Federal tax credits can help you pay part of the cost of running your business. Many businesses overlook them each year, even though they often qualify for one or more of these credits. Though both tax deductions and credits can save businesses money, they do it in different ways. A deduction lowers the income on which tax is figured, while a credit lowers the tax itself! An additional benefit of the credit is that in many cases, it can be carried-forward from prior years as well as carried back from later years to lower taxes.
There are many general business credits available, covering a wide variety of initiatives, such as alternative energy and employer pension plans. Here are few credits that may apply to your business:
Alternative motor vehicle – This credit is for alternative motor vehicles that you placed in service during the tax year. An alternative motor vehicle is a new vehicle that qualifies as one of the following four types of vehicles: qualified fuel cell motor vehicle, advanced lean burn technology motor vehicle, qualified hybrid motor vehicle, or qualified alternative fuel motor vehicle. The maximum allowable credit varies by vehicle, make, and model.
Alternative fuel vehicle refueling property -This credit applies to the cost of any qualified fuel vehicle refueling property you place in service. Qualified alternative fuel vehicle refueling property is any property (other than a building or its structural components) used to store or dispense an alternative fuel into the fuel tank of a motor vehicle. The credit for all property placed in service at each location is generally the smaller of 30% of the property’s cost or $30,000.
Biodiesel and renewable diesel fuels – This credit applies to certain fuels sold or used in your business. Those fuels include: Biodiesel, Renewable diesel, Biodiesel mixture, Renewable diesel mixture, and Small agri-biodiesel producer. The credit ranges from $0.10 to $1 per gallon of fuel produced or used.
Employees and Customers
Employer-provided childcare facilities and services – This credit applies to the expenses you pay for employee childcare and childcare resource and referral services. Qualified childcare expenditures are amounts paid or incurred to acquire, construct, rehabilitate, or expand property that is to be used as part of a qualified childcare facility of the taxpayer. This credit is 25% of the qualified childcare facility expenditures plus 10% of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The credit is limited to $150,000 per tax year.
Small employer pension plan startup costs – This credit applies to pension plan startup costs for a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. This credit equals 50% of the cost to set up, administer the plan, and educate participants about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. The credit can be carried back or forward to other tax years if it cannot be used in the current year.
Work opportunity – This credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs. An employee is a member of a targeted group if he or she is a: long-term family assistance recipient, qualified recipient of temporary assistance for needy, families (TANF), qualified veteran, qualified ex-felon, designated community resident, vocational rehabilitation referral, summer youth employee, food stamp recipient, or SSI recipient. This credit ranges from 25% to 50% of the wages paid during the first two years of employment.
Empowerment zone – You may qualify for this credit if you have employees and are engaged in a business in an empowerment zone or renewal community for which the credit is available. The credit amounts to 20% of the employer’s qualified wages (up to $15,000) paid or incurred during calendar year on behalf of qualified empowerment zone employees. Parts of Tucson, Arizona qualify as empowerment zones.
Disabled access – This credit is for an eligible small business that incurs expenses to provide access to persons who have disabilities. You must pay or incur the expenses to enable your business to comply with the Americans with Disabilities Act of 1990. The credit can range from $125 to $5125. Eligible access expenditures include amounts paid or incurred:
- To remove barriers that prevents a business from being accessible to or usable by individuals with disabilities
- To provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals
- To provide qualified readers, taped texts, and other methods of making visual materials available to individuals with visual impairments
- To acquire or modify equipment or devices for individuals with disabilities
Increasing research activities – This credit is designed to encourage businesses to increase the amount they spend on research and experimental activities, including energy research. This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer. This credit varies with calculation method.
Energy efficient homes – This credit is available for contractors of qualified new energy efficient homes, as well as reconstruction and rehabilitation of existing homes, whose construction is substantially completed before 2009. The homes are required to be certified to meet certain energy saving requirements. The credit is either $2,000 or $1,000 depending on whether or not the dwelling unit that is certified to have an annual level of heating and cooling energy consumption at least 50% or 30% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component improvements that account for at least 10% of the 50% reduction in energy consumption.
Renewable electricity, refined coal, and Indian coal production – This credit is for the sale of electricity, refined coal, or Indian coal produced in the United States from qualified energy resources at a qualified facility. Generally, the credit is 2.5 cents per kilowatt-hour (kWh) for the sale of electricity produced by the taxpayer from qualified energy resources at a qualified facility during the credit period, which can range from 5 to 10 years. The 2.5 cents credit amount is reduced by 50% for open-loop biomass, small irrigation, landfill gas, trash combustion, and hydro-power facilities. The credit is $7.173 per ton for the sale of refined coal produced at a qualified facility. The credit for the sale of Indian coal produced at a qualified facility applies to the 12 year period beginning in 2006.
Each year, many businesses will overlook tax credits, even though they often qualify for one or more of them. There are many general business credits available covering a wide variety of initiatives! As with many government programs, there are some rules that you need to comply with in order to qualify, however, these can be managed with a little research and planning. So take a closer look at these federal tax credits, they can really impact your company’s bottom line!
How does a good accounting system increase your company’s likelihood of staying in business and earning larger profits?
It helps you answer questions like these:
How much business am I doing and how much of that business is tied up in receivables?
A good accounting system will not only help you track your company revenues, it will help you track how much cash is actually being collected on those revenues. Closely monitoring your collection of accounts receivable is critical to good cash flow management for any business. An effective system will also help you determine what your losses from credit sales were, who owes you money, who is delinquent and who you should continue to extend credit to.
How much cash do I have in the bank? How much is my investment in merchandise? How often do I turn over my inventory? Have I allowed my inventory to become obsolete?
A solid accounting system will give you a complete picture of your company’s assets. It will also tell you if you are utilizing your company assets efficiently. A good system will tell you your cash position at any point in time. It will also tell you how much inventory you are carrying, the makeup of the inventory you have, and how quickly it is turning over.
How much do I owe my suppliers and other creditors?
Knowing how much you owe your creditors and when those bills need to be paid is key to managing your company’s cash flow. It can help you take advantage of favorable credit terms with your suppliers, as well as avoid late payment penalties. It will also help you to maintain strong relationships with those same suppliers.
