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Determining a Succession Plan for Your Business – Before You Need It

You’ve devoted time and money and poured heart and soul into building a successful family business. But do you have a succession plan? If not, you should. Without a plan for transferring your business to the next generation, anything could happen.

Deciding on Your New Role

Start by deciding how much or how little you want to be involved in the business after the transfer is complete. Are you picturing a clean break? Or a period of shared responsibilities and gradual transfer? This is an important decision because it will likely influence other decisions, particularly financial ones.

Choosing a Successor

This can get tricky, especially if there are several family members who may have an interest in — or expectation of — taking over the business. If there’s one clear candidate, that makes it easier. But don’t just assume someone (e.g., your oldest son) is the right successor. Do what’s best for the business. The best choice may be a grandchild, a niece, or even a relative paired with a trusted employee.

Estate planning is an important sidebar to a family business succession plan. There may be children who have no interest in being involved in running the business and are happy to let their siblings take over. However, they probably expect equal treatment when it comes to inheritances. If this is a likely scenario, make sure everyone communicates as clearly as possible and develop a plan you think is fair.

Grooming a Successor

Spend time grooming your successor, even if it’s a son or daughter who knows the business. He or she should understand how every part of the business operates. Before your successor starts representing your business publicly, make sure he or she meets your business contacts (clients, vendors, financial partners, etc.).

Figuring Out the Money

You probably don’t want to give your business away, even to your own offspring. Figure out how much you’re going to need to finance your next venture (retirement, a new business, etc.), and come up with an arrangement that meets your needs.

Take charge of your financial future. Give us a call, today, to find out how we can assist you and your business.

Four Ways to Control Business Costs

account and financeIncreasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort, business costs are often very ripe for a quick trimming. Here are some possibilities.

Supplies and Other Purchases

Usually in any business, relatively few items represent a very large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by making sure you always bid out significant purchases or by more actively seeking less expensive alternatives.

For many companies, inventory carrying costs are a very significant expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and Other Services

The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage.

Look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you are not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash Management

To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts.

On the receiving side, deposit all receipts daily. And always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed Expenses

One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives.

To learn more ways to control your business costs give us a call today. Our trained staff of professionals are always available to answer any questions you may have.

The Rental Route

DentalBuy or lease? It’s a decision many small businesses face. Owning real estate certainly can have advantages, including the opportunity to build equity. But many small businesses in need of space choose the rental route instead.

Cash Flow Considerations

By leasing, a company can avoid taking on debt to acquire a property. Less debt on the balance sheet may allow the company to finance other things, such as receivables or inventory and equipment purchases. And the upfront cash commitment needed to enter a lease agreement may be much lower than the down payment required for a property purchase.

Shopping Tips

If your business is looking around for the right rental location, here are a few suggestions to keep in mind. Not all of these tips are appropriate for all businesses, but some may help you get a lead on a good spot — and a good deal.

  • Find an eager landlord. Rental spots that have been on the market for a while could have some negative features, but they may be worth a look. If you find a location that suits you, you might also find a landlord who is anxious to negotiate.
  • Think about the term. A long­term lease locks in your rental rate — and that can be an advantage if you expect the market to trend upward. But leasing for short periods is often less expensive than leasing for longer periods. If your business is in its formative years, significant changes may lie ahead, so a short-­term arrangement could be more practical, too. Adding an “option to renew” clause can help keep your costs down and your options open.
  • Divide and conquer. Could you make do with two smaller spaces instead of one large space? The more flexible you can be, the better your chances of finding a good deal.
  • Check rental comps. Commercial property markets can be very localized. Rents may vary considerably between one locality and another just a few miles away. Unless you’re limited to a specific location, compare rates in several areas.

Tax­-smart Ways To Take Cash Out of Your Corporation

bankruptcy (2)Owners of closely held C corporations are often interested in withdrawing profits from their companies in ways that minimize taxes. What are the options?

Pay Salary/Bonus.
If the owner is a company employee, taking more salary or a year­end bonus is an option, as long as the total amount of compensation the owner receives is reasonable. The company deducts the payments as a business expense; the owner is taxed on the money. The “cost” of this option depends on the corporation’s and the owner’s tax rates. Payroll taxes are an added expense.

