

The Day Series: The Day I let my first employee go - angilly
http://thedayseries.com/post/592577257/the-day-i-let-my-first-employee-go

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frederickcook
Is there a case where it does makes sense to put write off salary as loans to
the founders? As the OP indicated, any sophisticated investor would insist all
the money goes "forward." But even if the company bootstrapped it to
profitability, there would be no difference in tax due using this accounting
practice, is there?

Is there any advantage at all to doing it this way?

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notauser
I think you have it the wrong way around.

Their salary was $100k, of which (say) $80k was returned as a loan from the
founder to the company.

This lets the company book $100k of costs on a net cash outflow of $20k. Costs
are applied before calculating profit and therefore before calculating
taxation due. At a corporate tax rate of 20% that would be worth $16k more
than the tax deduction due from paying salaries of $20k.

Tax losses can be deferred until you make a profit in most tax regimes so that
$16k will be held over until you need it to avoid paying taxes on the first
$80k of corporate profits no matter when they happen.

It may also be possible to essentially sell tax savings to other companies
under some circumstances (usually when winding up a company).

Overall this scheme would probably cost money as employment taxes would be
due. But that can vary depending on other tax breaks, especially in
progressive taxation systems. You may also be able to do something interesting
with loan interest repayments which are often subject to tax breaks. Tax codes
for Western countries are huge and full of interesting possibilities!

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alexsolo
It's good for the company, that makes sense.

What I don't get is, if you pay yourself $100K, aren't you personally taxed on
your 100K income?

Or, will you claim you only had a 100K - 80K = 20K income on your personal
taxes? I would think the government would try to match up the $100K company
expense with a $100K personal income (and if they don't match, audit you).

I'm actually really curious if you can pull this kind of thing off.

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angilly
My position is that the salaries were really just our egos. We didn't have the
money to pay ourselves over $100k. The $20k "example" is actually pretty
close.

Ideally, take what you can to pay your mortgage. Put that on the books. Spend
time getting profitable instead of balancing the books. If you become
profitable, or get a nice round, it'll all work out :)

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goatforce5
_He was even nice enough to proofread this post for me. This was a startup. CJ
new that._

Heh.

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angilly
sweet, sweet revenge... :)

been fixed. thanks.

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binarymax
Great post that brought back some memories. In 2001 I was hired by a startup
that was in a very similar situation. When they ran out of cash 5 months later
I could tell it was much harder on the founder than it was on me, since not
only did he need to let me go but his startup dream was ending. He let me
continue to use the machines until the doors finally closed, and I ended up
landing a good contract position all negotiated from that very equipment.

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tibbon
Has CJ found a new gig yet, or is he in need? I know there's a handful of
companies out there that need bright engineers for their startup.

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angilly
Well this was two years ago, so by now he's doing well. Feel free to get at
him @waltz though, I'll update the post. Thanks!

