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- Calculate DIO for current and past periods and compare—There is no single, correct DIO figure for all companies and industries. DIO is a ratio used to show trends, so it should be calculated for current and past periods and then compared.
- Initially, calculate a single DIO ratio for all inventory—Calculate a company-wide DIO figure that includes all inventory. If inventory is being held too long, then research to determine the cause.
- The calculation does not have to be perfect—Include only inventory-related cost in the cost of goods figure, if possible. If your inventory value includes only material and freight costs, then try to include only those in your cost of goods figure. If separating inventory-related costs from all other cost of goods is too difficult, then use total cost of goods. Calculating the ratio consistently over each period is more important than being perfect.
- Later, calculate DIO for specific inventory categories or product lines—If you sell hotdogs and sodas, try to calculate a DIO ratio for hotdogs and a DIO for sodas. Hotdog inventory may turn very quickly while soda inventory turns slowly. You can then focus on improving the slow turning inventory.
- Focus on selling old inventory and over-stocked inventory—Having $500 in cash now is better than having $700 in pumpkin-flavored soda sitting in inventory for three years. Identify old and over-stocked inventory and convert that inventory to cash. This reduces total inventory and improves DIO.
- Subscribing and maintaining an annual service agreement for virus protection, anti-spyware and personal firewall and ensuring that the settings allow for automatic updates. Products such as Norton 360 provide a comprehensive protection for less than $100/year per user. This is very intuitive, but many companies do not subscribe after the trial period or unknowingly allow the agreements to expire.
- Transitioning to a cloud-based email service and re-routing your incoming and outgoing email traffic through a third-party service to scan for spam, viruses, phishing scams, directory-harvesting, and denial-of-service attacks. McAfee and Symantec are two of the leaders in email protection. Their solutions are very affordable, relatively easy to setup, and do not require new hardware. Once their service is active, it is a very effective for sanitizing emails and requires little or no continued maintenance or support.
- Require your employees to use a two-step login procedure. Email accounts are often exploited by a hacker that “guesses” a user’s password using available information. A two-step procedure requires the user to use a complex password and another means of digital identification such as a coded message sent via SMS to mobile phone or key fob.
- Lock and encrypt your mobile devices. Email user account and password information is readily accessible from a smartphone. Most people will enable the password feature on their mobile device, but if that device is lost or stolen, the password is easily bypassed within minutes. To protect your email account information and other data stored on the mobile device, it is highly recommended that you activate the option to encrypt all data—including that on the SD card. Consult your user guide for instructions on this simple procedure.
- The expiration of the 2% employee-side payroll tax cut. Effective January 1, employees and self-employed taxpayers return to paying 6.2% FICA tax rather than 4.2%
- The 3.8% surtax on net investment income, including capital gains, for single filers with $200,000 AGI and joint filers with $250,000 AGI
- The 0.9% surtax on wages or self-employment income exceeding $200,000 for single filers and $250,000 for joint filers
- Marriage penalty relief—increased size of 15% bracket and increased standard deduction for married joint filers
- Child and dependent care credit of up to $3,000 for one dependent or $6,000 for more than one
- Exclusion for employer-provided educational assistance
- Enhanced rules related to the student loan interest deduction
- 50% bonus depreciation (Section 168)—extended to include new property placed in service by December 31, 2013
- The Section 179-dollar limitation is restored to $500,000 for taxable years beginning in 2012 and 2013, with reductions if total additions exceed $2 million. The $25,000 dollar limitation now returns in 2014
- Section 179 deductions for qualified real property—retroactively extended for 2012 and 2013
- 15-year depreciation for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property—retroactively extended for property placed in service between January 1, 2012 and December 31, 2013
- Reduction in S corporation recognition period for built-in gains tax to 5 years—retroactively extended to taxable years beginning in 2012 and 2013
- 100% exclusion of gain from sale of small business stock under Sec. 1202—retroactively extended to qualified small business stock acquired between January 1, 2012 and December 31, 2012
- Credit for increasing research and development activities—retroactively extended for 2012 and 2013
- S corporation basis reduction for charitable contribution of property, reducing basis for adjusted basis of the property rather than for the deductible amount passed through—retroactively extended to contributions made between January 1, 2012 and December 31, 2013
- Work Opportunity Tax Credit—retroactively extended to 2012 and 2013 (no longer applying only to qualified veterans in 2012)
- Credit for energy-efficient improvements to existing homes (windows, doors, furnaces, water heaters, etc.) —retroactively extended for 2012 and 2013
- New energy efficient home credit for contractors—retroactively extended for 2012 and 2013
- It gives the key managers a reason to stay.