Pay Family Members.
Reasonable amounts paid to an owner’s family members for services actually rendered to the company are deductible by the corporation and are taxable at the family members’ own tax rates. Often, these rates are much lower than theowner’s. Pay a Dividend. Dividends the company pays out will, in effect, be taxed twice — once at the corporate level (dividends are nondeductible) and once to the owner personally. No payroll taxes will be due. With the individual tax rate on qualifying dividends currently capped at 20% for taxpayers in the 39.6% regular bracket (and 15% for most other taxpayers), this option may have more appeal.

Utilize Fringe Benefits.
Certain fringe benefits are deductible by the corporation but not includible in the owner’s gross income. Examples include qualifying group life insurance, health care benefits, and disability insurance. (Most fringes must be provided on a nondiscriminatory basis to other company employees.) To the extent an owner is paying for these items individually, having the company pay for them increases the cash available to the owner.

Take a Loan.
If an owner borrows money from the corporation, the owner is not taxed on the loan amount. The loan must be a legitimate debt, with proper documentation and timely interest and principal payments.

Lease Assets to the Company.
An owner might consider leasing property to the corporation. The company deducts the lease payments; the owner includes the amounts received in income and deducts expenses associated with the rental activity.

Lock In Those Business Deductions

Itemized PersonalIf you run a small business, you already have a full plate. The last thing you need is for the IRS to question any of your business expense deductions. But it could happen. And that’s why having records that prove your expenses is so important. Even deductions for routine business expenses could be disallowed if you don’t have appropriate records.

What Records Are Required?

Except in a few instances, the tax law does not require any special kind of records. You’re free to have a recordkeeping system that is suited to your business, as long as it clearly shows your expenses. In addition to books that allow you to track and summarize your business transactions, you should keep supporting documents, such as:

  • Canceled checks
  • Cash register receipts
  • Credit card sales slips
  • Invoices
  • Account statements

The rules are stricter for travel, entertainment, and transportation expenses. You should retain hotel bills or other documentary evidence (e.g., receipts, canceled checks) for each lodging expense and for any other expense of $75 or more. In addition, you should maintain a diary, log, or account book with the information described below.

Travel. Your records should show the cost of each separate expense for travel, lodging, and meals. For each trip, record your destination, the dates you left and returned, and the number of days spent on business. Also record the business purpose for the expense or the business benefit you gained or expected to gain. Incidental expenses, such as taxi fares, may be totaled in reasonable categories.

Entertainment. Record the date the entertainment took place and the amount of each separate expense, along with the name and address or location of the place of entertainment. Note the business purpose for the expense or the business benefit you gained or expected to gain and the nature of any business discussion or activity that took place. Also list the identities and occupations of the individuals you were entertaining or other information that indicates their business relationship to you.

If the entertainment was directly before or after a business discussion, be sure to indicate the date, place, nature, and duration of the discussion and the individuals who took part in both the discussion and the entertainment activity. For a business meal, you must prove that either you or your employee was present.

Transportation. As with travel and entertainment, you should record the amount and date of each separate expense. Note your business destination and the business purpose for the expense. If you are deducting actual car expenses, you’ll need to record the cost of the car and the date you started using it for business (for depreciation purposes). If you drive the car for both business and personal purposes or claim the standard mileage rate, keep records of the mileage for each business use and the total miles driven during the year.

Don’t Mix Business and Personal Expenses
Things can get tangled if you intermingle business and personal expenses. You can avoid headaches by having a separate business bank account and credit card.

Taking Family Members on a Business Trip

119353386Anyone who spends a significant amount of time traveling for business purposes will tell you that living out of a suitcase is no fun. Despite routinely traveling to destinations many people only hope to visit, many business travelers dislike having to leave home on an extended business trip. Taking a spouse or the whole family along from time to time for a combined business trip/vacation can make the travel more enjoyable. Here are some tax rules to consider when family members accompany a business traveler.