How much gross profit did I earn? How much profit did I earn and what are my resulting taxes?
Profit: it’s why most business owners are in business. Knowing your company’s gross margin and profit margin is key to having a sustainable business, putting cash in the bank, and paying your taxes. Also, since these are common measurements across many industries, knowing these metrics for your business will allow you to compare your company’s performance to competitors in your industry, as well as best in class in other industries.
What were my expenses, including those not requiring a cash outlay?
This is critical to effectively managing your business and earning a profit. You need to know what your current expenses are in total, as well as the major drivers of those expenses. It is also critical to know how those expenses have changed over time and what they are forecast to be in the future as your company grows.
What is my weekly payroll? Do I have adequate payroll records to meet the requirements for worker’s compensation, social security, unemployment insurance, and withholding taxes?
Having employees that enjoy coming to come to work each day is key to having a productive company. Your employees are depending on you to handle their payroll accurately and on a timely basis. So, keep your employees happy and get your payroll right the first time. Your company’s profitability depends on it.
What is my capital position? How much of my assets would be left after paying my creditors?
Knowing what your company is worth today and what it will be worth in the future will help you to ensure that your company is on track to achieve its short term and long term goals. It will also help you focus on those items in your business that increase its value over time. Furthermore, it could help you position the company for a sale or public offering if that is in your plan.
Are my sales, expenses, profits and capital showing improvement? Did I do better than last year?
If your company’s financial position is not improving, you need to know what is driving it. Being able to analyze the financial performance of your business on a monthly basis will help you understand how your company is changing over time. It will also help you identify those problem areas early on rather than later, so that you can make minor course corrections in your business to stay on track with your goals.
On what line of goods or in what departments am I making a profit?
For companies that provide several products or services, this can be very important. Oftentimes, there will be products or services your provide that are very profitable and others that are not. Knowing the breakdown of these products and services in your portfolio of offerings can help you determine which products or services to provide more of when you are resource constrained.
A good accounting system should be able to answer all the questions above and more. If your not getting this kind of information out of your accounting system on a regular basis, maybe it’s time for a change. If used effectively, a good accounting system can significantly increase your company’s likelihood of staying in business and earning larger and larger profits.
Covid-19 has significantly impacted businesses throughout the United States in many different ways, from government mandated shutdowns to significant decreases in customer demand and disruptions to business supply chains. In an effort to reduce the economic impact of Covid-19, the Internal Revenue Service has recently introduced three important new tax credits available to US businesses with a focus on main street business and employee retention. These new tax credits include the: Employee Retention Credit, Paid Sick Leave Credit and the Family Leave Credit. Business owners will want to take advantage of these credits in the next few quarters to improve their business performance and support their employees.
Employee Retention Credit:
The employee retention credit is designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans such as the Paycheck Protection Program (“PPP”) or the Economic Impact Disaster Loan (“EIDL”).
Qualifying employers must fall into one of two categories:
- The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
- The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
Employers will calculate these measures each calendar quarter and take the tax benefit each calendar quarter until the $10,000 limit is reached or they no longer qualify for the credit.
Paid Sick Leave Credit:
The paid sick leave credit is designed to allow business to get a credit for an employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.
The employer can also receive the credit for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, up to $200 per day and $2,000 in total.
Family Leave Credit:
Employees are also entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. This is a significant benefit to employers allowing them to immediately benefit from this tax incentive.
Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Covid-19 has significantly impacted businesses throughout the United States in many different ways, from government mandated shutdowns to significant decreases in customer demand and disruptions to business supply chains. In an effort to reduce the economic impact of Covid-19, the Internal Revenue Service has recently introduced three important new tax credits available to US businesses with a focus on main street business and employee retention. These new tax credits include the: Employee Retention Credit, Paid Sick Leave Credit and the Family Leave Credit. Business owners will want to take advantage of these credits in the next few quarters to improve their business performance and support their employees.
In these very challenging and uncertain times many companies struggle to maintain focus, and control of their businesses. All too often, these companies become paralyzed by the uncertainty in their markets. In many cases, their lack of decision making, results in the market making the decisions for them and a business closure. The need for sound financial management is even more important during these times. There are several things companies can do to manage and thrive in challenging markets. Here are a few items you may want to consider to help your company maintain its bearing.
Preserving cash is critical in these challenging markets. Deferring expenses and delaying non-critical capital purchases can help to preserve cash. Renegotiating payment terms with vendors to extend loan terms and lower monthly payments can also help preserve cash. Companies should also focus on making their expenses more variable so that they pay more when their sales or usage is higher and pay less when their sales or usage is lower. Some examples of this are putting more employees on commission or an hourly rate vs. salary, renegotiating pricing with your vendors to buy on a usage/per unit basis versus a fixed price contract. Another example is paying for such things as insurance and maintenance on a monthly basis instead of an annual or quarterly basis.
Cost reduction is key in these markets, companies should perform a Pareto Analysis to evaluate the key drivers of their spending. They should then work to eliminate all non-critical expenses and reduce critical expenses. Many companies don’t’ realize what they can do in this area, until they really scrutinize their spending and challenge existing norms. Only spend money on those items that lead to immediate sales profitability and cash flow for the company. Companies should also evaluate their overall operating/manufacturing efficiency during these times. This starts with having clear objectives and good performance tracking capabilities. Companies should identify the underperforming equipment or people and improve their performance or eliminate them.
Update Financial Plans
Updating financial plans can really make a difference in challenging markets. These plans help you to maintain focus and priorities, when the environment around you is changing rapidly. Financial plans that include sensitivity analysis help you determine what your course of action will be under best case, worst case, and most likely case scenarios. These plans help you proactively manage your business instead of being forced to react quickly to changes in your market. These plans help you understand your cash flow today and in the future. They also help you obtain the cash you need before you need it. These plans also help you understand what your financial ratios look like under each of the scenarios and whether or not you are getting close to violating any loan covenants with your bank.
