How do companies like Microsoft, Google & Apple hoard cash?
I hear from a lot of small businesses that if they don't get rid of there cash by the end of the year then they get taxed. Also if they bank that money they still get taxed again every year, possibly 40% to 50%.
How is it the big companies can hoard cash? Are they getting taxed on it the same way?
I'm a total noob at this so any info would be helpful.
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Define "hoarding" please – Henry The Hengineer 13 years ago
3 Answers
I hear from a lot of small businessesSmall business often are run by people that are pretty stupid in tax things.
that if they don't get rid of there
cash by the end of the year then they
get taxed.
Businesses (big and small) pay tax on PROFIT - whether they still have the cash or not is their problem. Getting rid of the cash only lowers tax if there is an associated tax deductible expense associated - so burning it on purpose does not count. Taking the money out as profit also does not reduce the tax burden.
With statements like the one you quote I do not wonder so many small businesses go bankrupt. Tax fundamentals are business 101 - similar to accounting.
I'm a total noob at this so any infoGet a beginner book on accounting. Really.
would be helpful.
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Yup. In fact, one factor in after-Christmas sales is that many American states and local taxing districts levy property tax on end-of-year inventory. If your local property tax rate is 1.25%, and you can unload $100,000 of your store's inventory at cost before New Year's, it will save you $1250 because you don't pay tax on the cash. Then you can turn around and re-stock your store in January. – Bob Murphy 13 years ago
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it's a Q&A site; OP asked a question so answer it. No need to be condescending. – Clint 13 years ago
In most countries, you are only taxed on profits.
Year one, profit 200,000. Tax 20% - pay 40,000 to Govt, keep 160,000
Year two, profit 350,000. Tax 20% - pay 70,000 to govt, keep 280,000 and all 160,000 from previous year.
Some countries also have a wealth tax for individuals. e.g. 2% over 500,000 that does tax savings rather than new income. I am not aware of any country that applies this to companies.
The word choice in the question and description lends to a bit of confusion. Not "getting rid of cash" in itself doesn't engender a higher corporate income tax (likewise, getting rid of cash doesn't lower tax liability). On the contrary, dispensing corporate income as salary and dividends effectively results in other taxes (FICA, capital gains) further down the stream. Perhaps you meant a higher tax impact if employees bank that money? Startups actually benefit significantly from reinvestment of earnings as opposed to its dispensation as salary or dividends.
As an aside, these companies aren't hoarding cash for the long term, they're reinvesting. Any type of hoarding is an opportunity cost for the company and its investors unless there are plans for a large M&A down the road or there's little justifiable confidence in the market.
http://voices.washingtonpost.com/ezra-klein/2010/07/corporations_not_hoarding_cash.html
