Smart Tax Strategy: Building Value, Not Just Avoiding Taxes
I strongly support using proper tax structures and incentives – it’s part of our business! Smart business decisions matter. But here’s the key: base your financial and capital allocation decisions on returns generated (including taxes), not just tax avoidance.
The Construction Industry Tax Challenge
I spend significant time talking with construction industry clients and prospects throughout Ohio. I enjoy these conversations, whether we discuss the industry broadly or their specific businesses.
This time of year, taxes dominate our discussions – federal, state, and local. I continue meeting owners whose primary goal seems simple: pay as little tax as possible.
I understand this mindset. However, while spending money simply to avoid taxes can be inefficient, there’s a bigger problem: this approach significantly reduces your business value.
How Tax-Only Thinking Hurts Your Business
1. Limited Access to Capital
Most financing providers prioritize cash flow above all else. When you artificially reduce financial statement earnings or create significant book/tax differences, you limit your access to capital. This affects:
- Lines of credit
- Equipment and real estate debt
- Term debt based on enterprise value
- Expansion financing
- Owner liquidity events (ESOPs, management buyouts)
2. Lower Business Valuations
Many transactions require independent third-party valuations or Quality of Earnings reports. “Managed” or reduced earnings will negatively impact these findings in material ways.
Third-party evaluators see the numbers you show them. They rarely give full credit to “add-backs” for discretionary items, even when those adjustments would accurately reflect your business’s true performance.
3. Reduced Bonding Capacity
Surety capacity often depends on working capital and net worth. When you invest in excess equipment or artificially reduce earnings to cut tax liability, both balance sheet measures suffer.
Most bonding agents and underwriters I know struggle to advocate for contractors who show artificially modest financial statement earnings, even when they know the business performs well.
The Real Cost of Over-Managing Earnings
“Managed” financial statement earnings or overly aggressive tax deductions create significant book/tax differences. These strategies often cause more harm than good.
Yes, you reduce your tax liability. But you also devalue your business. I’ve seen this backfire when construction contractors need capital access or plan ownership transfers.
Best Practice: Think Holistically
If you’ve read my work before, this advice will sound familiar: schedule a joint discussion with your CPA, finance provider, and surety company.
Together, outline your goals. Discuss the best path for creating long-term business value.
Your providers should think holistically on your behalf. If they don’t, let’s talk.
If your providers aren’t thinking holistically like this on your behalf, give me a call at 614.314.5937 to discuss.
