Once you have researched long-term care insurance and are seriously considering buying a policy, there are still many things to consider before your purchase, says Robert D. Coode, a Principal and Registered Representative at Skoda Minotti.
“Make sure you’re doing it for the right reasons and are not being swayed by unsubstantiated sales pitches,” Coode says.
He says potential buyers should consider possible increases to the premium over time; the definition of terms, such as what constitutes an assisted living facility in different states; the financial strength of the institution from which the policy is being purchased; and the chance that an unscrupulous agent is out to inflate his or her commissions to the detriment of the client.
Smart Business spoke with Coode about buying long-term care insurance and what to be wary of before jumping into a policy.
What is long-term care insurance?
Long-term care insurance helps those with chronic illness, disability or those who are unable to perform the basic activities of daily living to offset the cost of care. These policies generally cover services not addressed by health insurance, Medicare or Medicaid.
Are all types of care facilities covered through these policies?
Currently there are no national standards for what constitutes a long-term care facility. This means that an assisted living facility or adult daycare could have one meaning in a particular policy or state and another elsewhere.
This can pose a problem if you buy a policy in one state and retire to another. There could be no facilities in your new state that match the definitions in your policy. To protect yourself, make sure you understand exactly what the policy covers before you buy it.
If I purchase a policy now, will premiums remain the same over the life of the policy?
With most policies, your age at the time you purchase the policy is a factor in determining premiums. However, that doesn’t mean your premiums will stay the same as long as you own it. In fact, your premiums can increase if your insurance company establishes a rate increase for everyone in your class and the state insurance commissioner approves increase.
As a relatively new type of insurance, long-term policies could be more susceptible to rate increases because insurance companies lack a sufficient amount of underwriting data to predict the number and size of claims they can expect in the future. Unfortunately, if your insurance company raises premiums, taking your business elsewhere might not be that simple. Any premium on a new policy will still be based on your age, which will be older, and your health, which might be worse than when you initially bought the coverage. So no matter when you buy your policy, make sure you can afford the premiums both now and in the future.
Is the financial stability of the insurance carrier relevant to the purchasing decision?
A large number of unexpected long-term care claims could potentially devastate an insurance company that isn’t financially strong. So before you buy a policy, it’s always a good idea to check the company’s financial rating by using a rating service such as Standard & Poor’s, Moody’s, A.M. Best or Fitch Ratings. You can also check with your state’s insurance department for more specific financial information on particular companies.
Is a long-term care policy a good tax write-off?
Although it’s true that premiums paid on a tax-qualified long-term care policy can reduce your tax burden, it’s important to note that you must itemize deductions to be eligible. This type of insurance premium falls under the write-off for medical and dental expenses, which is limited to expenses exceeding 7.5 percent of your adjusted gross income. For example, if your adjusted gross income is $60,000, you are able to deduct only that portion of your unreimbursed medical and dental expenses, including long-term care premiums, exceeding $4,500.
However, there’s another caveat. Even if your premiums exceed 7.5 percent of your adjusted gross income, you can’t include all of the premiums in your deduction for medical and dental expenses. Instead, your premiums are deductible according to a sliding scale that’s contingent on your age. So what might look like a great tax write-off at first might not be so great after all.
Also, it’s important to note that beginning in 2013, the threshold to deduct medical expenses will be raised from 7.5 percent of adjusted gross income to 10 percent. The threshold increase will be delayed until 2017 for those ages 65 and older.
What should someone keep in mind when switching policies?
Although in some cases a new policy might have an attractive added benefit that your old policy doesn’t, red flags should go up if an insurance agent encourages you to ditch your old policy for a new one without providing a clear explanation of the added benefits.
For one thing, your premiums are based on your age and health at the time you purchase the policy. So all other things being equal, your new policy will be more expensive. For another, you run the risk that a pre-existing condition won’t be covered under the new policy.
If you’re unhappy with your current policy, an alternative might be to upgrade it rather than replace it. Unfortunately, there are unethical agents who make misleading comparisons of long-term care policies in an attempt to get you to switch products for no more reason than to boost their commission.
If you’re considering switching policies, make sure you understand exactly what the new one offers, whether the additional coverage is important to you and what you’re giving up in the exchange.
Robert D. Coode is a Principal and Registered Representative with Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.
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When you’re launching a product or considering new markets, do you perform market research before moving ahead? If you do, then are you really listening to the results, or just looking for results that support what you’ve already decided to do?
