Listening to a financial radio station today I heard something that caused me to say…”what?” Here’s the outline:
First the Cash Source:
China has gobs of U.S. dollars that they get from selling us incredible amounts of stuff.
China is catching heat for owning so much U.S. Treasury debt, so they want to use the US Dollars for something other than lending it back to the US Treasury. So why not loan it to U.S. companies?
The Use of Cash:
A big U.S. company, that will remain nameless, pays 1.8% dividend on it’s stock. Note, this is important …Dividends for biz are not tax deductible, meaning companies pay dividends after they pay their tax obligations.
So what to do?
This company borrows US Dollars at 1.7% interest from China. The 1.7% interest is tax deductible which means the effective cost of the interest is about 1.2%…and remember the effective cost of dividends is 1.8% because dividends are not tax deductible. So the cost to the company for borrowing from China is 33% cheaper than the dividend cost.
The solution, borrow US Dollars from China, deduct the interest from taxes and use the cash to buy back the stock which eliminates the 1.8% cash dividend cost and replaces if with an effective $1.2% cash cost.
Incredible but true, another case of the perverted U.S. tax code. Borrowing is more tax effective than returning cash to shareholders as dividends.
Why do so many small business owners say “I can’t get good employees?”
The business owner’s assumption seems to start from the premise that good employees are either no where to be found or will only work for big companies. In my experience I find both of these assumptions to be incorrect.
There are many small businesses with good employees and I believe there are many people working in large companies who would rather be working in small companies…if….they could find the circumstances that permit it. What’s the problem? There are too many small business owners who have poor to terrible management and leadership skills. I meet with hundreds of business owners a year, I know small business owners.
If you want your small business to attract high quality employees here are the things I would focus on:
Your integrity – Say what you’ll do, then do what you say.
Always be respectful to employees and customers, even when you’re angry. Whatever anyone hears you say is what they assume you’ll say when they aren’t near.
Even if you know the answer, help the employee figure it out.
Let your employees make little mistakes and then show the leadership compassion when you unscramble the problem.
Focus local for employees, a short commute is high value these days.
Don’t be afraid to hire people smarter than you…and…when you do hire someone smarter than you let them help you.
Focus on total compensation not just the salary. Put in place bonus plans so that when the business does well, everyone does well.
Hire slow, fire fast.
That’s a start. Get focused on getting better people and you will have the opportunities. Now the real question is, how do you become a business owner who deserves better people?
In the real world of business management ownership you can only create income in 2 basic ways. These two income methods are taxed differently by good ‘ol Uncle Sam.
The first method income is “earned” income. Let’s say I’m a graphic artist and you hire me to create a logo. I design the logo and you pay me $250. That is earned income to me (assuming it goes to me and not into a corporation). The $250 goes into my gross income and I pay tax on it as high as 35% federal and depending on what state you live in, it could be over 45%. So your $250 of earned income (assumes no state tax) is worth only $162.50 in your pocket.
The second method is capital gains income. Capital Gains can be generated in many ways. Let’s look at a simple example. You get on Ebay and find a great bike for $100, you buy it. Then a year later you’re riding around the block on your $100 bike and a guy stops you and offers you $350 on the spot. You take it and walk home! You made $250 (same as if you designed a logo above) but this is capital gains and your tax on that is only 15% of your gain ($350 rec’d – $100 paid = $250 gain). Your tax for this is $37.50 and your net in pocket is $212.50.
You get to keep $50 more if you earned your money through capital gains income. This is just another reason why accumulating capital is important to long term wealth…if you have capital you can manage your taxes a lot better than if you only have earned income.
When running your business think of all the ways to build value that is taxed at 15% instead of 35%…over time it could be a lot more money in your pocket. Talk to your CPA to see if you have opportunities to maximize the availability of the capital gains tax rates.