Archive for the ‘Tips’ Category

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.

You may remember a few years ago when the sales tax in California increased by 1%.  That increase expired June 30, 2011 and as of July 1, 2011, we are back to a 7.25% state sales tax.   We’ve been waiting to see if the California legislature was going to extend it, since they can’t balance the budget. 

In San Diego, we have an additional 0.50% local tax which brings our sales tax to 7.75% in most areas.  Vista has an additional 0.50% city sales tax on top of that, bringing the new rate to 8.25%.  Click here to view the Board of Equalization’s chart of all cities in California and the sales tax rates effective July 1^st.  

Make sure your accounting software, POS systems, accountants, etc. are updated on the change. 

Be sure to see your tax advisor if you are uncertain of your responsibilities.  Any excess sales tax collected must be remitted to the state.

The IRS enacted a nonrefundable income tax credit for “new qualified plug-in electric drive motor vehicles”. For each qualifying vehicle, the credit is $2,500…. plus $417 for vehicles with at least five kilowatt hours (kwh) of rechargeable battery power, and an additional $417 for each additional kwh above five, to an additional credit of $5,000. This brings the maximum credit to $7,500. 

This is great news considering the 2011 Chevy Volt is advertised as having a battery capacity of 16 kwh, the 2011 Nissan Leaf 24 kwh, and the Ford Focus Electric 23 kwh. For example, Volt owners would be eligible to receive a whopping $7,500 tax credit ($2,500 plus $417 (for kwh of at least 5), plus $4,587 (for the extra 11 kwh (16-5)). 

Electric model requirements for the credit are that the qualified plug-in vehicles must be powered ‘to a significant extent’ by an electric motor drawing power from a battery with a capacity of at least 4 kwh that can be recharged from an external source of electricity. Cars with the ability to use both a plug-in electric engine and gasoline engine, technically known as plug-in hybrid electric vehicles (PHEVs) are eligible. 

Vehicles with fewer than 4 kwh or weighing more than 14,000 pounds are not eligible. 

The credit will have a production phase-out similar to the previous hybrid vehicle credit. The phase-out per manufacturer begins once the total qualifying vehicles manufactured and sold for use in the U.S. since the beginning of 2010 reaches 200,000 units. From there, the applicable credit per vehicle will be cut in half for two calendar quarters, then reduced by 25% in the third and fourth quarters and fully eliminated after that. The phaseout is more generous than the Hybrid credit which started to phase-out at 60,000 vehicles per manufacturer produced and sold after Dec. 31, 2005. 

To claim the credit Form 8834, “Qualified Plug-In Electric and Electric Vehicle Credit” will be filed with the taxpayer’s returns.

Our Firm previously posted a five part series discussing the advantages and disadvantages for the type of entity you choose for your business: Sole proprietor, Partnership, Limited Liability Company, S Corporation, and C Corporation. In a business group I attend, members of the group wanted to see an example of the potential tax savings between the various types of entities. Below is a comparative analysis of an Insurance Agent as a sole proprietor, S-Corp, or C- Corp to illustrate how a taxpayer can reduce FICA tax. A taxpayer can reduce the FICA tax vs. a Sole Proprietor by paying low officer wages reducing FICA tax (in this example) by $17,854. In a C-Corp, the income does not pass-through to the shareholder; therefore, the income would be taxed at the entity level and individual level if the Company pays dividends. The S-Corp appears to have the smallest potential liability of the three, but taxpayers should be aware of the additional compliance costs such as: annual meetings, entity tax return, annual state filings, and bookkeeping.

 Please note, these are simplified illustrations and when preparing actual tax Forms (1120, 1120S, and 1040) there are potential complex transactions involving basis, distributions, alternative minimum tax, etc. Please see your tax professional when considering your personal situation.

Steve Harrington is a local banker our firm has worked with for years.  His articale below provides very valuable information about potential SBA loans for commercial real estate.  Finally, some positive banking news during this slow economic recovery.

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

Steve Harrington
Senior Vice President
California Community Bank
sharrington@calcommunitybank.com
(760) 542-4230
(760) 542-4289 fax
(760) 390-4771 cell

I came across an interesting accommodation the SBA is allowing due to the challenging times in which we have found ourselves.  Many business owners utilize the SBA 504 loan program to purchase commercial real estate.  This program’s key benefit is 90% financing of the real estate and the improvements.  The financed portion is split between a bank loan in 1^st trust deed position for 50% of the property value or proposed project cost and an SBA loan in 2^nd position for 40%.  

The impact of the economic challenges we have faced over the last couple of years is that the value of the real estate, in most cases, has fallen more than the 10% equity.  I have a customer that would like to refinance his 1^st trust deed loan, but assumed that the SBA would be reluctant to subordinate to a new first trust deed.  This assumption was based upon his opinion that SBA would see that the current value of the real estate has exposed their 2^nd and would not approve a subordination request for a new 1^st trust deed.