- It is structured so that it increases the value of the company.
- It includes a penalty (usually in the form of a covenant not to compete and a non-solicitation of customers and employees) that prevents key managers from taking key clients, vendors, employees or trade secrets with them should they leave before or after the sale.
If your company makes or sells products, some amount of inventory is needed, and funding inventory requires cash. Purchasing and holding raw materials, building finished goods, or buying completed products from vendors that are held for resale, demand some portion of a company’s cash.
For a manufacturer or distributor, the cash required to fund inventory can be significant. If sales are seasonal or the production cycle is long, even more cash is needed. Unfortunately, owners and managers sometimes forget that INVENTORY = CASH.
Accounts receivable and inventory are current assets, so one expects both to be converted to cash within a year. The problem is that companies often focus on how quickly receivables get converted to cash but not how quickly inventory is turned to cash. When a small business’s cash flow gets tight, focusing on accounts receivable can provide an immediate solution. Collecting a few large, past due invoices can quickly generate additional cash. In fact, prompt collections are so important that business owners and managers generate accounts receivable aging reports, which are reviewed and shared with others to ensure collections remain current.
Unfortunately, many small businesses do not have access to similar reports showing the length of time inventory is held. One may have reports showing current inventory dollars and quantities by item, out of stock inventory, or vendor costs by item, but an inventory aging or an inventory turnover report may not exist. If companies do not measure the number of days that inventory is held, inventory turns can slow, which requires more cash.
A financial ratio called Days Inventory Outstanding (DIO) can be used to calculate how long inventory is being held. With this ratio, a company can determine how many days it currently holds inventory for comparison with past periods. If DIO increases, more cash is needed to fund inventory. If DIO decreases, less cash is needed. Below is the formula used to calculate Days Inventory Outstanding and some suggestions about how it can be used to better manage a business’s cash flow.
Days Inventory Outstanding = (Average Inventory / Cost of Goods) x Number of Days in the calculation period
Cash that is used to fund and hold inventory is cash that a company does not have available elsewhere. Using a financial ratio such as Days Inventory Outstanding can help managers identify when inventory is being held longer than targeted or expected. With this knowledge, managers can then work to reduce days outstanding to squeeze extra cash out of inventory.
Content contributed by Potter & Company, a local certified public accounting firm offering core services of tax, audit, business consulting and financial analysis. Content written by Michael Waddell, Financial and Management Consultant. For more information, contact him or John Kapelar, CPA, Partner, at 704-283-8189 or visit www.GoToPotter.com.
Cyberattacks are in the news every day. “Hackers,” operating as individuals and loosely-integrated teams, continually attack corporations and government agencies for reasons ranging from sport to financial gain. In October, Governor Nikki Haley announced that South Carolina’s servers were compromised and more than 3.6 million social security numbers and 387,000 credit card numbers were stolen.
Small and medium-size businesses are often very vulnerable, because they lack the sophistication, resources and infrastructure to protect their data and information and those of their customers. A recent poll showed that less than 15 percent of small business owners felt that they had adequate protection for their IT systems, but only 10 percent were planning to make major IT investments this year to reduce their risk and exposure.
In small businesses, a few people often do many different things. The company “IT guru” often maintains the web portals and sites, social media pages, email server, phone system, router, server, and firewall as a collateral responsibility—often with minimal or no formal instruction. In addition, a small business typically does not have a large IT budget, so the guru often uses whatever works to keep everyone up and running. This leaves dangerous gaps in the company’s digital armor and puts everything at-risk.
So what can a small business do to protect itself? Well, it’s a combination of educating the work force, making prudent investments in technology, and implementing a set of best practices for safeguarding data.
Over the next few issues, we will describe some simple things that you can do to reduce your risk of a catastrophic breach in your IT infrastructure. So let’s get started with the ubiquitous IT tool: email.
Hackers often use email to exploit their victims because it easy and effective, and there are many options available to dupe the unwitting email recipient. The hacker simply attaches a virus, trojan horse, key logger, or other malware to an email; disguises or embeds it in Adobe Acrobat, Microsoft Office or other common file type; and then makes it irresistible to open or launch—such as naming the file “Company Salaries and Bonuses for 2013 / HR Confidential / President Eyes Only”
Nearly everyone who receives such an email will open it. Once opened, the malware is uploaded and the hacker then owns that machine and assumes all the authorities assigned to that user. Company confidential information is immediately and continuously stolen with the malware running in the background and without the user’s knowledge.