It is important to keep the lines of communication open with your vendors and lending institutions. Let them know what is going on with your business and how you plan to proactively maintain control of the situation. If your vendors and bankers do not hear from you, they can often assume the worst and may take aggressive action to collect any outstanding debt. The more these partners understand your business and believe you will be successful, the more likely they are to work with you in these tough times. Furthermore, in challenging times you may want to consider restructuring your debt with your bank to extend loan terms and lower your monthly principle and interest payments.
Depending on your financial condition, some banks may be willing to allow your business to make interest only payments for a period of time to allow you to weather a downturn in your market. Other banks may consider lowering interest rates on outstanding debt for a period of time to allow a business to bridge a downturn. Still other financial institutions may allow a business to refinance assets to free up cash that can be used to support a business in a difficult market. You may also want to consider applying for SBA loans to help you get through these challenging times. These loan programs come in a variety of shapes and sizes from the traditional 7a and 504 loans to the Economic Injury Disaster Loan and the Paycheck Protection Program Loan.
Continue to Market/Sell
Continuing to market and sell in a challenging market is critical. Many businesses allow challenging markets to distract them from this important part of the business, especially if the business is downsizing its staff during these times. It is important to continue to support existing customers while looking for new opportunities to sell your products and services. Take a proactive role in driving new business; do not wait for the business to come to you. It is the businesses that are able to identify new markets for their products and services that survive these challenging markets.
By implementing these ideas, you have the cash you need to sustain your business in these markets; you have a much better focus on your priorities for the coming months. You also have a lean organization able to adapt to its dynamic market, you have business partners that understand your business and believe in your success and you have a team that is motivated and driven to bring in new business even when the road gets rough. Implementing the ideas listed above can have a very positive impact on your business! You may even find that you pick up a few customers from your competitors that are less savvy in financial management!
Please let us know if you have questions regarding financial management in a challenging market or any other financial, accounting or tax planning issues. We can be reached at (480) 980-3977.
The goal of most business owners is to increase the value of their company. However, in many cases this discussion does not arise until the business owner decides it’s time to sell the company. In most cases, this is too late in the game to have the discussion. Business owners that focus on building shareholder value throughout the life of their companies will create healthier more profitable companies than those that do not. In many cases, these healthier companies will in turn, lead to stronger economies, higher living standards and more career opportunities for individuals.
In the real market, you create value by earning a return on your invested capital greater than the opportunity cost of capital. The more you invest at returns above the cost of capital the more value you create (i.e. growth creates more value as long as the return on capital exceeds the cost of capital). Business owners should select strategies that maximize the present value of expected future cash flow or economic profit.
There are two key drivers of company value: the rate at which the company is growing its revenues, profits and capital base and the return on invested capital (relative to the cost of capital). These value drivers make common sense. A company that earns a higher profit for every dollar invested in the business will be worth more than a similar company that earns less profit for every dollar of invested capital. Similarly, a faster growing company will be worth more than a slower growing company if the both are earning the same return on invested capital.
If we look at the key drivers of company value more closely, here is what we find:
Profit Margin: This reflects the portion of revenue that remains as profit after paying operating costs, such as manufacturing costs, R&D, sales, general and administrative etc.
Asset Productivity: This term refers to the amount of Revenue that you generate from each dollar invested into Operating Assets (i.e. Revenue/Operating Assets). These assets may include such things as property plant and equipment. The more productivity we get out of existing assets or the same productivity we get from fewer assets, the higher the return on invested capital. This higher productivity typically leads to higher revenue, profits and company value.
Growth: A growing company and a stream of cash are worth more to investors than if it were constant or declining. Profit growth is what’s important; a growing company has the opportunity to generate more profits faster and as a result receives a higher value.
There are two fundamental ways to improve profits: increase revenues and or reduce costs. Increasing revenue can be done by:
Strengthen pricing: Success here may mean charging more, holding prices flat, or even slowing price declines. When increasing prices with a repeat customer, you will often need a compelling business reason, such as fuel cost pass-through, severe supply shortages, or a breakthrough new product feature. Analysis on competitor’s prices and your product advantages/disadvantages can give you a solid footing in price negotiations. If you have a large number of customers (like a retail store), you can experiment with different prices to see the impact on sales volume and then set prices to optimize profits. Some customers are willing to pay more than others, and you should look for ways to set different prices for these different customers.
Optimize Product/Customer Mix: Some products are more profitable than others. Likewise, some customers are more profitable than others. When your operations are constrained (e.g. by manufacturing capacity or personnel), you may want to cut low-profit products and customers to make room for high-profit ones. Be careful here not to shoot your golden goose by losing a key customer that you will need later on.
To reduce your product/service cost, set specific goals and incentivize your employees to achieve them. You may set a goal to reduce manufacturing spending by $1M and then pay out $100K in incentive if the goal is achieved. Set goals and incentives each period, and make it a part of your company culture and a point of pride. To help seed cost reduction efforts, identify your largest cost drivers (like raw materials, rent, utilities, and labor), break up the spending categories, and assign a team to each area.
R&D spending is another important focus area for improving profit margin and in turn company value. There are two things to consider when optimizing your R&D investment – setting the right budget and managing R&D productivity. To set the right R&D budget, start out by looking at how much other companies in your industry spend as a percentage of revenue. If your industry spends 10% of revenue on R&D, then this may be a reasonable starting point for your spending. If you have a high growth business relative to your industry, your spending may need to be a larger percentage of revenue. R&D productivity should reflect the quality of the R&D projects that are funded (i.e. are you funding worthwhile projects), speed (i.e. are you getting new products to market quickly), and efficiency (i.e. was the cost reasonable).
Optimizing SG&A spending is an important part of improving profit margin and growth. It is about setting the right spending budget and managing and rewarding productivity. You can again get started by looking at how much other companies in your industry spend as a percentage of revenue and then back into your implied spending level. Define your processes; identify value add steps; and eliminate all other steps. This approach often yields 30% cost improvements. Look to optimize sales, determine what a sale is worth to the company; consider the incremental revenue; the longevity of the revenue stream; and the cost to produce, deliver, and support the product volume. Ensure that sales compensation is heavily commissions based. This helps align incentives, but it also helps ensure that you are not investing more in sales than what you are getting in return.
