Archive for the ‘Business’ Category

Clients, Friends and Fans,
Sunday night Don and Paul were guests on the radio show “It’s your money not theirs” hosted by our good friend and former partner, Richard Muscio.  The show airs every Sunday at 7 p.m. on 760 KFMB.

We talked about entity selection and borrowing from traditional lenders like banks.

We have added some of the material to our website under articles of interest you can download the pdf here “Choice of Entity”

Enjoy!

In some instances bad debts may be written off.  Here we’ll look at what factors must be present in order to take a deduction.

For Accrual Method Taxpayers:

When using the accrual accounting method, management estimates an allowance for bad debts based on several factors such as prior experience, industry comparisons, the debtor’s ability to pay and/or appraisals of current economic conditions.  This is known as the allowance method.  Keep in mind; this is an estimate of an event that has not yet occurred.  When it comes to tax, the IRS does not allow you to make this estimate.  As you can imagine, it would be abused as a “tax planning” strategy.  Therefore, for tax purposes, we can only deduct actual bad debts.  The following factors must exist in order to deduct a bad debt:

1. It must be a creditor-debtor relationship
2. There must be a legal obligation to pay a fixed sum of money
3. There must be an actual loss of money (loss of time spent rendering services is not a loss of money unless the uncollected fee has already been included in taxable revenues on the accrual method)
4. Proof that the debt is and will remain uncollectible
5. A business purpose for the debt

When using the specific charge-off method to deduct bad debt (unlike the allowance method previously discussed), management has to prove that the debt is uncollectible to expense it.

Recovery of previously written off bad debts in subsequent years is recognized as other income in the year received.  As always, see your tax preparer when determining what your business can deduct for bad debt expense.

For Cash Method Taxpayers:

Cash basis businesses cannot deduct bad debt since the related revenue was never recognized.  There would only be bad debt for actual cash lost, i.e. because it was paid in cash to a vendor, etc.

Business auto expenses… it’s an area of the tax law that can be confusing and lead to abuse.  Businesses have two methods available for determining the most beneficial expense.  The following will explain each approach.

For a business, a vehicle can be deducted in two ways; actual expense and mileage.  When using actual expense, the vehicle can be depreciated and maintenance, insurance, gas and other expenses can be deducted. When using the standard mileage rate to calculate the deduction, depreciation expense is  included, therefore separate depreciate expense would not be taken.  When you purchase a new vehicle we will calculate the deduction using both methods (assuming all information is provided) and the method that gives the higher deduction will be used.  You should keep a log for each company owned vehicle recording the mileage and expenses for each.  This can become tedious but it will be one of the first items requested by an IRS auditor

If your employees are allowed to use company owned vehicles on personal time, it is considered a taxable fringe benefit.  We collect certain data and use an IRS table to determine the taxable amount.  This allows the business to deduct one hundred percent of the auto expense.  The employee pays tax on the personal use of the vehicle.  The IRS table for this taxable fringe is so beneficial that this is often the best method for both employer and employee.  The most important pieces of information needed are the annual business and personal miles on the vehicle.

As always, see your tax preparer in considering your tax situation.

I previously compiled a list of year-end tax planning strategies for individuals.

Here is a list of year-end strategies for businesses and business owners:

1.   Businesses should consider making expenditures that qualify for the business property expensing option.

Code sec. 179 expense: For tax years beginning in 2010 and 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000, and a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax year beginning 2012, the dollar limit will drop to $125,000 and $500,000 (both indexed for inflation) respectively, and expensing won’t available for qualified real property. Keep in mind, Sec. 179 deductions are limited by net income, thus, they cannot be used to create a tax loss.

Bonus depreciation: Property that does not qualify for an immediate tax write off under the Sec. 179 may qualify for bonus depreciation. Unlike the Sec. 179 deduction, there are no restrictions on the amount of qualifying property and there is no taxable income limit. The deduction is 100% of the cost for qualified property purchased and placed in service during 2011. This first year write off won’t be available next year (2012) unless Congress acts to extend it.

2.   Businesses that hire qualifying workers (such as certain veterans) before the end of 2011 can claim a credit up to 40% of the first $6,000 in wages paid to each such employee.