Often, the hacker uses the compromised machine to then attack the system administrator from the inside, which is significantly easier than from outside a firewall. If the system administrator account is compromised, the small business is going to pay a significant price—in lost sales, damaged reputation, or capital expenditures to reclaim/replace most of its IT equipment or all of the above.
To reduce your vulnerability to email exploitation, there are a few simple things that every small business owner should consider:
In the next edition, I will make some recommendations for protecting your identity while online.
As you are likely aware, Congress passed a new tax act on January 1, 2013 which has been signed by the President. First, here are a few changes, which were already signed into law and effective January 1, 2013.
Following is a summary of the largest, most-impactful provisions of the new tax act.
Income Tax Rates
The reduced tax rates enacted in 2001 and 2003 are made permanent for all taxpayers other than the highest earners. For the latter, a new income threshold of $450,000 for joint filers, $400,000 for single filers, and $425,000 for head of household will apply, and these individuals will now pay 39.6% income tax on taxable income exceeding these thresholds. Previously, this rate was 35%.
Long-term capital gains and qualified dividends continue to be taxed at 15%, unless a taxpayer’s income exceeds the thresholds shown above, in which case such income would be taxed at 20%. The 0% rate on such income for lower-income individuals will continue.
The phase-out of personal exemptions and itemized deductions is reinstated at thresholds of $300,000 for joint filers, $250,000 for single filers, and $275,000 for head of household.
Historically, the exemption amounts for the alternative minimum tax had not been indexed for inflation, requiring Congress to pass a “patch” every year or two to prevent taxpayers from being subject to AMT merely because of income inflation. The exemption amounts are recalibrated to $78,750 for joint filers and $50,600 for single filers for 2012, and these exemptions will be indexed for inflation each year beginning in 2013.
Estate and Gift Taxes
The $5 million estate and gift tax exemption (adjusted for inflation after 2011) is made permanent, and the tax rate is raised to 40%. The portability law that allows a spouse to transfer his or her estate tax exemption to a surviving spouse is also made permanent.
Certain benefits that were enacted in 2001 that were scheduled to expire along with the reduced tax rates were made permanent. These benefits include the following:
Other benefits are extended for a temporary period of time and may be renewed from time to time if Congress determines the benefit is worth the cost. Below are benefits that are extended with the new legislation for businesses.
Energy Tax Extensions
Several energy credits and provisions were extended, most of which had expired at the end of 2011. A couple of the most-used provisions are presented below.
One way to start the dreaded but necessary BUDGET discussion with my private business clients is by admitting that, “I hate budgets”. Most of them quickly agree and then add, “Budgets take too long; budgets do not generate income; budgets are too complicated; budgets are always wrong…”
A budget, however, is really just a plan or a blueprint for the future. So why do private business owners react negatively when budgets are mentioned?
The budget is usually NOT the problem. The problem is in building the budget. Instead of participants cooperating to build a reliable forecast, they become adversarial. Owners or managers demand a “best case” budget, and they push for unattainably high profits while the budget builders low-ball their estimates to try to guarantee that their later performance can beat the plan.
When the budgeting process is properly managed, it can produce a reliable plan that can be used to steer your business into the future.
There are different types of budgets: sales budgets may estimate the quantities and products that will be sold, payroll budgets might show how many employees a company will hire and the wages that will be paid, production budgets may forecast the quantities and costs of items to be produced, etc. The income budget, however, is an overall profitability plan for the company, and it combines revenue and expense information from across all departments.
The final result is an annual income statement forecast that shows revenue, expenses and net profits by month. Even if the budgeting process is difficult, time consuming and imperfect, all private companies should work to develop a realistic annual income budget.
Keys to building a successful income budget:
1. Take time to plan. Small and mid-size business owners and managers are often too busy running their business to stop and manage the business. Building a forecast requires company leaders to set aside time to think and plan for the future.
2. Look backwards. Historical performance can help predict the future. During the budgeting process there are opportunities to study past performance and talk about ways to improve. Time is spent trying to understand prior revenue and expenses, and this can lead to future changes and improvements.
3. Get participation from all departments. Your accounting staff might put the pieces together, but a successful budget requires participation from all departments. This allows opportunities for questions and suggestions across departments, and participants take some ownership because they help develop the plan.
4. Start with revenue. Your sales team should provide the sales estimate. Company leaders then need to agree upon a single revenue forecast that all other departments use to forecast their costs. If annual revenue is expected to double, then manufacturing and purchasing departments may need to increase expenses to hire more employees, buy more inventory, etc. If annual revenue is expected to drop by half, then departments need to focus on cost reductions. Deciding upon expected annual revenue helps every other department plan for the future.
