Why Banks base loan amounts on Tax Returns instead of P&L Statements
Quite often this time of year clients are referred to us that show great growth and profits for the prior Calendar year (2019)- when compared to their 2018 year-end. Invariably they need capital to refinance short term debt, want working capital or lines of credit to address the cash need their growth has caused, and/or need funds for inventory/machinery and equipment or sales/advertising.
Given the surge in sales and profits on their Profit and Loss Statement (and bank statements), clients want to know why Banks need them to file their 2019 Tax return before lending them the Capital they need. Here is why:
Profit and Loss Statements are not something the IRS audits
Because of this, many of the Profit & Loss and Balance Sheets we receive from clients read like Science Fiction novels. The Balance Sheets often don’t balance, the P&L is frequently bereft of many expenses and often shows outlandishly large profits. Given that the Profits will trickle down to the shareholders K-1’s when they file their personal tax returns, Corporate Tax returns often show MUCH less profit- to mitigate the personal tax liability of the Principal(s).
Striking the balance between disclosing gains for borrowing purposes and diminishing them for tax purposes is an important part of the process and something that requires planning on your part.
We at BCCUSA encourage you to consult with us and your CPA for the best possible results.
KNOW BEFORE YOU BORROW