3.   Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post 2011 expenditures unless Congress extends the credit.

4.   If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

5.   If you own an interest in a partnership or S corporation, and the business incurs a loss in 2011, you may need to plan ahead to be sure you can take advantage of that loss. These rules can be complicated,  and you should consult with your tax adviser.

6. Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

Again, we recommend that you always, see a professional when considering tax planning strategies for your situation. There are very important details underlying each of these strategies which must be thoroughly understood before you employ them!

One morning I stopped by my dry cleaners to drop off some clothes. There was a sign on the door thanking the loyal customers of so many years, and due to an equipment breakdown, same day service was no longer available.  Also, the prices were increased by about 40%. The reason I have been using this cleaner for the past 20 years is that he offered same day service.  The convenience of only having to remember “CLEANERS” one day a week made this dry cleaner very appealing to me.  He was also the cheapest cleaner in town.

One day I asked the owner what happened.  He told me that his equipment was very old and he had never been able to save enough money to replace it.  Now, with credit markets as tight as they are, he cannot get financing to purchase new equipment. 

There are valuable lessons here for business owners: 

It is critical that you know your competitive advantages and disadvantages, in the customers’ eyes.  This business owner thought that he had to have the lowest price to compete.  So he priced his service about 16% to 30% below the competition. He was the only cleaner that offered same day service without an extra “same day” charge.  Now, he no longer has either the price advantage or the service advantage; he is just like his competitors. 

I wonder how much business he would have lost if he raised his prices to a point midway between the competition’s regular price and their “same day” price?  Certainly, he would have lost the “bottom feeders”, but by observation, most of his business was “going out” or office work clothes and uniforms…..clothes people need every day for work.  I’ll bet he wouldn’t have lost much business at all.  You are talking about 50 to 75 cents per garment. 

Here are some lessons in this unfortunate story:

1. Know your costs…..including the wasting cost of the assets used in your business.  Nothing lasts forever.  Manufacturers have data they are more than willing to share.  Also consider the obsolescence risk.  Due to the high cost of labor, most manufacturers are automating equipment to greater degrees to limit labor inputs.  Many business owners think of depreciation as something you do for taxes.  In reality, it is “a rational method of allocating the cost of an asset to the periods it is used in the business.”
2. Know your customers.  Ask them why they like to do business with you.  They will tell you.  If my cleaner friend had asked me I would have told him that it was worth a premium to be able to pick up my cleaning the same day I dropped it off.  If most customers were like me, he could have earned more over the life of his business and been in a position to replace the equipment.  When he is ready to retire, he would have had a saleable business.  I’m not sure he has that anymore.  He’s just another dry cleaner now.
3. Find differentiators other than price.  Someone else can always do what you do cheaper.  Find a unique value proposition you can offer your customers and set your price based on that value proposition.  Regularly review your cost of providing the goods or services you sell and make sure you protect your margins. Frequently we help our clients in this regard by illustrating “cost, volume profit analysis” at various price points with various volume assumptions.  It is much easier for a small business to achieve and retain profitability at low volume and high margins than attempting to ramp up volume and hold down prices.
4. Always keep an eye on technology as applied to your business.  Don’t be afraid to adopt new technology if your due diligence indicates that it will improve your value proposition. 

Michael Gerber, author of the “E Myth” and several other best selling business books, has built an empire based on a simple concept:  An owner must work “on” his business, not “in” his business.  

We must all work smarter, not harder.  Working hard at the wrong thing frequently leads to exhaustion, burnout and failure.

Jodi Coppens of AdvantEdge Accounting Solutions is a consultant we have worked with for years.  Jodi is an expert with the MAS 90/200 software family of products and the QuickBooks software line of business software.

Our clients really appreciate Jodi’s expertise in helping them maximize their investment in software.  Jodi was telling me about some significant features being added to QuickBooks for the 2012 releases.

I asked Jodi to write this blog for our readers:

By the way, if you are interested in contributing to our blog, email Mary for more information. mmm@politoeppich.com

QuickBooks takes baby steps into the world of CRM with the release of its 2012 product line!