“Companies that I have seen that conduct their own research sometimes get caught looking for data points to support what they want to do rather than looking for data points to validate their ideas,” says John Moore, managing director — strategic marketing programs, with Skoda Minotti’s Strategic Marketing Group. “Market leaders truly embrace market research, and when they do get results that don’t support their position, they change their strategic direction.”
Smart Business spoke with Moore about the market research process and the times when it is critical to engage in it.
When are key times to conduct market research?
Before you start a business, you need to look at total strategy development, with research as a component of the plan. You need to know your markets, who your customers are, who the competition is, what price points you can use to position your product, and what sales channel you should use. Answers to these questions are all gained through market research, by digging into data, using industry reports, accessing online data, using government information, conducting face-to-face focus groups and phone surveys, and attending industry trade shows.
Market research provides you with the base to develop the strategy and provides direction for moving forward. But as you continue, you may find that you need to change your strategy. For example, you may find a business similar to the one you want to start so you may decide an acquisition is a better path than a startup.
Although there are ways to ‘mine’ the data yourself, it’s sometimes better to have an outside party involved to validate your plan and help you develop a strategy. Having that outside research partner gives you input from someone who may see something you are overlooking because of a bias. An outside research partner may minimize ‘group’ think and may provide a different view when looking at the same data.
How can market research help with the launch of a new product?
Before developing a new product, a market researcher should be involved from the development of the idea through all the stages of the product development cycle. This includes from design to marketing to sales. For example, if a company has an idea, market research can help validate and define market potential. Basic questions will be answered. Will anyone buy the product? How will it be used? What features should be included that benefit the customer? How should it be priced? How will it get to market?
In fact, in the initial research, you may find the product isn’t needed. For example, a sales group suggested a new product, but the company wasn’t sure it could allocate the engineering design resources. In this instance, the marketing partner surveyed customers regarding the features and functions of the new product. In the end, the customers said they didn’t need the features. This research saved the business a significant amount of money in engineering resources, freeing those people to perfect products the company already had. This is what the customers wanted.
Another example of market researching being used to validate a new product involves a product being developed for the fire industry. Focus groups helped to shape the idea for the product and then broader population of fire chiefs evaluated it. From that research, a prototype was developed and sent to fire departments for beta testing, and it was then sent to a university to test according to established industry criteria. After each step, the process was stopped and evaluated to determine if it should continue. The product launch was successful. Had it not gone through all of those stages, the company could have gone to the considerable expense of developing a new product that nobody wanted.
How can market research assist in determining a new market?
You should know where your competition and your customers are located. You should map where your customer base and potential customers are. Then you need to ask: Do I have the proper support? Do I need channel partners to sell to this new area? Do I have the direct sales team to support this new area? You also need to consider regional pricing issues. Take the time to look at the strategy you want to implement, find additional data, and if it’s a significant opportunity, go to the area to look around and talk to local officials and the chamber of commerce.
How can partnering with a market research professional improve the process?
A market research professional can help you determine possible results before you even get started. A research professional can also help you establish your objectives. Are you looking to grow sales revenue, reduce costs, increase brand awareness and recognition, or take market share from a competitor?
They will help you dig in to what you do well and what needs improvement. They should provide a collaborative environment and work closely with you, treating every decision as if it was a decision they had to make themselves for their own business. At the end of the day, that person is telling a story to your business. It may not be a story that you want to hear, but it includes all the facts, allowing you to make an informed decision to grow your business.
John C. Moore is managing director – strategic marketing programs, with Skoda Minotti’s Strategic Marketing Group. Reach him at (440) 449-6800 or firstname.lastname@example.org.
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As a company grows, its information technology (IT) needs to grow with it. But some areas may be overlooked in the day-to-day hustle of getting the job done, says Timothy A. Heikkila, a principal with the Skoda Minotti Technology Partners Group.
“Companies should be considering options such as the cloud, looking at the security of their data and setting up a disaster recovery plan,” says Heikkila. “An outside advisor can help you ask the right questions and identify areas of concern.”
Smart Business spoke with Heikkila about what IT issues growing businesses should be concerned about and how to address those issues.
What is the first IT issue that growing businesses should look at?
As a business’s IT needs grow, companies need to consider whether cloud computing makes sense. If you aren’t familiar with cloud computing, it’s essentially remote access to applications and services via the Internet; it gives you secure access to all your applications and data from any network device.