Look separately at assets that are directly involved in generating revenue (like factories or delivery trucks) and those that are not (like office buildings). For revenue generating assets, look for opportunities to increase output. You may be able to stagger employee break time to keep equipment running; identify your bottleneck assets and improve their availability; or start running a facility 24 hrs a day. There are probably hundreds of ways to improve here, so think of this as continuous improvement rather than a one-time effort.
If you have assets that are not being effectively utilized 90% of the time, you may want to consider selling them.
For assets that don’t directly drive revenue, look for ways to eliminate waste. For example, what would it take to consolidate from three buildings to two? Does every employee need their own desk, or can frequent travelers share a few community desks? What if employees worked from home once per week? Can you use cubicles instead of offices? What about outsourcing some services to save cost and reduce assets?
Growth is a powerful lever for improving company value. Simply put, a growing stream of cash is worth more than if it were constant or declining. Driving growth requires time, motivation, and resources. The best way to manage for business growth is to assign an individual or team to focus on it, free up necessary resources, set goals and incentives, and hold the team accountable. Good ideas will never materialize without proper growth management in place. Once your highly motivated and skilled team is ready to embark on their mission, looking at your products and customers is a good place to start.
Sell more of your current products to your current customers
Sell your current products to new customers who are similar to your current customers.
Sell adjacent products that leverage your core strengths
Partner with a complementary business in a way that is mutually beneficial. For example, each company may introduce the other to their customers in order to grow revenue for both companies.
Advertise through the right channels. Where and how are your target customers being educated on products that you sell, and how can you advertise there?
Some businesses suite themselves well to a sales-force, either internal or contracted. The gauge is whether a sale brings in enough profit to afford the sales commission. If your business model can afford to send sales reps out after new customers, this can be a powerful sales approach.
If your product or service could enhance the offering of other companies, you should consider licensing your product.
The goal of most business owners is to increase the value of their company. Increasing focus on the rate at which the company is growing its revenues, profits and capital base and the return on invested capital is critical to driving business value. Business owners that focus on building shareholder value throughout the life of their companies will create healthier more profitable companies than those that do not. In many cases these healthier companies will in turn lead to stronger economies, higher living standards and more career opportunities for individuals.
Please let us know if you have questions regarding business value creation or any other financial, accounting or tax planning issues. We can be reached at (480) 980-3977.
Business owners, just by their very nature, are greater risk takers than the average person on the street. In many cases, the process of starting a business requires that the entrepreneur put a significant portion of everything they have worked for on the line, based on a belief that their efforts will lead to success. Furthermore, once the risk of starting up is over, other risks, with the potential of even greater opportunity, continue to entice business owners.
Large contracts, new products, acquisitions and expansions into new markets are just a few of the risks. These opportunities along with increased competition are just some of the reasons entrepreneurs need to take a serious look at placing the business at risk again and again. Much of the research about appropriate risk taking, warns against overconfidence, that biases in human behavior against risk might lead business owners to overstate the likelihood of a project’s success and minimize its downside. Such biases were certainly much debated during the financial crisis.
Often overlooked are the behavioral forces, company structures and reward systems that lead businesses to become risk averse or unwilling to tolerate uncertainty even when a project’s potential earnings are far larger than its potential losses. The profit forgone by choosing a safer alternative, putting less money at risk with a shorter time to payoff could result in underinvestment that would ultimately hurt company performance, share-holder returns and the economy as a whole.
Mitigating risk aversion requires that companies rethink activities associated with investment projects that cause the bias, from the processes used to identify and evaluate projects to the structural incentives and rewards used to compensate employees. Much of the typical risk aversion related to smaller investments can be attributed to a combination of two behavioral biases. The first is loss aversion, a phenomenon in which people fear losses more than they value equivalent gains. The second is narrow framing, in which people weigh potential risks as if there were only a single potential outcome instead of viewing them as part of a larger portfolio of outcomes.
Reduce the Effects of Risk Aversion
Diversify Risks Across Multiple Projects
If the same employee faced not one decision but five, the story would change. The employee’s range of outcomes would no longer be an all-or-nothing matter of success or failure, but instead a matter of various combinations of outcomes, some more successful, some less. In other words, combining risks can lead to a striking reduction in risk aversion.
Evaluate employee performance based on a portfolio of outcomes, not single projects.
Wherever possible, employees should be evaluated based on the performance of a portfolio of outcomes, not punished for pursuing a more risky individual project. Reward skill, not luck. Companies need to better understand whether the causes of particular successes and failures were controllable or uncontrollable and eliminate the role of luck, good or bad, in structuring rewards for project owners. They should be willing to reward those who execute projects well, even if they fail due to anticipated factors outside their control, and also to discipline those who manage projects poorly, even if they succeed due to luck.
Promote an organization-wide attitude towards risk that guides individual decisions.
Encourage employees to explore innovative ideas beyond their comfort levels, ask for project ideas that are risky but have high potential returns. Encourage further work on these ideas before formally reviewing them. Require employees to submit each investment recommendation with a riskier version of the same project with more upside or an alternative one.
Consider both the upside and downside.
Business owners should require that project plans include a range of scenarios or outcomes that include both failure and success. Doing so will enable project evaluators to better understand their potential value and their sources of risk. In many cases,downside risks are seldom fixed. If you look at the opportunity creatively and objectively, there are often ways to decrease the downside and reduce the risks. The range of scenarios evaluated should not simply be the baseline scenario plus or minus an arbitrary percentage. Instead, they should be linked to real business drivers such as penetration rates, prices, and production costs. By forcing this analysis, business owners can ensure that the likelihood of a home run is factored into the analysis when the project is evaluated and they are better able to thoughtfully reshape projects to capture the upside and avoid the downside. One rule every business owner needs to follow, if you do not have the time to determine what the downside is, pass on the opportunity.
Have a Contingency Plan
Even though the majority of time and effort spent evaluating an opportunity will not, and should not, be directed towards the downside, it is important to have a back-up plan. The contingency plan needs address how the company would recover in a worst case scenario. From there, a step-by-step plan can be designed. The major value of having a contingency plan is that if the ship starts sinking, benchmarks and plans to take action have already been devised. A contingency plan can also help keep the business focused on going forward with the knowledge that a back-up plan is in place.
