase income.  Banks like W-2 income the best so you may be feeling this.

Jimmy Hong · Answer

@Matthew Kreitzer @Brandon Hall

I haven't done anything yet.  My long time cpa, whom I trust, have been filing our tax returns.  Just to be clear, my question isn't about breaking any laws.  But as previous business owner, I know filing for taxes can be flexible to a certain limit, such as meals, cell phones, car payments under business or personal, etc.  I dunno, am I way off base here?  Guess that's why I'm asking...

Thanks for advice @Victor Argueta

Victor Argueta · Answer

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Pay higher taxes to get access to financing?

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