Would it be cost effective to take your company’s e-mail to the cloud so that you don’t have to worry about maintaining data at your own location? When considering questions like these, companies should really weigh the pros and cons of taking that step. For instance, do you already have a location for your servers in-house, are you going to have remote offices, do you have a large traveling sales force? For a single location office, the cloud may not be a beneficial or cost-effective step, but for a company with multiple locations or a traveling sales force, it could make perfect sense to have your data housed at a central location in the cloud so that everyone shares access.
How can an outside technology expert help determine your needs in the cloud?
Outside expert advice is definitely recommended because the industry is changing so quickly that the types of questions you need to ask and the way to ask them are changing daily. For example, does the cloud provider have multiple Internet connections coming in to eliminate service interruption? What is the cloud’s capacity? How much is your business going to be able to grow at your current facility without shortchanging yourself?
Security is another important area to ask about. A lot of data centers that house this equipment are having SOC Reports prepared to make sure they have the proper controls in place that ensure their data is secure and not at risk of being breached.
What other technologies should growing businesses be aware of?
We’re seeing a lot of mobility with the evolution of the iPad and other tablets. A sales force can really take advantage of those devices by using them to take notes, share presentations, adjust quotations on the fly, get signed quotes, and close deals on the spot. It benefits the sales team because they can be connected to the office immediately, respond to e-mail and get instant answers as if they were sitting at their desks in their office.
One area of concern around these devices that a company needs to consider is security. Companies need to make sure that they have a policy in place that protects the company’s data in the mobile hands of the employees. For example, companies should be able to lock down or control the devices should they get lost. If a salesperson accidentally leaves an iPad somewhere, the company needs to be able to erase all of the data on that device so that it doesn’t get into the wrong hands.
Most e-mail servers have controls built into them that allow you to send a signal wirelessly to devices to erase the data, but if you don’t have an e-mail server with that capability, you have to get a third-party, add-on product that can erase it wirelessly. Companies need to have a plan in place to cover these new and growing concerns.
What should businesses think about when considering a disaster recovery plan?
Disaster recovery is another area that can help a business grow, or at least ensure that it is not set back. As technology grows more complex, having a disaster recovery plan is becoming more vital, and planning for if something does fail has become almost as important as investing in technology to grow your business.
A disaster recovery plan starts with sitting down to figure out what disasters your company should plan for, prevent, or recover from. For example, if you are OK with a tornado coming through your building and you don’t think it’s worth the investment to plan for a second, off-site location to back up your data, then you don’t need to plan for that event.
But, if you want to prepare for a virus attack against your mail server because it’s critical to get that server up and running again, it’s a complex process. Businesses need to sit down and figure out what they want to plan for and determine the most critical pieces of technology that they need to have up and running again if something should fail. Once the company determines which critical pieces of technology they need to have up and running, the next question to ask yourself is how quickly does it need to be up and running? For example, if you need to have your e-mail fully functional within two hours, you will need to have a standby e-mail server already built and ready to go.
Too many companies understand that something could happen, but they put the blinders on and think that it won’t actually happen to them. There are a lot of things they can’t control, though, and that they may not have thought about. This is another area in which an outside technology expert can help. That person will know all of the questions that go into building a disaster recovery plan and make sure that plan can be executed if needed.
Timothy A. Heikkila is a principal with the Skoda Minotti Technology Partners Group. Reach him at email@example.com
You think it can’t happen to you. Your employees are honest, you trust them and they would never steal from you.
But no company is exempt from the threat of fraud, says Frank A. Suponcic, CPA, CFE, CFF, principal in the Valuation & Litigation Advisory Services Group at Skoda Minotti.
“Fraud is out there, it is increasing and companies need to be more vigilant,” says Suponcic. “They need to not be so trusting and raise their level of awareness.”
Smart Business spoke with Suponcic about how to reduce the risk of your business becoming a victim of fraud.
How does fraud occur?
Ninety percent of fraud occurs in disbursements, money leaving the company in the form of unauthorized checks, electronic funds transfers and debit transactions. Employees are not as likely to steal cash receipts, but it’s easy to write a check to yourself, submit your personal credit card statement to the corporation or commit fraud on an expense report.
There are many ways that employees can unlawfully enrich themselves, so within those mechanisms, there have to be policies and procedures in place. For example, there should always be substantiating documents for disbursements. Too many companies simply pay bills without documentation and aren’t conscientious about the fact that they may not be paying for what they think or that there may be overcharges. They just don’t take the time to approve invoices and match them to other corroborating documentation.