Utilize Your Trusted Advisors
At times like this, you need to rely on the opinions of your advisors. Talking to the company’s accountant, banker, attorney, or other business people can provide a wealth of information based on their professional or life experiences. The purpose of listening to these individuals is not necessarily to do what they say, but to build a foundation of information upon which to base the decision.
Monitor Your Results
Compare your actual results to your projected results on a regular basis. If the project is not going according to plan, understand what is causing the diversion and take action to correct it as soon as possible. Also, understand at what point you begin execution of your contingency plans. Monitoring project results on a regular basis can allow you to identify when a project is not on track and gives you the time to make the necessary course corrections to get it back on track.
Business owners, just by their very nature, are greater risk takers than the average person on the street. However, often overlooked are the behavioral forces, company structures and reward systems, that lead businesses to become risk averse or unwilling to tolerate uncertainty even when a project’s potential earnings are far larger than its potential losses. The profit forgone by choosing a safer alternative, putting less money at risk with a shorter time to payoff could result in underinvestment that would ultimately hurt company performance, share-holder returns, and the economy as a whole. Utilizing techniques to encourage employee risk taking, evaluating performance on a portfolio of outcomes, considering a project’s upside and downside, having a contingency plan, utilizing your advisors and monitoring performance, can have a significant impact on a business owner’s ability to effectively manage risk.
Please contact Pinnacle Business Solutions if you have questions concerning managing business risk or any other financial or business planning issues.
Business credit cards have been around for many years, but only recently explicitly targeted true entrepreneurs by offering special financing incentives. Now, major credit card issuers are going after the small business market with a diverse array of credit card products. What isn’t explicitly stated in most credit card offer’s is the fact that business owners can leverage startup and working capital. Furthermore, streamline the buying process for essential business purchases. They may also provide capital solutions for new employees who do not have sufficient personal credit to cover their business expenses.
Credit Card Overview
Credit Cards Can Help Extend Company Cash Flow
For businesses that rely on consistent cash flow for supplies or contractors, a business credit card that can aid in purchases before invoicing customers is ideal. For example, a computer manufacturer may use a credit card at the beginning of the month to buy materials from its computer parts supplier and then pay the card off when the statement comes at the end of the month and its customers have paid for their computers. This way money paid out by the company does not need to come from the computer manufacturer’s cash accounts.
Credit cards offer flexible credit limits, some include fairly generous spending limits while other have no preset spending limits. If your business spending needs increase dramatically due to inventory purchases, a credit card with a flexible spending limit can give you the short term working capital you need to continue doing business. Credit cards can also help businesses on the record keeping side, which is crucial for proper business management. Credit card statements, particularly year end statements, report spending by category which will help the business managers monitor their spending more closely. Having these statements will also make it easier for your CPA to prepare your business tax return.
Credit Card Solutions
Business credit cards come in a variety of sizes and shapes. There are small business credit cards, company credit cards and corporate credit cards offered by the major issuers of Visa, MasterCard and American Express. In general, small business credit cards are targeted at privately held small businesses with less than 100 employees. The unique characteristic of these cards is that they are most often guaranteed by the employee, the business, and the business owner or principal of the firm.
Company credit cards are targeted at companies that have been in business for 2 to 3 years, and are consistently generating revenue and profitability or have a higher net worth (i.e. greater than $1M). These cards are often guaranteed by just the employee and the business. There are also company credit cards available that only have to be guaranteed by the business. However, the company will have to secure the combined credit limit on these cards with some type of collateral such as cash or certificates of deposit held in an escrow account at their bank.
Corporate credit cards are offered to Fortune 500 sized companies and are generally issued in the name of the corporation. As with the nature of corporate structure in American business law, the corporation is considered an individual, and the liability for repayment is placed upon the organization and not the individual using the card. The secondary responsibility between the company and its employees is set and enforced using human resource policies.
Credit Card Terms
Most credit cards contain terms and conditions that cover how the card can be used, what kind of charges the card holder will incur, and a preset monthly spending limit based on business credit history. That spending limit could range from $1,000 to $50,000 per card depending on the company. Some cards do not have a preset spending limit, however, the outstanding balance on these cards is required to be paid off each month.
Many cards charge the holder a fee to use the card such as an annual fee ranging from $0 to $200 per card. All cards come with a stated annual interest rate (or APR) which is charged on all outstanding balances that are carried over from month to month. Interest rates can range from introductory limited time annual interest rates of 0% to annual interest rates as high as 18% APR. Beware of credit cards that offer a very low introductory rate for a limited time, say the first six months, to get your business and then automatically convert to a regular APR of 15% to 18% after the six month period has ended.
Many credit cards offer rewards for making purchases. Rewards can take the form of travel rewards, discounts on autos/gas purchases, discounts on retail purchases, contributions to various types of savings plans and cash back. Cash back awards can range from 1% to 5% of the value of the purchases made.
Find The Card That Is Right For Your Business
Before you select a credit card for your business, ask yourself a few questions.
- How many cards do I need for my business/employees?
- What kind of purchases will my business make with the card?
- Where will my employees use the card; domestically or internationally?
- How much will my business charge on the card?
- Do I plan to pay the card off every month?
- Who will be responsible to guarantee payment of the outstanding balance on the credit cards?
- What credit card rewards could be most effectively utilized by the business?
Knowing the answer to all of these questions will help you determine which credit card solution will work most effectively for your business.
If used properly they can be quite effective in addressing a business owners startup and working capital needs and help streamline the buying process for essential business purchases. They may also provide capital solutions to new employees who do not have sufficient personal credit for business expenses and can even help businesses with their record keeping!
The verdict is still out on the effectiveness of the Tax Cut and Jobs Act (“TCJA”) with increasing GDP, lower unemployment and increasing wages offset by increases in our nation’s deficit and debt (105% of GDP in 2018). That being said, there are several provisions of the TCJA that will impact businesses and individuals in 2019. Here are a few of the key provisions you will want to be aware of.