 What I found through conversations with the local SBA representatives is that the SBA will require a copy of the new appraisal, but will not base their decision to approve a subordination request on the current loan to value ratio.  What is of concern is whether their loan is current and handled as agreed, and whether the new first improves the cash flow of the business.

We were introduced to Brendan Foote and his company, Cal Tax Group, Inc., through a client of ours who was able to claim quite a bit in California tax credits related to the Enterprise Zone.  This article gives the quick facts of what you need to know about the Enterprise Zone credits. 

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

Brendan Foote, Partner

Cal Tax Group, Inc.,  San Diego, CA  92101   

619-202-4198; bfoote@caltaxgroup.com

 “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” We are clearly in the midst of difficult economic times that limit our ability to grow a business, but for companies in certain areas of San Diego County, there is one program that may be the perfect catalyst to take steps in the expansion direction. The San Diego Regional Enterprise Zone is a California funded tax incentive program that encourages businesses and business owners in certain parts of the state to create job opportunities and buy equipment. Through lucrative tax incentives, companies creating eligible jobs and purchasing qualified equipment can look forward to tens of thousands of dollars in state income tax credits. 

San Diego’s Enterprise Zone is concentrated south of Interstate 8, stretching from Downtown and east, including the majority of the South Bay and border regions as well. Companies located “in the zone” can obtain state income tax credits for each new employee they hire who meets one of thirteen qualifying criteria. Among these criteria include; former military, those hired off unemployment, residents of the local communities and those laid off from their previous place of employment. For each employee that meets one of these qualifying criteria, companies can receive up to $38,000 in credits over a five year period. 

For qualified equipment purchased, namely manufacturing equipment or computer based equipment; companies can convert California sales tax paid on such expenditures into an income tax credit. 

All California income tax credits obtained can be carried forward indefinitely and used against any tax liabilities resulting from Enterprise Zone income. For pass-through entities such as S-Corporations and LLCs, the income tax credits flow directly to the shareholders of the company and can be applied against personal income taxes resulting from W2, K-1 and rental or other passive income sources generated within the Enterprise Zone. 

One of the best parts about this program is companies who have not yet participated can identify and claim credits retro-actively on amended tax returns for up to four years against taxes they have paid to the State. Refunds will be issued and any remaining credits can be carried forward for future use.

 In short, if you aren’t taking advantage of the Enterprise Zone Program, you are passing up “free” money.

In order to deduct charitable contributions, the charitable organization must be created or organized in the US (including the states, District of Columbia and possessions of the US) or must be provided by a treaty (side note – have you ever tried to read a treaty?  Not fun!).  Many generous people want to give for causes around the world and there is absolutely nothing wrong with it.  It is commendable!  However, in order for charitable contributions to be tax deductible, you need to give it to a bona fide US charitable organization which can direct the funds to those in need around the world.  Some think that Catholic churches located in other countries would qualify because they are arms of the Roman Catholic Church, a universal organization.  Tax courts have repeatedly rejected this argument. 

 Also beware of giving money to an individual or earmarking a donation for a specific individual.  You cannot give money to your church or other charity to give to a specific family in need. While it is a charitable act, it is not tax deductible.

Bonus depreciation: 2010 Tax relief Act extended bonus depreciation through December 31, 2012. The Act also increases 50% bonus depreciation to 100% for qualified assets (must be new property) acquired and placed in service after September 8, 2010, and before January 1, 2012. Unlike Code Sec. 179 expense, it is not limited to use by smaller business or capped at a certain dollar level.

 Code Sec. 179 expense: Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending. The 2010 Small Business Jobs Act increased the Code Sec. 179 deduction  limits to $500,000 for businesses with total asset purchases of $2 million or less for tax years beginning in 2010 and 2011. The 2010 Tax relief act sets the maximum Sec. 179 expense for 2012 at $125,000 for companies purchasing up to $500,000 in eligible assets. Both amounts are indexed for inflation. For tax years beginning after 2012, the Act resets Sec. 179 expense amounts at $25,000 with a $200,000 total acquisition limitation, and the reset amounts are not adjusted for inflation.

 Other important issues relating to bonus depreciation and Code Section 179 deduction:

Section 179 deductions are limited by net income, thus, it cannot be used to create a tax loss.  Used equipment qualifies for Section 179, but is not eligible for bonus depreciation.  Bonus depreciation can be used to create a tax loss.  Section 179 and bonus depreciation can be used in tandem when circumstances permit.

To see more examples of qualified property eligible for bonus depreciation, see my blog from October in the Archives which discusses qualified leasehold improvement, restaurant and retail properties