Fraud is occurring more often in this economy as a spouse loses a job or an employee is threatened with home foreclosure or is struggling to pay their bills. And once they have a reason or rationalization, the next step is figuring out how to exploit the system to fulfill that need. Smart people with criminal intent can identify the internal control weaknesses. They know you aren’t looking at the bank statements and invoices to be paid or that the check plate or blank check stock is not secured. They know that you trust them and, as a result, will take advantage of that.
Why should businesses be concerned about fraud if they have good relationships with their employees?
Occurrences of misconduct happen in every occupation, from professional organizations to religious organizations to not-for-profit organizations to law enforcement, legal and accounting firms, and at every level, from the receptionist to the CEO.
You can’t let your guard down. Fraud is based on a violation of trust, and the more that you trust someone, the more you should have your guard up. Many cases have involved family members, people who have known each other since childhood, or even the best man at your wedding. There are no boundaries as far as who commits fraud, and if you think it can’t happen to you, invite a forensic professional into your business for an hour and he or she can likely show you several places in which you have inadequate internal controls.
How can having a forensic professional perform a fraud assessment help prevent fraud?
During a fraud assessment, the forensic accountant will interview everyone in the accounting cycle, identify the weaknesses and provide the company with suggestions for enhancement of internal controls. If there are weaknesses that can be exploited, it is well worth the cost of the assessment. It’s not uncommon for the forensic CPA to compile many valuable recommendations, some of which have a cost attached and some of which can be implemented for free.
How can surprise audits help deter fraud?
Surprise audits review specific transactions, and the fact that employees can’t prepare for them can be a deterrent. This is a valuable internal control mechanism, especially in smaller companies.
People may be aware that there is a corporate policy against fraud, but if they recognize that no one is looking over their shoulder, bringing in an outside forensic CPA can provide management with assurance that there is an invoice for every disbursement, that credit card bills don’t reflect personal purchases, that the person who issues payroll isn’t paying themselves too much, and that specific controls are operating and being adhered to.
What other steps can a business take to help prevent fraud?
Have people rotate jobs, so you don’t have just one person in a position in which fraud could occur. You can also offer financial incentives to employees to report suspicious activity. Also, have bank statements sent to your house. Don’t just hand them over to your bookkeeper. Actually look at the disbursements and examine what is being paid out of the account.
In addition, the tone at the top is critical. Employees need to see that executives are ethically handling business transactions and instilling that the company will do things right. Require employees to sign a fraud policy that discusses, in writing, the definition of stealing and what will happen should an employee decide to commit a financial crime. Make it clear that you will press criminal charges and pursue every civil course for restitution. Fraud has put companies out of businesses. Employees need to understand that everyone has a stake in making sure that the company continues and that one unethical person can jeopardize that.
Circulate the fraud policy annually, meet with the employees and have them acknowledge that they have read it, that they have not perpetrated a fraud and that they understand what stealing is. This is also a good time to ask if they have noticed anything unusual, such as someone cheating on an expense report or padding payroll. Give employees the opportunity to talk to you. You can also utilize a fraud hotline so employees can anonymously report suspicious financial activity.
Fraud can’t be eliminated, but by taking steps to implement effective internal controls, you can reduce your risk of becoming a victim.
Frank A. Suponcic, CPA, CFE, CFF, is a principal in the Valuation & Litigation Advisory Services Group at Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.
When determining what entity type is best for your organization, you need to consider several factors, and working with an outside adviser can help avoid trouble down the road, says Steven H. Gross, CPA, a partner with Skoda Minotti.
“A limited liability company (LLC) often makes the most sense, as it provides the most flexibility, but there are other options to consider,” says Gross. “Even with an LLC, you need to determine the best way to be taxed.”
Smart Business spoke with Gross about how to make the best choice to lessen your tax burden and avoid common tax traps.
What types of entity structures can businesses choose from?
The most common options are a C corporation, an S corporation, partnerships and, as mentioned above, an LLC.
A corporation (S or C) is a separate legal entity. C corporations are tax paying entities, that is, they pay taxes on their taxable income just as individuals pay taxes on their taxable income. A C corporation can make a distribution to its shareholders, which may be taxed as a dividend. These dividends are not deductible to the corporation, but taxed, at least until 2013, at a favorable tax rate to the recipient. Depending on the tax situation of the individual and the corporation, paying some dividends may result in less taxes paid by the corporation and individual combined.