C Corporation Tax Rate
The C Corporation tax rates changed to a flat rate of 21% effective January 1, 2018. This includes personal service corporations.
|Taxable Income||Tax Rate 2019/2020|
|Less than $50,0000||21%|
|$50,000 – $75,000||21%|
|$75,000 – $10,000,000||21%|
|Greater than $10,000,000||21%|
Qualified Business Income Deduction
Effective January 1, 2018, in the case of a taxpayer other than a C Corporation there shall be a deduction with respect to any qualified trade of business of an amount equal to the lessor of:
- 20% of the taxpayers qualified business income
- The greater of:
a. 50% of the w-2 wages of the qualified business
b. The sum of 25% of the w-2 wages of the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property
*Please note that the w-2 limitation (2 above) does not apply to any taxpayer whose taxable income for the year does not exceed $321,400 MFJ and $160,700 single. The w-2 limit applies fully for a taxpayer whose taxable income is in excess of the threshold amount by $100,000 MFJ, $50,000 single. Also, note that if your business is a Specified Service Trade or Business (i.e. Health, Law, Accounting, Financial Services) and your taxable income exceeds $421,400 MFJ and $210,700 single, you no longer qualify for the deduction.
Section 179 Expense Limitations and Modifications
The maximum amount a taxpayer can elect to expense under sections 179 is increased from $1,000,000 in 2018 to $1,020,000 Furthermore, the deduction limit or phase out began at $2,500,000 in 2018, this limit is increased to $2,550,000 in 2019. The Section 179 limit for SUVs, Trucks, Vans over 6000 pounds GVWR is $25,000. A truck or van that is a qualified non-personal use vehicle is not subject to the annual depreciation limit.
Taxpayers are required to take and additional first year special depreciation allowance for certain qualified property. This deduction is calculated after taking any Section 179 and before any regular depreciation deduction. This additional depreciation taken on new or used property is held at 100% from 2018 to 2022. This increased deduction also applies to Longer Production Period Property and Certain Aircraft. After 2022, the deduction is reduced 20 percentage points each year until it reaches 0% for qualified property and 20% for Longer Production Period Property and Certain Aircraft in 2027. The additional first year bonus depreciation for vehicles purchased after 9/27/17 remained at $8,000 for 2019.
Qualified Opportunity Funds
This new tax provision provides an effective deferral mechanism for short and long-term capital gains from current investments in nearly all asset classes including stocks and other securities. Unlike Section 1031 “like-kind” deferral, qualified opportunity zones will provide: (i) the ability to invest only the gain rather than the entire current investment, (ii) a broader range of investments eligible for the deferral, (iii) a potential basis step-up of 15 percent of the initial deferred amount of investment, and (iv) an opportunity to abate all taxation on capital gains post-investment.
The new provision allows taxpayers to defer the short term or long-term capital gains tax due upon a sale or disposition of property if the capital gain portion of the sale or disposition is reinvested within 180 days in a “qualified opportunity fund”. A “Qualified Opportunity Zone Fund” is a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property. A Qualified Opportunity Zone is a population census tract that is a low-income community that is designated as a qualified opportunity zone. The governor of each state and the US Treasury Department certify the qualified opportunity zones within a state. In Arizona portions of Phoenix, Scottsdale, Glendale, Tempe and Mesa have been designated as Opportunity Zones.
Limitation of Business Interest Deduction
Effective January 1, 2018, the deduction of business interest will be limited to the sum of:
- Business interest income of the taxpayer for the tax year
- 30% of the adjusted taxable income of the taxpayer for the tax year
- The floor plan financing interest of the taxpayer for the tax year
The amount of any business interest not allowed as a deduction for any taxable year shall be treated as business interest paid or accrued in the succeeding taxable year. There is an exemption from this provision for certain small businesses with average annual gross receipts of less than $25 million for the proceeding 3 tax years.
Repeal of 2 Year Net Operating Loss Carryback and Limit of Carryovers
For losses arising in taxable years after December 31, 2017, the NOL deduction is limited to 80% of taxable income. Furthermore, the Tax Cuts and Jobs Act repeals the 2-year carryback provision except for farming businesses and property and casualty insurance companies.
Limitation of Excess Business Losses of Non-Corporate Taxpayer
Effective January 1, 2018, any excess business losses of the taxpayer shall not be allowed. Where “excess business loss” means the excess of aggregate deductions attributable to the business of the taxpayer over the sum of:
- The aggregate business income/gain of the taxpayer
- $250,000 single and $500,000 MFJ
Research and Development Expenditures
Currently taxpayers may elect to deduct certain expenses for research and development in the current year. Effective after December 31, 2021, research and development expenses will be required to be capitalized and amortized ratably over a 5-year period.
Business Meals and Entertainment Expenses
Effective January 1, 2018, businesses may no longer deduct expenses generally considered to be entertainment, amusement or recreation, membership dues with respect to any club organized for business, pleasure, recreation or other social purpose or a facility used in connection with any of the above. Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
The seven Individual Income Tax Brackets will remain as follows:
Income Tax Brackets for 2019
|(10% Below)||Married Filed Jointly||Single|
|Beginning of the 12% Bracket||$19,400||$9,700|
|Beginning of the 22% Bracket||$78,950||$39,475|
|Beginning of the 24% Bracket||$168,400||$84,200|
|Beginning of the 32% Bracket||$321,450||$160,725|
|Beginning of the 35% Bracket||$408,200||$204,100|
|Beginning of the 37% Bracket||$612,350||$510,300|
The marriage penalty is removed in every bracket except 37% for 2018 – 2025.
Standard Deduction/Personal Exemption
Effective January 1, 2018 through 2025, the standard deduction and personal exemption will change as follows:
|Standard Deduction (Single)||$12,200|
|Standard Deduction (MFJ)||$24,400|
Capital Gains and Qualified Dividend Rates for 2019 are as follows:
|Taxable Income (MFJ)||Taxable Income (Single)||Tax Rate|
|Less than $78,750||Less than $39,375||0%|
|Less than $488,450||Less than $434,550||15%|
|Greater than $488,850||Greater than $434,550||20%|
Net Investment Income Tax
This rate remains at 3.8% for 2019 and applies to modified AGI above $250,000 MFJ and $125,000 Single. An individual is subject to the net investment income tax on the lessor of net investment income (i.e. gross income from interest, dividends, annuities, royalties, rents, gain on disposition of property) for the year or or modified adjusted gross income for the year exceeding the threshold amount.