Introducing the Lead Center:  moving towards a mini-CRM functionality, a new “Center” has been added to manage Leads.  You have basic support for tracking your interactions with potential customer.  You can add lead information one entry at a time, or cut and paste multiple entries from an Excel spreadsheet (after moving columns to conform to the mapping that QuickBooks requires). Once a lead becomes a customer, you can easily move the lead data to your customer database with a single click, and the best thing is, they don’t clutter up the customer list until that time.

Users who desire more-robust CRM functionality now have the option of integrating this software with Salesforce.com through the new Salesforce for QuickBooks add-on.

Also introducing the Calendar View:  You can now access an organized and automatically populated calendar view of appointments, your To Do’s list, and invoices and bills coming due or past due.

You can also use this view to see what transactions you entered on any given date. I think I’m going to find this very useful!!

For more preliminary information on new and improved features in the 2012 product line check our Blog!

Jodi M. Coppens 760-722-6839

www.AdvantEdgeOnline.com

Jodi@AdvantEdgeOnline.com 

Over the summer, I found myself consumed with nonprofit work.  It’s the time of year when that is pretty much all I do.  It is occasionally broken up with other jobs, but they seem few and far between.  The following blog post is  focused on nonprofit topics:

Nonprofit entities are required to classify expenses between three categories: Program, Management & General, and Fundraising.  Determining how to classify expenses in these categories is usually a matter of judgement. 

The IRS does provide some guidance, but not much.  Hopefully the following will help answer some questions. 

The following descriptions come straight out of the Form 990 instructions: 

Program Services (Expenses) are mainly those activities that further the organization’s exempt purposes.  What is your exempt purpose?  How are you accomplishing that purpose?  What are the programs you run?  

Management and General are expenses that relate to the organization’s overall operations and management, rather than to fundraising activities or program services.  Overall management usually includes the salaries and expenses of the organization’s chief executive officer and his or her staff, unless a part of their time is spent directly supervising program services or fundraising activities.  In that case, salaries and expenses should be allocated among management, fundraising, and program services. 

The IRS generally considers the following expenses to be management and general:

Costs of board of directors meetings, committee meetings and staff meetings (unless they involve specific program services or fundraising activities)

• General legal and accounting
• General liability insurance
• Office management
• Human resources
• Management of investments 

Fundraising expenses are the expenses incurred in soliciting contributions, gifts and grants.  If you have contributions revenue, you should have some fundraising expenses.  These expenses include:

• Publicizing and conducting fundraising campaigns
• Soliciting bequests and grants from foundations, other organizations or government entities
• Participating in federated fundraising campaigns (such as United Way)
• Preparing and distributing fundraising manuals, instructions and other materials 

Expenses will either be direct expenses or indirect.  The direct expenses are easy, they are identified specifically with an organization’s activity or project and can be assigned with a high degree of accuracy.  Indirect expenses are costs that are not identified specifically to one category or another and must be allocated accordingly.  If the CEO spends time in management, programs and fundraising, compensation must be allocated among the three categories.  Oftentimes using a percentage based on hours spent in each activity is the most realistic approach. 

I wish I could say it’s easy to make the determination between these expense categories in all cases.  The fact of the matter is, we run into the grey areas with most returns we prepare and discussion is needed to make the determination.  Seek advice from your tax preparer when trying to make the distinction.  Have an in depth conversation about the activities. 

One way to simplify the process is to prepare an annual budget determining in advance the types of expense activity to be included in each category.

Well, it finally happened.  Sort of.  A deal has been made on the debt ceiling issue and supposedly there will be no new taxes.  Congress agreed to make $917 billion in spending cuts (over 10 years) and the President is able to raise the debt ceiling by $400 billion.  Future debt ceiling increases of $500 billion have also been authorized.  No one actually likes the deal, but apparently it is as good as it’s going to get according to Congressional leaders.

Where are the $900 billion in spending cuts going to hit?  Well, that is up to a joint committee to determine.  This “committee”, which has not yet been established, has until November to make its recommendations for a vote by Congress.  If unsuccessful, automatic spending cuts would occur which have already been established.