5. Accept net profit levels. Once all the revenue and expense estimates are combined, the income budget shows anticipated profits. These are estimates, but company leaders should be willing to accept the calculated profits, if all goes as planned. If the estimated profits are negative or too low, then continue working to build a better, realistic and attainable plan.
6. Compare the budget to actuals. After you finalize the budget, actual company performance should be compared monthly to the plan during the following year. If actual performance is significantly different than the budget, research and address the problems. To be the most beneficial, your budget should be a working document that is continuously referenced and updated, if needed.
Developing an income budget gives owners and managers the opportunity to plan for their company’s future success. This process should include participation from key employees and cooperation across departments.
The final budget serves as a financial map that can be followed, and actual results can then be compared to the forecast each month in order to track company performance against the plan.
All private companies should take time to develop an income budget to help them be successful next year. They should then follow this plan to improve their chances of earning actual profits that closely match their forecast.
When we talk to business owners about the value of Exit Planning, we are talking about planning their exit from their business in a manner that fulfills their unique financial and personal goals. Since tackling a task of this magnitude can be daunting, owners sometimes ask whether devoting the necessary time and money to this project is really worthwhile.
In working everyday with owners of small and mid-sized companies, we have learned that failure to plan for the owner’s exit can mean the difference between a successful closing of the ultimate sale of their business and a complete derailment of the sale process.
According to Kevin Short, an investment banker who works with owners of small and mid-sized companies, “The element of Exit Planning that gives an owner the biggest bang for the buck is, without a doubt, Step 3 of The Exit Planning Process: Building and Preserving Value.”
One of the “Value Drivers” used to build and preserve value is called a Stay Bonus—a technique we use to motivate managers to remain with a company post-closing. An effective Stay Bonus accomplishes three tasks:
There are far too many horror stories about owners who, believing that their loyal employees were happy and already well compensated, have been held hostage by those same employees.
For example, we represented a business owner who was within a couple of weeks of closing on the sale of his company when the buyer met with each of his key employees to reassure them that they’d be retained by the new owners at their existing compensation levels.
At its meeting with one of the owner’s top salesman, the buyer was lavish about how important the salesman’s continued success was to the company’s future success. When the buyer then asked the salesman to sign a covenant not to compete before the closing date, the salesman asked for a break and headed straight to talk with the owner. He reminded the owner that he had helped build the company to its current value during his tenure, and ever so generously consented to wait until the closing date to collect his $1 million bonus.
Our client paid the ransom. He understood that if the salesman servicing one of his top clients left the company, the buyer would likely scrap the deal. If the buyer did come to the closing table, it would reduce its purchase offer by $3 million—far more than the $1 million the salesman demanded.
As a result of this and many similar experiences, we recommend that owners get very aggressive about implementing Stay Bonuses long before a sale is planned with anyone who has a significant impact on a company’s performance. In most cases, instead of $1 million, the Stay Bonus would be calculated at 50 percent to 200 percent of an employee’s annual compensation and should be tied to a covenant not to compete (or similar agreement).
As Exit Planning advisors, we also work with owners to protect business value. One method is to clean up shareholder agreements (again, well in advance of any contemplated sale or transfer of the business).
“If a shareholder agreement does not force a minority shareholder to sell when the majority shareholder does, majority owners can (and often do) find themselves unable to sell, or held hostage by minority shareholders,” Short observes.
“By and large,” adds Short, “entrepreneurs ignore both Stay Bonus plans and shareholder agreements because they believe that other shareholders or employees will ‘come along’ on closing day.” Short observes, “What owners forget is that every shareholder and every employee figures out leverage and most intend to use it.”
From these and many other examples from our practice, we believe that Exit Planning is indeed well worth the time and money owners devote to it as these and other issues which desperately need to be addressed are “flushed out” and fixed during the Exit Planning process—long before it costs the owner huge amounts of money.
Article presented by Robert Norris, founder and managing partner of Wishart Norris law firm, a member of Business Enterprise Institute’s International Network of Exit Planning Professionals. © 2013 Business Enterprise Institute, Inc. Reprinted with permission. Wishart Norris law firm partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, exit planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Robert Norris at 704-364-0010 or Robert.Norris@wnhplaw.com.
In today’s digital marketplace, the photographs on your company’s website and social media are the equivalent of your firm handshake. They should be thoughtfully presented and represent you in the very best light. No matter how eye-catching your headline or snappy your copy, it is imagery that first attracts a viewer to an ad, article or website. It’s also the first and sometimes only thing later recalled by a viewer.