Additional Medicare Tax
This rate remains at .9% for 2019 and applies to wages and self employment income in excess of $250,000 MFJ, $125,000 Single.
State and Local Taxes
Effective January 1, 2018, an itemized deduction is allowed up to $10,000 for state and local income and property taxes, prior to this date this deduction was not limited.
Qualified Residence Interest
Effective January 1, 2018 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:
|Acquisition Indebtedness Limit (MFJ)||$750,000|
|Home Equity Indebtedness Limit (MFJ)||$0|
Miscellaneous Itemized Deductions
Effective January 1, 2018 through 2025 these deductions are suspended.
Alternative Minimum Tax (“AMT”)
The AMT exemption amount increases from $109,400 in 2018 to $111,700 in 2019 MFJ, $70,300 in 2018 to $71,700 in 2019 Single. Furthermore, the phase out threshold for the exemption is increased from from $1,000,000 in 2018 to $1,020,600 in 2019 MFJ, $500,000 in 2018 to $510,300 in 2019 Single.
Shared Responsibility Payment
Effective January 1, 2018, the shared responsibility payment enacted as part of the Affordable Care Act is reduced from $272 per month (Single), $1,360 per month (family of five), to $0 for both categories.
Child Tax Credit Enhanced
This credit was held flat at $2,000 per child from 2018 to 2019. The phase out for the credit was held flat at AGI of $400,000 MFJ and $200,000 Single from 2018 to 2019. There is also a $500 credit for qualifying dependents other than qualifying children.
There are many provisions in the Tax Cuts and Jobs Act legislation that will impact businesses and individuals in 2019. It is in your best interest to understand these changes in the tax law as they could impact both your business and personal bottom lines!
Please let us know if you have questions concerning the 2019 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!
One of the greatest benefits you can provide to your staff is a retirement plan. Retirement plans provide benefit to the employee as well as the employer. Retirement plans allow you to invest now for financial security when you and your employees retire. As a bonus, you and your employees get significant tax advantages and other incentives.
Employer contributions are tax-deductible. Assets in the plan grow tax-free. Flexible plan options are available. Tax credits (small employer) and other incentives for starting a plan may reduce costs. A retirement plan can attract and retain better employees, reducing new employee training costs.
Employee contributions can reduce current taxable income. Contributions and investment gains are not taxed until distributed. Contributions are easy to make through payroll deductions. Compounding interest over time allows small regular contributions to grow to significant retirement savings. Retirement assets can be carried from one employer to another. Saver’s Credit is available up to $2000 for married couples. The employee has an opportunity to improve financial security in retirement.
Individual Retirement Arrangements (IRAs)
You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older. The most you can contribute to all of your traditional IRA in 2013 is the smaller of, $5,500, or $6,500 if you’re age 50 or older by the end of the year, or your taxable compensation for the year. Your contribution must be made by your tax return filing deadline (not including extensions). For example, you have until April 15, 2014, to make your 2013 contribution. You must start taking required minimum distributions by April 1 following the year in which you turn age 70½ and by December 31 of later years. Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable as ordinary income. However, it’s still a great deal considering the net present value of that tax you pay in 30 years is significantly less (~90% less) than if you were to pay the tax on that income today. Please note that if you are under age 59 ½ you may have to pay an additional 10% tax penalty for early withdrawals unless you qualify for an exception. You cannot take a long term loan against your IRA account.
You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts. Your contributions aren’t deductible, but your investment earnings grow tax free. The contribution limits and filing deadlines are the same as the traditional IRA. You are not required to take required minimum distributions. Qualified distributions (made after the 5 year tax year period) are not taxable. Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax penalty for early withdrawals unless you qualify for an exception. You cannot take a long term loan against your IRA account.
A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals). Employers can contribute to employees’ accounts. Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts). There is a limit on the amount of elective deferrals that you can contribute to your traditional or safe harbor 401(k) plan is $17,500 for 2013. You can take a loan against your 401(k) up to $50,000 or 50% of vested account balance, whichever is less. The elective deferral/catch up contribution age 50 and older limit increases to $5,500 for 2013.
There are other limits that restrict contributions made on your behalf. In addition to the limit on elective deferrals, annual contributions to all of your accounts – this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts – may not exceed the lesser of 100% of your compensation $51,000 for 2013. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $255,000 for 2013. Although contributions are not treated as current income for federal income tax purposes, they are included as wages subject to social security (FICA), Medicare, and federal unemployment taxes (FUTA) or by most State governments until they are distributed. A 401(k) plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.
- Traditional 401(k) plans allow eligible employees (i.e., employees eligible to participate in the plan) to make pre-tax elective deferrals through payroll deductions. In addition, in a traditional 401(k) plan, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both. These employer contributions can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes non-forfeitable only after a period of time, or be immediately vested. Rules relating to traditional 401(k) plans require that contributions made under the plan meet specific nondiscrimination requirements. In order to ensure that the plan satisfies these requirements, the employer must perform annual tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.
- Safe harbor 401(k) plans. A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
- SIMPLE 401(k) plans. The SIMPLE 401(k) plan was created so that small businesses could have an effective, cost-efficient way to offer retirement benefits to their employees. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans. As with a safe harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year. Limits on the amount of elective deferrals that a plan participant can contribute to a SIMPLE 401(k) plan are different from those in a traditional or safe harbor 401(k). The limit is $12,000 in 2013. The catch up contribution is $2500 in 2013. Employees who are eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer.
403(b) Plans – A tax-sheltered annuity (TSA) plan is a retirement plan, similar to a 401(k) plan, offered by public schools and certain 501(c)(3) tax-exempt organizations. An individual may only obtain a 403(b) annuity under an employer’s TSA plan.
SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan. They are available to any small business – generally with 100 or fewer employees. Easily established by adopting Form 5304-SIMPLE, 5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan document. Employers cannot have any other retirement plan. There is no filing requirement for the employer. The employer is required to contribute each year either a: Matching contribution up to 3% of compensation, or 2% non-elective contribution for each eligible employee. Employees may elect to contribute. Employee is always 100% vested in all SIMPLE IRA money. The amount the employee contributes to a SIMPLE IRA cannot exceed $12,000 in 2013. The catch-up contribution limit for SIMPLE IRA plans for 2012 and 2013 is $2,500. These plans are relatively easy and inexpensive to set up and operate. The employees share responsibility for their retirement. There is no discrimination testing required. Although, they have Inflexible contributions and lower contribution limits than some other retirement plans
SEP Plans (Simplified Employee Pension)
A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP. The Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay. It is available to any size business. It is easily established by adopting Form 5305-SEP, a SEP prototype or an individually designed plan document. If Form 5305-SEP is used, the business cannot have any other retirement plan (except another SEP). There is no filing requirement for the employer. Only the employer contributes. Employee is always 100% vested in (or, has ownership of) all SEP-IRA money. They are easy to set up and operate and have low administrative costs. They also have flexible annual contributions – good plan if cash flow is an issue. However, employer must contribute equally for all eligible employees and SEP’s do not provide for participant loans.
A SARSEP is a Simplified Employee Pension (SEP) plan that was established before 1997. Permits employee salary reduction contributions. Meets the following participation requirements annually based on all eligible employees (even those hired after 1996): At least 50% of eligible employees must choose to make employee salary reduction contributions for the year. Had no more than 25 employees who were eligible to participate at any time during the preceding year.
Payroll Deduction IRAs
Under a Payroll Deduction IRA, employees establish an IRA (either a Traditional or Roth IRA) with a financial institution and authorize a payroll deduction amount for it. A business of any size, even self-employed, can establish a Payroll Deduction IRA program. Payroll Deduction IRAs have the same limits as other IRAs.
Contributions to a profit-sharing plan are made by the employer only and are discretionary. There is no set amount that you need to make. If you can afford to make some amount of contributions to the plan, then go ahead. If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money goes into a separate account for each employee. If you establish a profit-sharing plan, you can have other retirement plans. You can be a business of any size. However you are required to annually file a Form 5500. This plan offers greater flexibility in contributions as contributions are strictly discretionary. It is a good plan if cash flow is an issue. However, administrative costs may be higher than under more basic arrangements. You will also need to test that benefits do not discriminate in favor of the highly compensated employees. Contribution Limits: The lesser of 25% of compensation $51,000 for 2013. Participant Loans are permitted under this plan.
Defined Benefit Plans
Employers can generally contribute (and, therefore, deduct) more than to other types of plans. Substantial benefits can be provided – even with early retirement. Vesting can be immediate or spread out over a seven-year period. Benefits are not dependent on asset returns. If you establish a defined benefit plan you: can have other retirement plans, can be a business of any size, need to annually file a Form 5500 with a Schedule B, need to have an enrolled actuary determine the funding levels and benefits cannot be retroactively decreased. Significant benefits are possible in a relatively short period of time. Employers can contribute (and deduct) more than under other retirement plans. Deduction limit is any amount up to the plan’s unfunded current liability (see an enrolled actuary for further details). These plans provide a predictable benefit. They can be used to promote certain business strategies by offering subsidized early retirement benefits. However, these are the most costly type of plan and are the most administratively complex. An excise tax applies if the minimum contribution requirement is not satisfied.
Money Purchase Plans
Money purchase plans have required contributions. Employers are required to make a contribution, on behalf of the plan participants, to the plan each year. Employees may also contribute to these plans. With a money purchase plan, the plan states the contribution percentage that is required. For example, let’s say that your money purchase plan has a contribution of 5% of each eligible employee’s pay. You, as the employer, need to make a contribution of 5% of each eligible employee’s pay to their separate account. A participant’s benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement. It is possible to grow larger account balances than under some other arrangements. However, administrative costs may be higher than under more basic arrangements. You are required to test that benefits do not discriminate in favor of the highly compensated employees. An excise tax applies if the minimum contribution requirement is not satisfied. Contributions are limited to the lesser of 25% of compensation or $51,000 in 2013. Annual filing of Form 5500 is required. Participant Loans are permitted.
Employee Stock Ownership Plans (ESOPs)
An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/ money purchase plan. An ESOP must be designed to invest primarily in qualifying employer securities as defined by IRC section 4975(e)(8) and meet certain requirements of the Code and regulations. The IRS and Department of Labor share jurisdiction over some ESOP features.
Retirement plans can help you attract and retain better employees. Furthermore, this can help you improve company performance and reduce new employee training costs. If you questions regarding retirement plans or any other tax planning strategies, schedule a consultation with us today!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
If you get a call from the “IRS” threatening you with lawsuits or jail unless you pay up immediately … guess what? It’s a scam. IRS impersonation and tax scams by phone, email, postal mail and text are ongoing. Criminals use more and more creative ploys to trick taxpayers and tax preparers. Don’t be a victim.
The IRS doesn’t initiate contact with taxpayers by email, text message or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.
Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.
The IRS will never:
- Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
- Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
- Require you to use a specific payment method for your taxes, such as a prepaid debit card.
- Ask for credit or debit card numbers over the phone.
- Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:
If you don’t owe taxes, or have no reason to think that you do:
- Do not give out any information. Hang up immediately.
- Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
- Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.
- If you know you owe, or think you may owe tax:
- Call the IRS at 800-829-1040. IRS workers can help you.
A phishing scam is an unsolicited, bogus email that claims to come from the IRS, your bank, your credit card company, or your employer. They often use fake refunds, phony tax bills, threats of an audit or request personal or financial information. Some emails link to sham websites that look real. The scammers’ goal is to lure victims to give up their personal and financial information. If they get what they’re after, they use it to steal a victim’s money and their identity.
If you get a ‘phishing’ email, the IRS offers this advice:
- Don’t reply to the message.
- Don’t give out your personal or financial information.
- Forward the email to email@example.com. Then delete it.
- Don’t open any attachments or click on any links. They may have malicious code that will infect your computer.
Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.
Please let us know if you have questions concerning these IRS tax scams or any other tax compliance or planning issues.
Note: The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
Data Source: Internal Revenue Service