Reducing taxes can be more profitable than cutting costs

In today's economy, we're all looking for ways to maintain our business profits.  Ideas for increasing sales and cutting costs abound.  You've probably tried most of them.  But there's one source of cost savings that is often overlooked, and it can be surprisingly effective.

Most business people don't think of taxes as a profit source, but saving a dollar of taxes can be even better for your financial health than cutting a dollar of costs.  Why?  When you reduce your taxes, you get to keep 100% of the savings.  On the other hand, when you increase profits by increasing sales or cutting costs, you must share a portion of your additional profit with the IRS.

Consider this example.  Say you do an exhaustive study of your operations and figure out a way to cut $10,000 of costs.  If sales are unchanged, you'll boost your pretax income by $10,000.  Assuming a 39% corporate income tax bracket, you'll pay $3,900 in taxes on the $10,000 income, leaving $6,100 of after-tax profits.

Now let's look at an alternative scenario.  Assume you do some serious tax planning and identify $10,000 of tax savings.  That's $10,000 less that you'll pay to the IRS and $10,000 more cash in your bank account.  Conclusion: A dollar of tax savings has more financial impact than a dollar of cost reductions.

Depending on how efficient your business is, you should be on the lookout for ways to cut costs.  But don't give up when you've run out of cost-cutting ideas.  It's highly unlikely that your business is taking advantage of every tax-saving opportunity available.  As this example shows, effective tax planning could be the most direct way to end up with more money.

If you own a business, a thorough business and tax review may reveal tax-cutting opportunities.