Transportation and Lodging Costs

For a person making a bona fide business trip alone to a U.S. location, the round­trip transportation costs are fully deductible ­­ as long as the primary reason for the trip is business (as opposed to vacation/recreation). Lodging costs for the business portion of the trip are also fully deductible. When a spouse or other family member without a bona fide business purpose accompanies the business traveler, the amount deductible as a business expense is limited to the single rate cost of transportation and lodging.

Example: Ed has a four-­day trade show next month in Washington, D.C. and wants to bring along his wife and son to visit the nation’s capital. The discounted airfare for all three is $500; lodging is $500 for the four nights of the trade show. If Ed makes the trip alone, the cost of a single airline ticket will be $200 and lodging for a single occupant, $400. How much is Ed’s allowable business deduction for airfare and lodging for the family trip? $600 ­­ the single rate cost.

Note: If, instead of flying on their trip to Washington, D.C., Ed and his family drive an automobile on the most direct round­trip route, the expense will be fully deductible, since that will presumably be the single­rate transportation cost.

Primary Business Purpose

Although the tax laws contain no specific rule or definition of what constitutes a trip that is primarily for business purposes, the regulations and case law generally look to the relationship between the number of business-­versus­-personal days to make the determination. A day in which the traveler conducts bona fide business constitutes a workday, even if less than the entire day is devoted to business. Therefore, if a morning business engagement ends by noon, the traveler need not schedule afternoon business activities to preserve the day as business related.

A rule of thumb used by many business travelers is that the trip should have twice as many business­related days as vacation­related days to ensure its primary business nature. If, on a particular trip, the business purpose rule is not met, none of the round­trip transportation cost is deductible. However, for the business­related days of the trip, the single­rate lodging is deductible, as well as 50% of the business meals.

Example: If Ed and his family extended their trip by one day, Ed’s transportation and lodging deduction would not change. However, extending the trip by three days could jeopardize the primary business purpose of the trip, thus making Ed’s round­trip transportation costs nondeductible.

Before planning a business trip that includes vacation time or accompanying family members, carefully consider the tax ramifications. Call us if we may be of assistance.

Federal Tax Breaks Restored

bankruptcy (2)Individual and business taxpayers can benefit from a variety of federal tax breaks that were extended or made permanent by the Protecting America from Tax Hikes (PATH) Act and the Consolidated Appropriations Act, 2016. Here are selected highlights.

State and local sales tax deduction.
The law gives individuals who itemize their deductions the option of deducting state and local sales taxes instead of state and local income taxes. Taxpayers who elect to do so may deduct the actual amount of sales taxes paid during the year or a preset amount from an IRS table. This provision has been made permanent.

Nontaxable IRA transfers to charities.
Taxpayers age 701/2 or older who directly transfer up to $100,000 annually from their individual retirement accounts (IRAs) to qualifying charities can exclude these contributions from gross income. If all qualifications are met, these contributions will still count toward the taxpayer’s required minimum distribution for the year. This provision has been made permanent.

Increase in expensing limits.
The law permanently extends the increased Section 179 expensing limit, allowing eligible businesses to expense, rather than depreciate, up to $500,000 per year of the cost of equipment and other eligible property placed in service during the tax year. The election is subject to a dollar-for-­dollar phase out as the cost of expensing­eligible property rises from $2 million to $2.5 million. The IRS will adjust the 179 limits for inflation.

First­-year bonus depreciation.
Eligible businesses may claim bonus depreciation for qualifying property acquired and placed in service during 2015 through 2019. The available bonus depreciation percentage depends on the year the property is placed in service: 50% for 2015 through 2017, 40% for 2018, and 30% for 2019. For certain longer­lived and transportation property, these percentages apply one year later than indicated, and bonus depreciation will be available through 2020.

Increase in “luxury auto” limits.
The new law increases the dollar limits on depreciation deductions (and Section 179 expensing) by $8,000 for vehicles placed in service after 2015 and before 2018. The limits are increased by $6,400 for vehicles placed in service in 2018 and by $4,800 in 2019.

All About the Earned Income Tax Credit

Individuals who are working and who have low-to-moderate taxable income may qualify for this income tax credit.