Photographs of your building, offices, executives and/or staff can begin humanizing your company long before a prospect actually meets or talks to a member of your team. If they make a favorable first impression, the viewer often experiences what psychologists call the “halo effect”—whereby the perception of positive qualities in one respect gives rise to the perception of similar qualities in other respects or in the whole.
Studies have shown, for example, how being physically attractive skews judgments favorably towards individuals in terms of likability, competency and trustworthiness, and advertising is predicated upon the effect of selecting attractive candidates to represent products and services. The more positive a viewer reacts to photographs of your business or executives, the more likely they are to favorably view your products and services.
And, according to a 2005 Princeton University study published in Psychological Science, people make those decisions about competency, trustworthiness, and likability in less than 1/10th of a second. Literally the blink of an eye. People will continue to use a website or read written material that makes a favorable first visual impression; if unfavorable, they will leave your site and toss your mailed pieces before they learn you may be offering more than your competition.
You can’t afford to risk your business’s reputation with poor-quality photos that will infer poor-quality on your services and products. But you don’t want to waste money either. So what is the best way to get your company represented in the best possible photos?
Sending company executives to an outside studio for portrait shots will require a great deal of time by all concerned and result in less than engaging photo formats. Oftentimes, in fact, environmental portraiture can tell more of a story than a traditional seamless background photo.
Attempting to use Jim from the mailroom for corporate photography because he also “does photography” could be equally foolhardy, especially considering the expenses of time spent and business interrupted whilst employees are diverted for less than professional results.
The best option is to outsource the project to a professional photographer that specializes in location studio work. Such an image-maker can set up backgrounds and lights in a meeting room or other space and/or can utilize visually evocative elements of the building or interior office for environmental portraiture.
Additionally, good photographers have a great deal of knowledge regarding different lenses and lighting to create different effects or evoke particular emotions; good frame visualization and selection of background effects; suggestions for scene layout, perspective and even posing and dress; and, frankly, experience assuaging even the grumpiest of executives.
In short, the professional can pose the company’s people and premises in the most favorable and engaging light possible while providing a continuum and consistency to the photography taken.
Equally important to obtaining a quality photo is the knowledge and skill in processing it post-production. Processing encompasses overall adjustments to the photo’s temperature, contrasts and saturation, and retouching. An experienced professional will want to get the photo right in the camera at the outset, with proper lens work, composition, exposure and lighting…i.e. not a lot of befores-and-afters.
A lot of the photos that people think are retouched actually aren’t—the colorful effects in the Firebird photo shown here, for example, were not created in Photoshop, but are mostly a product of the exposure time through a very small aperture and polarized lens. Likewise, the airplane shown here was shot using green gels over the lights and white balanced for fluorescent; it’s not a composite sky.
To avoid the appearance of fiction, good retouching in business photography is necessarily subtle and age-appropriate. Skin should never have a blurry or waxy appearance. To retain skin’s qualities, the retoucher should work at the pore-level with little brushes. Blemishes should probably be removed, unflattering shadows lightened and flattering ones darkened, and the appearance of wrinkles reduced. Ill-fitting collars and waistbands are often smoothed. Usually specific requests can be made between the processing and retouching stages.
When searching for the right professional, beware of faux-tographers. Anyone with a business card, a consumer-level camera, and a $50 website template can market themselves a professional photographer. The down economy has washed many green amateurs into the market hoping for a little under-the-table income. The web mixes the good and bad and makes it easy for the unscrupulous to misrepresent their abilities and experience.
Recently, a Texas-based image-maker charged that the portfolio of a Charlotte-based studio advertising on one of those daily deal coupon sites was full of images stolen from her site. Charlotte consumers have likewise been burned buying from photographers with fake portfolios on Etsy. Of course there are more Craigslist horror stories than can be recounted.
To ensure continuing confidence in the professionalism of the field of photography, many image-makers are choosing to undergo certification from the Professional Photographic Certification Commission. Certified Professional Photographers (CPP) must pass stringent standardized tests and a portfolio review by a panel of experts, and adhere to a stringent code of conduct. Certification must be renewed on a periodic basis, through further exams or continuing education.
Finally, in selecting a professional photographer, you’ll want to shop around and look at lots of portfolios. Look for range and a consistent quality and cohesive visual style across the artist’s portfolios. Determine how long they’ve been in operating as a professional and how much executive portrait work experience they have. Take a meeting to talk about your company’s brand and what emotions and messages the photos need to evoke.
