Karl – the cost of mixing business and pleasure

Karl was another contractor who also had about 20 employees, but ran his company as a sole proprietorship.  He had a large cash balance in his company account, but he carried a lot of high interest loans for trucks and trailers, and also for personal items such as his RV, boat, another trailer, credit cards, and the family vehicles.  The interest on his business items was deductible, but he was still paying high interest rates on that debt and the interest on the personal items was at the same or higher interest rate, but not deductible.

I asked Karl why he didn’t take some of the money in his company account to pay off his debt, and he responded that if he touched that money, he’d have to pay income tax on it.  Really?  He’d been working with the same CPA for years, and apparently the CPA did the personal and company tax returns looking in hindsight and never discussing how Karl could make improvements to his financial situation.  They had never discussed debt management or planning.

I explained to Karl that, as a sole proprietor, he had already paid all of the taxes on the money that was being held in his company accounts, and he could take some out to reduce his debt payments and save on interest.  He laughed at me and told me that he had a super-sharp CPA, and I just didn’t know taxes, so I encouraged him to not take my word on it, but simply call his “super-smart CPA” and have his CPA explain the tax situation to him.

The CPA told Karl that I was right, and Karl admitted that he was completely embarrassed by his lack of knowledge on taxes and for having done things the wrong way for nearly 20 years.  —  Yes, twenty years!  And the CPA had never taken the time to do advance planning with Karl to reduce his interest payments and save him a considerable amount of money.  The CPA just kept preparing the tax returns year after year.

Karl ran a successful construction company, but he lacked the basic tax knowledge about how things affected him financially.

Although none of the above cases are testimonials or endorsements, they are true cases, and we give full disclosure here by stating here that any reference to the result of any past case does not constitute a guarantee, warranty, or prediction regarding the outcome of your own case.  Every matter is different.

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