When you think about ways to offset your income as you’re preparing for income tax time, do you primarily consider the deductions you can take? Things like home mortgage interest, charitable donations, and taxes you paid that can be claimed?

Allowable credits can also work in your favor. If you meet the Internal Revenue Service’s seven criteria, you may be eligible for the Earned Income Tax Credit (sometimes called Earned Income Credit, or EIC).

Note: As you read the rules that the IRS has established, keep in mind that, as with many of the agency’s regulations, there can be exceptions. We can help you determine whether you are a candidate for this credit.

If you can answer “Yes” to these seven questions, you may be able to fill in and file a Schedule EIC:

  1. Is your Adjusted Gross Income (AGI) less than the IRS’s limits? For 2015, this is:
     

    • 3+ qualifying children: $47,747 ($53,267 for married filing jointly)
    • 2 qualifying children: $44,454 ($49,974 for married filing jointly)
    • 1 qualifying child: $39,131 ($44,651 for married filing jointly)
    • No qualifying children: $14,820 ($20,330 for married filing jointly)

      If you qualify for the Earned Income Credit, you’ll need to complete a Schedule EIC, which can be filed with either the Form 1040 or 1040A.
       

  2. Do you have a valid Social Security number?

    If you are filing jointly, both you and your spouse are required to have valid Social Security numbers issued by the Social Security Administration (SSA) by the date your tax return is due (including extensions). Any qualifying child claimed must also have one.

  3. Is your status “married filing jointly” or “head of household”?

    Couples whose filing status is “married filing separately” cannot claim the EIC. An exception here: A couple is married, but one spouse did not reside in the home at any time during the second half of the year. The spouse who remained might qualify for the EIC if his or her filing status is “head of household.”

  4. Were you or your spouse a U.S. citizen or resident alien for the entire tax year?

    This is complicated. If one of you was a U.S. citizen or resident alien but the other was a nonresident alien for any part of the year, you may qualify for the EIC if your status is “married filing jointly.” If that’s the case, you will be taxed on your “…joint worldwide income.”

  5. Was your income earned only in the United States and/or a U.S. possession?

    If you earned income in a foreign country and you plan to exclude it from your gross income, you cannot claim the EIC. Filing a Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion) disqualifies you.

    2015 Form 1040, lines 66a and 66b (EIC information appears on lines 42a and 42b of the 2015 Form 1040A)
     

  6. Is your investment income $3,400 or less?

    Simple enough. For the Form 1040, this includes:

    • Interest and dividends,
    • Capital gain net income, and,
    • Royalties and rental income from personal property.
  7. Do you have earned income?

    This means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. But you may be in another situation that would make you eligible for the EIC. For example, nontaxable combat pay, ministers’ housing, and strike benefits provided by a union are considered earned income.

Only Part of the Equation

If you believe that you’re able to claim the Earned Income Credit, or if there are other tax-related topics that you don’t fully understand, we’ll be happy to look at your entire financial scenario. If you’ve filed an extension for 2015, we can work with you to make sure you’re taking all of the deductions and credits that you’ve earned.

As always, tax planning should be a year-round process. Let us know if we can help you start preparing now for next year’s filing.

Are You Applying Finance Charges? Should You Be?

Assessing finance charges is a complicated process. But if you have a lot of late payments coming in, you may want to consider it.

There are many reasons why your customers send in payments past their due dates. Maybe they missed or misplaced your invoice, or they’re disputing the charges. They might not be very conscientious about bill-paying. Or they simply don’t have the money.

Sometimes they contact you about their oversight, but more often, you just see the overdue days pile up in your reports.

You could use stronger language in your customer messages. Send statements. Make phone calls if the delinquency goes on too long. Or you could start assessing finance charges to invoices that go unpaid past the due date. QuickBooks provides tools to accommodate this, but you’ll want to make absolutely sure you’re using them correctly – or you’ll risk angering customers and creating problems with your accounts receivable.

Setting the Rules

Before you can start, you’ll need to tell QuickBooks how you’d like your finance charges to work. It’s at this stage that we recommend you let us work with you. There’s nothing overly difficult about understanding finance charges in theory: you apply a percentage of the dollar amount that’s overdue to come up with a new total balance. But setting up your QuickBooks file with the finance charge rules you want to incorporate may require some assistance. If it’s done incorrectly, you will hear from your customers.