When you find a photographer’s whose work you love and like and trust, book them. You won’t regret it.
Like many, I am optimistic that the worst of the downturn is behind us, and that brighter days are ahead. As a result, I’m seeing many people starting new businesses, and current business owners that are considering moving to a new location to accommodate anticipated future growth.
Regardless of whether a business requires office, retail, industrial/manufacturing or some other type of property (or all of the above), there is a threshold question: Should I lease or buy the real estate where I will be operating my business?
Here are a few considerations which most any business owner should consider when deciding whether to find real estate to lease or buy.
Cash Flow. Cash flow is always a concern for business owners. Often, leasing is appealing as it normally involves less upfront cost than buying, but can involve greater long-term cost, without the benefit of building equity in the property and realizing on any appreciation in the value of the property (depending on the market, of course).
If you need liquidity and cash to maintain the flexibility to build your business, the upfront costs of purchasing a property may not be the best move. As a practical matter, many small businesses and start-ups without a history of performance or current cash flow may have trouble finding the financing to purchase a property, which could make leasing the only viable option.
Flexibility to Move vs. Being “Stuck”. A lease provides the freedom to relocate when your lease expires. If you love your location and do not want to move, you could end up either overpaying to secure a renewal, or not coming to renewal terms and having to go through and undesired, disruptive moving process. For uses that rely heavily on location, the prospect of having to move is frightening. For more “fungible” uses, this may not be a big deal. If you buy a property and it doesn’t work out for some reason, moving can be a more complicated (and expensive) process.
Do You Need Room to Grow and Expand? If you are certain of your short- to mid-term needs, a lease of X square feet can suit you just fine. But what if there is a chance that next big line of business comes through, doubling your needs in the near future? You could buy a property that currently accommodates (or with some renovation/expansion, could accommodate) that growth potential, so you have the ability to meet current and future needs.
Typically, people do not want to lease (and pay for) more space than they know they will need, and subleasing excess space that you lease is often subject to landlord approval, whereas excess space that you own can be subleased as you see fit. In an office building, it may be the case that the landlord can offer you an expansion right on adjacent space, but that assumes that there is space available at your office property of choice, and that the expansion space of predetermined size/dimensions will suit expansion needs. However, if you purchased a 50,000-square-foot manufacturing facility with a current need for 30,000 square feet of that, you have space available to meet future needs as they arise.
Do You Need Control of the Property? Purchasing affords the owner more control over the use of the property than leasing the same property would, as landlords often want to restrict the extent to which a tenant can use, operate and renovate/improve the property.
Splitting the Difference—Making Real Estate Part of Your Personal Planning.Many business owners have realized the benefit of forming a limited liability company (LLC) for the purpose of owning their real estate, and leasing the real estate back to their operating company. There are tax and other advantages to this structure which may allow your operating company some of the benefits of leasing, while securing the longer-term economic advantage of ownership for yourself.
These are just a handful of the myriad issues that arise when a business owner is faced with a decision about where to set up shop. Be sure to consult with a qualified professional when evaluating what approach works best for you and your business.
Content contributed by Wishart, Norris, Henninger & Pittman, P.A., which partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Andrew McCullough, J.D., at 704-364-0010 or Andrew.McCullough@wnhplaw.com.
As we begin the new year, most HR departments will be rolling out a menu of benefit choices. What is the purpose of these benefits, and what is the advantage or value of each? Let’s explore the most common choices offered by employers and ways these may benefit you.
Many of these options will allow you to contribute pre-tax dollars to an account, which will reduce your tax liability when you file your return by lowering taxable income. To fully appreciate the value of pre-tax dollars, let’s assume you are in the 25 percent tax bracket for federal taxes. For every dollar contributed, you will save a combined 40 cents on federal, state, and payroll taxes.
Flexible Spending Account (FSA)
A flexible spending account allows an employee to contribute up to $2,500 (for 2013) in pre-tax dollars to an account which can be used for doctor co-pays, prescriptions, insurance deductibles and other qualified medical expenses. Over-the-counter medications are no longer eligible for this program unless prescribed by a doctor. One important characteristic of these plans is any amount remaining in the account at the end of the year is lost, and this account cannot be taken with you if you leave your current employer.
Dependent Care Flexible Spending
A dependent care flexible spending account is a type of flexible spending account wherein employees can contribute up to $5,000 annually on a pre-tax basis. These accounts are used to pay for childcare services for children under age 13. Dependent care dollars can also be used for adult dependents (as long as they are claimed as a dependent on your tax return). The caveat of these accounts is that if you are married, both parents must have earned income to qualify for this benefit. As with FSAs, unused amounts do not roll over to future years.