They say that there will be no tax increases.  The problem is, those Bush-era tax cuts that were extended last minute… (remember that chaos?) are set to expire December 31, 2012.  Do you think they forgot about that?  I highly doubt it.  In addition, there are tax increases which will mostly affect the high income earners that are set to begin in 2013.  I’m sure Congress is counting on those tax increases. 

I personally struggle with the continued last minute deals that really don’t make a difference except to calm down the immediate crisis.  Politicians are letting their political aspirations limit their actual potential impact for good in our government.  Everything they do and pass is for a temporary fix.  They extended the Bush tax cuts for only two years… they extended the estate tax and AMT issues out for two years… they refuse to actually take on the tax system and give it a much needed tax reform.  I can’t be too harsh.  The “Gang of Six”, made up of six Senate members, has been working on a comprehensive tax reform plan.  However, it’s far from being ready for proposal to Congress.  At this point, it’s hard to say where those efforts will lead us. I understand that with the two main parties having such differing opinions on tax issues, this task is not an easy one.  But no one can deny that something has to be done.  

For more information see the ‘Debt Ceiling breakdown of deal’ on CNN’s website

The continuing unemployment news makes it obvious to me that we must find a way to compete again in the manufacturing sector.  There are long lists of reasons why we don’t make things in America anymore, but the fact is, we must if we want a vibrant economy. 

Not all of us are capable of being “knowledge workers” or similar highly educated people employed in high tech or service industries.  There will always be a portion of any population that thrives by making things – performing physical labor.  We cannot continue to “legislate” or “collective bargain” the value of that labor; the world economy has set the value.  The market always sets the value of goods and services. 

During the great depression, the organized labor movement got a huge boost as the government came to the aid of the then under-represented American laborer.  Over the years the protections and bargaining rights have developed to the point where in many industries our labor has simply priced itself out of the market.  Labor unions have in many cases, caused manufacturers to move manufacturing off-shore or to “right to work” states” in the U.S.  It appears to me that unions are now costing their members more jobs than they are saving. 

I have made it my business to look for US manufacturing companies that are flourishing.  It seems that those few (and the numbers are growing) have developed a niche, are fanatical about quality, and happy enough to make a profit.  Their goal is not necessarily to go public or make gazillions of dollars.  They are typically small, efficient businesses who have identified a need in the marketplace and filled it….with high quality, appropriately priced products.  They do not compete on price; they compete on quality and service. 

Typically the stakeholders of these small companies are the owners’ families, their customers and their employees; not investment banks and shareholders.  This is the way most businesses get started; identify a need and meet it, making a good living and return on investment in the process. 

I now find myself looking carefully at where the things I buy are made.  If I can find a product made in USA that meets my needs, I buy it over the foreign made competition.  Thus in my own small way I am supporting my fellow Americans.  There is a growing movement to increase support for U.S. manufacturers.  Check out Diane Sawyer’s  Made in America Challenge.   Also there is an interesting blog called   “China Ate My Jeans”  written by my cousin, Tina Parsons, who has made 2011 the year she will try to purchase nothing unless it is made in the USA.  She has identified many US companies who are slowly beginning to rebuild our manufacturing sector. 

It may never be possible for U.S. manufacturers to compete on price in the world marketplace.  However, on a local or “close to home” level, niche manufacturers are beginning to flourish.  In my experience, the quality of the U.S. made products reward my extra shopping effort required to find them.  You won’t find these products at the local big box retailer.  You will have to look online buying direct from the manufacturer or at specialized “niche” retailers.

The IRS has issued the new mileage rates.  Beginning July 1, 2011, the standard mileage rate for business purpose is 55.5 cents per mile (was 51 cents from January 1 through June 30).  The most common uses of the rate include:

• Mileage reimbursement to employees using an accountable reimbursement plan (can be less than the federal rates, but never greater)
• Mileage deducted on schedule C
• Unreimbursed business miles deducted on Schedule A 

The IRS publishes these rates as a guideline, not a requirement.  Businesses are allowed to use a lower rate if they choose.  However, you cannot use a higher rate.  If a business reimburses its employees using a higher rate, the difference would be taxable to the employee. 

The mileage rates for medical or moving expenses also increased 4.5 cents from 19 cents to 23.5 cents per mile.  The charitable mileage rate remains at 14 cents per mile.