Author Topic: Where to put business cash reserves  (Read 1056 times)

theoverlook

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Where to put business cash reserves
« on: November 05, 2020, 07:35:11 AM »
We have significant cash reserves in our business (C Corporation, commercial real estate) because from time to time we need to spend a few hundred thousand dollars renovating or upgrading spaces for tenants or mechanical systems. Rather than using a line of credit we let unused profits build up as cash and hold onto them. For years we've just left it in a business savings account but obviously that's yielding nothing at this point. I'd like to see a few percent yield to stay ahead of inflation but am not keen on putting it right into the stock market. What suggestions do you folks have for a principal preservation strategy that can yield something? Ideally I was thinking 3-4%.

cool7hand

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Re: Where to put business cash reserves
« Reply #1 on: November 05, 2020, 03:03:06 PM »
I think we need to know a little more to help. The decisionmakers owe a duty of care and a duty of loyalty to the entity/shareholders to act as a reasonably prudent business person in the decision on where to put the money. If you are the sole shareholder, that means you can do whatever you want. If you are not a shareholder or sole shareholder, you should consider getting professional advice because of the risk of liability.

bacchi

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Re: Where to put business cash reserves
« Reply #2 on: November 05, 2020, 04:35:09 PM »
Let it ride on Tesla!

Proud Foot

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Re: Where to put business cash reserves
« Reply #3 on: November 06, 2020, 10:29:05 AM »
The biggest thing would be to know what your ownership structure is like as cool7hand stated.

Otherwise I think 3-4% may be a little hard to do without much risk. You may look into CD's or a blend of investment grade bond funds.

MustacheAndaHalf

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Re: Where to put business cash reserves
« Reply #4 on: November 06, 2020, 11:29:40 AM »
It sounds like you have more money in your business savings account than you spend in a year.  You might keep some of it in cash anyways - perhaps what you expect to spend in 2021.

One approach to investing establishes buckets of different risk levels.  So for next year's expenses, that might be 100% cash - the savings account.

For expenses you don't normally have, but might encounter 1 in 3 years (or over the next 2-3 years), maybe you could invest 25% stocks and 75% bonds.  Very conservative, but enough to beat inflation.

And finally for long-term money you expect to very rarely need, you can push for a higher stock allocation.

TomTX

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Re: Where to put business cash reserves
« Reply #5 on: November 06, 2020, 04:11:06 PM »
BoA offers some nice perks if you keep larger amounts of cash (or securities via Merrill Edge) with them. Both business and personal.

You do have to sign up for the perks when you are eligible for the first tier (based on a trailing-3-month average, calculated a couple of weeks into the next month.) After that, improving perks is automatic.

ChpBstrd

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Re: Where to put business cash reserves
« Reply #6 on: November 06, 2020, 08:03:16 PM »
Are you avoiding paying it out to the owners to defer taxes? If so, consider that the taxes will have to be paid some day anyway, and by keeping it in the company the owners are earning nada on the cash instead of whatever they could do privately. This is kind of like leaving your money in a 401k that only offers a cash option, rather than paying taxes now so you can invest the remainder for decades. Also, while they are business assets the funds may be at risk from business liability.

If the funds are being held so that a large unexpected expense or period of vacancy can be handled, you don't really have any good choices to earn yield while the funds are available for withdraw at will and also have minimal risk.

If you are the only owner, you could withdraw the funds from the company and then just plan to pay in additional capital if the business needed it. However this might be a good way to get double-taxed. See your tax accountant.

theoverlook

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Re: Where to put business cash reserves
« Reply #7 on: November 09, 2020, 08:17:02 AM »
Thanks for the input guys! It's a C-corporation with three owners, active in the business, and of course the decision for how to invest it would depend on the approval of all of us.

We're avoiding paying it out just to keep it in the corporate structure for future expenses. It's definite more than we would usually spend in a year but it's possible most of it would be spent if we needed to do a lot of tenant improvements and also had maintenance costs. Everything in commercial real estate is expensive so even a large savings can be spent pretty quickly when the occasion comes up.

gimmi80

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Re: Where to put business cash reserves
« Reply #8 on: November 09, 2020, 06:55:20 PM »
Thanks for the input guys! It's a C-corporation with three owners, active in the business, and of course the decision for how to invest it would depend on the approval of all of us.

We're avoiding paying it out just to keep it in the corporate structure for future expenses. It's definite more than we would usually spend in a year but it's possible most of it would be spent if we needed to do a lot of tenant improvements and also had maintenance costs. Everything in commercial real estate is expensive so even a large savings can be spent pretty quickly when the occasion comes up.


I'm in a similar situation and I'm trying to decide how to proceed...
Consider that:
- Biden wants to increase tax rate on dividend to 40% (up from the current 0-15-20%)
- There is an Accumulated Earning Tax that the IRS can impose on accumulated earnings in c-corp, that match the current tax rate (more likely to happen once the tax rate goes up to 40%)
- All the spending programs need funding (a lot of funding), Green New Deal alone is in the Trillions of dollars.
- Money printing it is likely to continue.
- Interest rate are staying a 0% for at least another 2-3 years, according to Gerome.

It would not be unreasonable to: distribute some dividends taking advantage of the favorable tax rate, and/or buy/build more properties in opportunity zone areas, and/or buy a competing business, buy a McDonald.

MustacheAndaHalf

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Re: Where to put business cash reserves
« Reply #9 on: November 10, 2020, 12:46:15 AM »
You might ask about this in the "Taxes" area - there's some very tax savvy posters there.

Consider that:
- Biden wants to increase tax rate on dividend to 40% (up from the current 0-15-20%)
"Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation."
https://taxfoundation.org/joe-biden-tax-plan-2020/

People with under $1 million in annual income and capital gains wouldn't be impacted.  It's also very unlikely to pass in it's current form.

TomTX

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Re: Where to put business cash reserves
« Reply #10 on: November 19, 2020, 07:03:48 PM »
It would not be unreasonable to: distribute some dividends taking advantage of the favorable tax rate, and/or buy/build more properties in opportunity zone areas, and/or buy a competing business, buy a McDonald.

If the company needs cash later, it can be loaned back to the company at going rates.