Unreported Cash

Some people do work for cash, cash that never shows up on their tax return. This may seem like a good thing since you don’t have a big tax hit on this money. For a sole proprietor, that can mean a tax savings of 35% or more, but I do not recommend this. Forgetting the fact that it is illegal, wrong and dishonest, there are three other reasons that I discourage unreported cash.

The first reason is the bank and your attempt to borrow money from the bank. They look at your tax return, and financial statements, to determine your potential. If you are not showing all your income, you don’t look as good.

The second reason is similar to the first. If you ever want to sell your business, the value will be based in part on the old financial statements. It is hard for me to go to the banker, or potential buyer, and say that “We have a whole bunch of other income. It just doesn’t show up here.” If it is my client doing the buying, I don’t put much stock in statements like that. There is no way to know if they are true.

The third reason I dislike unreported cash is the negative appearance it gives to the outside world. It tells everyone who knows about it that I cheat. I do things that are wrong. If you are working with someone who does this, doesn’t it make you stop and wonder what else they do wrong? Do they cut corners on materials in a construction job? Do they charge you for hours that they never worked? Do they lie when you discuss problems?

I do not want any of these negatives associated with me or my business. I pay more tax, but I don’t have to worry about getting caught or about having a negative image. It is just not worth it.