Understatement of Net Income and What That Means for Small and Medium-Sized Businesses

Let’s talk about the subject many small and medium-sized business owners have to think about from time to time and that is the matter of minimization of taxable / reportable business income, or simply understatement of net income.

My name is Alexander Larson. I am a certified public accountant with an accounting firm called Glasgow Knight Financial. I have over 20 years of accounting and tax preparation experience helping business owners organize their finances, automate their accounting and tax compliance and help them run efficient, well-informed businesses.

Let’s begin by saying that there are plenty of resources out there on the legal aspects of understatement of net income and the distinction between tax avoidance and tax evasion. We are not attorneys, we are not rendering legal advice, and, frankly, that is not the point of today’s discussion.

As a financial professional I often receive questions from business owners asking me how much taxable income is “enough” for me to report. That is a loaded question. Tax optimization (or tax avoidance) taken to an extreme may cause some serious non-tax consequences that I want to talk about today.

The most obvious one is access (or shall we say, lack of access) to capital. Business tax returns and business financial statements are almost always used by banks, governments, private money lenders, and investors when it comes to matters of financing of and investing in businesses. Low net income or taxable income numbers are the main reason why many businesses are denied access to capital.

Another non-tax consequence is the lack of accurate financial statements that could be used to run an efficient, well-informed enterprise. Many businesses with distorted revenues, inaccurate inventory, overstated expenses, or even personal expenses charged to their business, deny themselves the use of a powerful business management tool – and that is the use of comparable financial statements and financial statement ratios that could help them make well-informed business decisions.

Finally, it’s the question of management’s integrity and trust. Earnings management that concerns itself with best accounting presentation rather than the best presentation of economic reality of the business backfires by killing off trust in management’s integrity or its ability to run an honest business. Lack of trust is cited as a #1 reason why joint ventures, partnerships, or business alliances fall apart.

So, where does Glasgow Knight come in?

Glasgow Knight Financial exists to bring order to people’s financial lives, cause them to understand their finances (educate them about their finances), automate their accounting and tax compliance, savings and investments, help them generate ever-growing passive income, and transfer significant financial risks to the best insurers in the world.  

You can reach Glasgow Knight Financial for any of these needs by going to our website at www.glasgowknight.com.

Who we are in the world is solution-driven, trusted financial, accounting, tax and insurance advisors reimagining people’s financial well-being.