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I hear from a lot of small businesses that if they don't get rid of there cash by the end of the year then they get taxed. Also if they bank that money they still get taxed again every year, possibly 40% to 50%. How is it the big companies can hoard cash? Are they getting taxed on it the same way? I'm a total noob at this so any info would be helpful. |
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Here's how Google "hoards" 1 billion per year using a complicated offshore policy |
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Small business often are run by people that are pretty stupid in tax things. Businesses (big and small) pay tax on PROFIT - whether they still have the cash or not is their problem. Getting rid of the cash only lowers tax if there is an associated tax deductible expense associated - so burning it on purpose does not count. Taking the money out as profit also does not reduce the tax burden. With statements like the one you quote I do not wonder so many small businesses go bankrupt. Tax fundamentals are business 101 - similar to accounting.
Get a beginner book on accounting. Really. |
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In most countries, you are only taxed on profits. Year one, profit 200,000. Tax 20% - pay 40,000 to Govt, keep 160,000 Year two, profit 350,000. Tax 20% - pay 70,000 to govt, keep 280,000 and all 160,000 from previous year. Some countries also have a wealth tax for individuals. e.g. 2% over 500,000 that does tax savings rather than new income. I am not aware of any country that applies this to companies. |
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Large companies hoard cash in the sense that they generate so much cash flow that they keep it to reinvest and buy companies. Additionally the money they have accrues interest as well. Usually high growth companies will "hoard" cash for strategic investments, other well established companies will return it back to the investors as dividends. Small companies who are usually owner run will operate as a sole proprietor so when they file their tax return the income they get from their company is counted as direct income to them. So to offset all this income which they need to pay tax on they will show expenses and try to bring their net income down to zero. Large public companies try to bring their income down as well but can only bring it down to an extent and will eventually have to pay tax on how much they make. |
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The word choice in the question and description lends to a bit of confusion. Not "getting rid of cash" in itself doesn't engender a higher corporate income tax (likewise, getting rid of cash doesn't lower tax liability). On the contrary, dispensing corporate income as salary and dividends effectively results in other taxes (FICA, capital gains) further down the stream. Perhaps you meant a higher tax impact if employees bank that money? Startups actually benefit significantly from reinvestment of earnings as opposed to its dispensation as salary or dividends. As an aside, these companies aren't hoarding cash for the long term, they're reinvesting. Any type of hoarding is an opportunity cost for the company and its investors unless there are plans for a large M&A down the road or there's little justifiable confidence in the market. http://voices.washingtonpost.com/ezra-klein/2010/07/corporations_not_hoarding_cash.html |
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