Health Savings Account (HSA)
A health savings account is owned by the employee and used in conjunction with a high deductible health insurance plan. The purpose of these accounts is to allow the employee to accumulate dollars to pay for qualified medical expenses that are not covered by insurance. The types of medical expenses that qualify are very similar to those that qualify under an FSA.
Both employer and employee can contribute to an HSA account. A maximum of $6,450 for a family can be contributed per year. If you are over the age of 55, you can contribute an additional $1,000 per year. Employer contributions are tax deductible to the employer and the employee contributions are made pre-tax. These accounts grow tax-free similar to a 401(k) plan and unused dollars are rolled forward to next year.
Similar to an individual retirement account, you can use contributions to an HSA as a tax planning tool to reduce your tax liability. If you have not already reached your maximum contributions for the year, you can make contributions up to the due date of your tax return to count towards last year’s contribution. The account is portable unlike FSA accounts, which means that if you change employers the money in the account stays with you.
Health Reimbursement Arrangement (HRA)
Health reimbursement arrangements are becoming a popular way for employers to limit their health care costs. In an HRA account, only the employer contributes money. A maximum contribution per employee is set each year by the employer. Unused amounts are never spent and are saved by the employer. This allows the employer to limit its health care costs. As the employee spends money on medical expenses, the employer will write them a reimbursement check on a tax-free basis.
Many employers offer group long-term and short-term disability policies to employees. In most of these programs the employee contributes money on an after-tax basis; however, if a claim is made and benefits are collected, these benefits are tax-free to the employee. A good rule of thumb is to purchase a policy that provides two-thirds coverage of your salary in the case of disability.
The benefit options available for both employers and employees are many and can be a confusing choice of letters and acronyms. The items described here are some of the more popular choices available. With health care costs continuing to rise, employers who want to continue to offer their employees this benefit have to become creative to keep their costs manageable.
If you have any questions about the tax implications of the benefit choices offered to you or any other tax concern, you should contact a CPA.
There are a variety of reasons why people start a new business. In these recent times of layoffs, corporate downsizing and high unemployment rates, you may decide that working for yourself is the best alternative. To get a new business off the ground successfully, consider what resources you will need to develop a solid business plan and successfully carry out that plan. Fortunately, these resources are readily available in your community—you simply have to know where to start.
Nearly 65 percent of new businesses fail within the first five years of operation with the primary reason being lack of proper research. There are steps you can take to improve your chances of success. A good starting point is to seek counsel from reputable, established business owners in your industry. These individuals can offer important planning tips for your business’ early stages. These business owners with “boots on the ground” experience are a vital resource in helping you avoid pitfalls and may provide information that can lead to the development of a more solid industry-specific business plan.
Once you have a feel for the industry, contact your local Small Business Administration (SBA) office. The SBA will provide business research information free of charge in many aspects related to your business. One important aspect is the demographics of the area in which you will practice. A demographic study will help you understand your potential customer base and identify your existing competition.
Make certain that the location where you plan to open your business has both the age and income demographic that will provide the best opportunity for success. The SBA also will provide tips for writing a business plan if you are uncomfortable devising a plan on your own. The Service Corps of Retired Executives, or SCORE, is also a great resource and will help when needed.
The next step is to ensure you have enough capital to carry out your plan. You need to be sure you have access to sufficient funds not only to open your business but also to cover business and personal expenses should times get rough. A business lacking adequate back-up capital is virtually doomed from the start.
Develop a working relationship with a local banker and share your business plan with this person. Even if you do not need funds upon start-up, in lean times or times of expansion, an established relationship with your banker may provide you with funds needed for future plans.
Before you open your doors, hire a qualified certified public accountant (CPA). A successful business owner is organized. Poor organization leads to poor accounting, and poor accounting is one of the biggest reasons that businesses fail. Your CPA can help you provide details of revenues and expenses to solidify your business plan. The more detailed and well thought out the business plan, the better your chances of clinching the financial backing you will need to operate your business.
Understand that your costs and overhead will likely be far higher than you anticipate. The unexpected is to be expected, and may come in the form of anything from escalating equipment, lease or insurance payments to surprise taxes and fees on the local, state or federal levels. A CPA can assist you by working with you and your insurance agent (property insurance, workers’ compensation insurance, owner’s life insurance coverage), real estate agent (leasing property versus purchase of a business site), or payroll service to better understand and control the costs of your business. Your CPA can also help you execute your business plan, including adjusting the plan periodically and helping you to distinguish between long-term and short-term goals of the business.