Here’s how it works. Open the Edit menu and select Preferences, then Finance Charge | Company Preferences.

Figure 1: Before you can start adding finance charges to overdue invoices, you’ll need to establish your company preferences.

What Annual Interest Rate percentage do you want to tack onto late payments? This is an issue we can discuss with you. Too low, and it’s not worth your extra time and trouble. Too high, and your customers may stop patronizing your business. And do you want to set a Minimum Finance Charge? Will you allow a Grace Period? If so, how many days?

You’ll need to assign an account to the funds that come in from interest charges. This needs to be an income account. In our example, it’s Other Income.

The next decision, whether to Assess finance charges on overdue finance charges, needs consideration – and some research. This may not be an option depending on the lending laws in the jurisdiction where your business is located. So again, if you want to charge interest on unpaid and tardy finance charges themselves, let’s talk.

When do you want the finance charge “countdown” to begin? When QuickBooks identifies a transaction that has not been paid within the stated terms, do you want the added charge to be applied based on the due date or the invoice/billed date?

Note: If your business sends statements rather than invoices, leave the Mark finance charge invoices “To be printed” box at the bottom of this window unchecked.

Applying the Rules

QuickBooks does not automatically add finance charges to your customers’ invoices. You’ll need to administer these additions yourself, though QuickBooks will handle the actual calculations.

Open the Customers menu and select Assess Finance Charges to open this window:

Figure 2: You’ll determine who should have finance charge invoices created in the Assess Finance Charges window.

Make very sure that the Assessment Date is correct, as it has impact on QuickBooks’ calculations. Being even a day off makes a difference. Select the customers who should have finance charges applied by clicking next to their names in the Assess column. QuickBooks will display the Overdue Balance from the original invoice, as well as the Finance Charge it has calculated.

  • If you choose not to apply finances charges to a customer because he or she has provided a good reason for the late payment, be sure the box in the Assess column is unchecked.
  • If you want to change the finance charge due for a valid reason, you can type over the amount in the last column. This would be a rare occurrence and should be exercised only after consulting with us.

Important: If there is an asterisk next to a customer’s name, there are payments or credit memos that have not yet been applied to any invoice.

When everything is correct, click the Assess Charges button at the bottom. QuickBooks will create separate invoices for finance charges for each customer who owes them.

We can’t stress enough the importance of consulting with us before you start to work with finance charges enough. Keep your company file accurate and your customers happy by getting this complex accounting element right from the start.

Drug Testing for New Hires is Important for Your Company

employment (2)If you have been considering putting a drug testing program into place, you’re not alone. Up to 60% of new hires are now required to pass a drug test before beginning a new job. This isn’t surprising as drug use costs employers $81 billion dollars annually. Pre-employment drug testing can save your company money and keep your employees safe.

Studies show that 9% of part-time workers and 7% of full-time employees use illegal drugs. While you may think that drug users are unemployed layabouts, actually over 70% of those with substance abuse issues hold a job of some kind, and over half of adults working know of an employee that has come to work while under the influence of drugs or alcohol.

It has been found that by drug testing new hires, you can improve your employee morale as well as productivity. By having a drug free work environment, you will reduce downtime, theft, accidents, and absenteeism and therefore increasing your bottom line. In addition, drug testing for new hires can help protect your company from law suits filed by an employee that is injured on the job by a coworker that is abusing drugs.

The two most common types of drug screening are the 5-panel and the 10-panel. The five-panel tests for cocaine, amphetamines, opiates, phencyclidine, and marijuana. The 10-panel test will also detect more prescription medications as well as additional recreational drugs.

Keep in mind that as an employer, you are also legally allowed to randomly drug test on a regular schedule even after a new employee has been hired. You also have the right to request the drug test to be taken in a short time span. A variety of specimens can be used for all of these drug tests including urine, hair, nails, blood, and saliva.

While some may find drug testing for new hires intrusive, for an employer, it is all about protection and productivity. Drug testing before someone becomes an employee can save you costly issues down the road.