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Salvaging Millions

Tips in dealing with your banker

Learn from the tips in these continuing articles.

Tip No. 4 – Utilize note payable shareholder equity and taxes

For a small-business owner whose company needs capital, the common response is often to get a loan. However, for those who are in a position to do so, there are certain advantages to putting personal capital into the company in the form of a loan.

The capital can be loaned as a note payable to the shareholder. You already paid taxes on the money when you earned it and putting it into your company as capital would mean that it would be taxed a second time if you took the money out as a distribution. If you make the money available as a loan, it’s a good idea to charge interest, although the IRS does have strict guidelines on that. However, if you make it a loan, the bank may require you to subordinate it, which means you agree not to pay yourself back until you have paid the bank back or it gives you permission. This means your money wouldn’t be accessible if you needed it.

When the money is given as a loan, those dollars won’t be taxed when they’re repaid to you unless the IRS decides the payout is a dividend and not a loan payment. (This is where a good accountant can help you navigate through potential traps.)

Here’s an example of why this makes good business sense. Let’s say that you, the business person, have $100,000 in a personal savings account. Meanwhile, you own a company that owes the bank $100,000.

Rather than let the money earn marginal interest in the bank, a better use of that money would be to loan it to your company. Charge your company the same interest rate that the bank would charge, whether it’s 7, 9 or even 10 percent.

Suddenly, that money from your savings account is working harder for you. It’s making money, because you’re earning the interest that would have gone to the bank. Just by looking at the bottom line it’s obvious that this is a much better use of the money; invest it in your own company and make some money off of it!

Not everyone wants to do this. In some cases, individuals might want the liquidity of the $100,000 that they have in savings. And the banks will perceive the money as liquidity.

Most lenders will view shareholder debt as capital, if you aren’t paying yourself back. To make the optics of the balance sheet look better, show it under long-term liabilities as the last item or create a separate long-term liability section and put it last – just before the owner equity section. The lender or examiner may treat it as capital, which improves the fundamentals of your statement.

Tip No. 5 – Use cost allocation to your benefit on real estate construction and even real estate purchases

It’s important to understand how to use cost allocation on new construction or even on a current building being purchased, if possible. To do this effectively, you need to find an accounting firm or a specialist that can do it well.

When you construct a building, the IRS allows you, as the owner, to take depreciation on most of it for 30 years. Some of the other assets – such as the parking lot, the fences, and the like – can be depreciated for 10 years.

Deeper in the code, you’ll find the depreciation allowances on such things as site lighting (five years). Certain types of doors, walls and fixtures are listed as five-year or seven-year assets.

For a business owner, it’s extremely valuable to have an accountant who understands cost allocations and can help leverage them. This allows you to get more depreciation early, which means you reduce your reportable income without affecting your cash flow.

This is a non-cash expense, so it’s a very good way to save money by reducing your taxes in the early years. Another thing to consider is that real estate is unlike any other asset. Every other asset you need for your business is going to depreciate. And in most cases, such as computers and company cars, that depreciation is very real. Those assets are going to wear out and eventually they’ll need to be replaced.

Real estate is the one area where depreciation is less real, especially on newer property. Even though your building may depreciate, in most cases, inflation or the increased value of the property will offset the depreciation.

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Ron Sturgeon is past owner of AAA Small Car World. In 1999, he sold his six Texas locations, with 140 employees, to Greenleaf. In 2001, he founded North Texas Insurance Auction, which he sold to Copart in 2002. In 2002, his book “Salvaging Millions” was published to help small business owners achieve significant success, and was recently reprinted. In June 2003, he joined the new ownership and management team of GreenLeaf. He also manages his real estate holdings and investments. You can learn more about him at He can be reached at 5940 Eden, Haltom City, TX 76117, or 817-834-3625 ext 6#.