Hire the services of a reputable attorney. Your attorney, along with your CPA, can advise you on the form of business you should establish, whether you should operate as a sole proprietorship, partnership, limited liability company, or corporation. Each structure offers advantages and disadvantages in the way of taxes and legal liability. If you choose a form of business other than a sole proprietorship, request assistance from your attorney to properly complete the appropriate registration forms for your business structure.The operating and reporting requirements and the tax consequences of each of these forms of business can vary greatly and your CPA can help you best choose the form most suited to your particular business and personal goals.
These trusted business advisors will ensure you are in compliance with licensing requirements, necessary fees, and applicable regulations, and may also assist you in handling other important issues such as tax payments and payroll. Reliance on those crucial business partners allow you to concentrate your energies on operating your business. The expense of obtaining the services of an attorney and a CPA will be recouped many times over.
Butcher, baker, candlestick maker? These villagers provided the essentials of life in the communities of old. In the present day, we all continue to rely on providers of essential services. A new business start-up requires the cooperation of a village of advisors to ensure the entrepreneur better understands the business and its operation in an ever complex economic, legal, and tax environment.
Hurricane Sandy may have caused billions of dollars in property damage, and will likely put many companies out of business in its wake, as major disasters usually do. But your business doesn’t have to partake in national headlines in order to experience disaster.
In fact, for more than 80 percent of businesses experiencing a major disaster this year, it will come in the form of technology mishaps. Even a simple power loss or minor theft can spell major problems for an unprepared small business. The cost of a single small event, such as the data loss associated with the theft of a company laptop, amounts on average to $50,000. By some estimates, 50 percent of small businesses that experience unexpected hardware failure will be out of business within one year.
Yet according to a global study by Regus last year, the percentage of companies with no form of disaster recovery plan remains around 43 percent—and the number among small and medium-sized businesses (SMBs) is higher.
Underlying this startling statistic is the reality that most small businesses simply don’t feel they have the time to devote to something as dauntingly complex as Disaster Recovery and Business Continuity. Traditionally, DR/BC has been the realm of big business, a complicated and expensive multi-step process involving consultants and lots of testing.
But new technology is changing that. For most small businesses, the disaster recovery plan can start with three straightforward items: Ensure employees know where to go and who to contact in the event of an office closing, update insurance policies, and maintain up-to-date, replicated, secure data backups.
Though it sounds complicated, the last step can be both the simplest, and the most important, step of all. Here is everything you need to know to take it in confidence:
Plan Now. Don’t wait until disaster strikes, or you have a new budget and a free weekend, to get started. You can’t afford not to make the investment.
Identify Your Critical Data. Knowing what you have and what you need is critical to ensuring you can access it when you need it. Critical data includes everything you use on a daily basis—employee and customer contacts, financial documents, data files—as well as everything you are required by law to keep and everything you might need later. Don’t forget logo and design files, past customer contacts, and email archives.
Choose a Backup Option. Secure cloud-based solutions are an ideal choice for most SMBs, as they are easier, more intuitive, and more secure than ever before. But know what to look for in a provider.
Choosing Your Backup Provider. Not all data backup services are created equal. Be sure yours meets these criteria, and be confident your company is truly protected:
Ø Multiple offsite replications in at least three distinct geographical regions.This ensures that even if power goes down for you and the rest of your region, your data will be secure and ready to recover as soon as the lights come back on.
Ø Near real-time backups. Current technology makes it easier than ever to ensure you never lose so much as 20 minutes worth of new data.
Ø 24/7 support. Agile data recovery is only possible if you can get help when you need it, because disaster doesn’t limit itself to standard business hours.
Ø Intuitive restoration. A good backup system will allow you to restore your data quickly and simply without technical assistance.
Ø Flexible restoration. Data that comes back in a jumbled mess can cost almost as much to recover as data that doesn’t come back at all. Choose a solution that allows for recovery of files, folders, partitions, mailboxes and messages, databases, and tables.
Ø Secure, encrypted, compressed formats. If a server is compromised by malware or hackers, it’s important that your data not be readable to thieves.
Ø On-site virtual server. While not strictly necessary, having an on-site version of your back-up can mean getting your business up and running significantly faster. Off-site recovery, depending on vendor, can take several days, while on-site recovery usually requires less than a couple of hours.
If you’re among the 43 percent who came into 2012 with no disaster recovery plan in place, commit to starting 2013 with confidence in your ability to recover. Because it doesn’t take a hurricane to make a disaster.