An S corporation is also a separate legal entity but generally is not a tax-paying entity for federal tax purposes. An advantage of an S corp. is that its profits are taxed to the shareholders, not the corporation itself; therefore the double taxation that exists in a C corp. is eliminated. Another advantage is that the amount of profits taxed to the shareholders is subject to self-employment tax. Since S corp. profits are not subject to self-employment tax, you can manage your self-employment taxes better than in a C corp. In an S corp., profits and losses have to be allocated to the shareholders in the same percentages, as ownership and distributions cannot be disproportionate.
Another entity structure option is an LLC. Generally, a multi-member LLC will be taxed as a partnership. An LLC filing a partnership return is not a tax-paying entity and the profits and losses flow through to the members in a similar manner to an S corp. Members of an LLC can elect to have the entity taxed as an S corp. or a C corp.
What are some benefits of an LLC?
An LLC that is treated as a partnership allows its members to avoid the double taxation and higher income tax of a corporation while, at the same time, retaining limited liability and other favorable attributes of a corporation.
An LLC, unlike an S corp., has the ability to specially allocate items of income, loss, deduction or credit, so long as the allocations have substantial economic effect.
Note that, even if an LLC is treated as a partnership for federal income tax purposes, an LLC may also be treated as a corporation and be subject to franchise taxes under state law.
What are some benefits of an S corporation?
As stated before, shareholders of an S corp. do not pay self-employment tax on the flow-through profits.
An S corp. with only one shareholder still files a separate return, unlike a single member LLC. A single member LLC is a disregarded entity for federal tax purposes and all of the business income and expenses are reported on Schedule C of the individual’s income tax return.
Disposition of an ownership interest in an S corp. at a loss may yield an ordinary loss under I.R.C. Sec. 1244, while disposition of an LLC ownership interest generally yields a capital loss.
What are some common tax traps businesses fall into?
When you have flow-through entities, you have basis issues when it comes to losses. If you meet certain criteria, those losses can be deducted on your tax return. However, individuals often think that if they are incurring losses in their pass-through entity, they can deduct those losses on their individual income tax returns when, in fact, they do not have basis to take the losses.
Another trap in the C corp. arena is charitable contributions. Contributions made in a C corp. are only deductible to the extent that they don’t exceed modified net income by 10 percent. Any excess contributions can be carried forward for up to five years. If a C corp. is running at a loss, the shareholder may want to consider making the donation personally.
How do you determine the right choice for your business?
Business owners need to seek advice on what would be the best choice in their particular situation. Sit down with an adviser, determine the pros and cons and weigh the options.
The issues can be very confusing and difficult to get your arms around. These are intricate tax issues and you would be best served by sorting through your options with an experienced professional.
Steven H. Gross, CPA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.
Estate planning generally has three purposes: to reduce estate taxes, to avoid probate and to protect beneficiaries.
Failing to plan can result in unnecessary expenses and leave your executor with the task of sorting through your estate. But creating a plan isn’t enough; you have to revisit it to ensure it remains relevant, says Steven C. Hartstein, CPA, JD, a partner in the Tax Planning & Preparation Department at Skoda Minotti.
“When it comes to estate planning to protect your business, your family and your assets, you need a good estate plan that is flexible, allowing you to take advantage of what the rules are now and what they will be in the future,” says Hartstein.
Smart Business spoke with Hartstein about how to plan your estate to minimize taxes and ensure a smooth transition to the next generation.
What are the current estate tax rules?
In 2010, if you passed away, there was no estate tax. Late in 2010, President Barack Obama signed the Tax Relief Act which said that, in 2011 and 2012, you can exclude up to $5 million from your estate while anything above $5 million is taxed at 35 percent. The rules in place now say that in 2013, the exclusion will be $1 million adjusted for inflation, and the highest tax rate could go to 55 percent.
Sitting here in 2011, no one thinks that’s actually going to happen, but in 2001, no one thought there would be an unlimited amount of untaxed estate in 2010. Although it is a guessing game, there are steps you can take to protect your estate.
How can you use the current rules to help limit your liability?
For 2011 and 2012, there is portability. That means that, since both the husband and wife get to pass along $5 million without tax, when the second spouse dies, that person can use the remaining amount of the first deceased spouse’s $5 million exclusion, providing that an election is made on the first deceased spouse’s tax return.
Technically, if the husband had zero assets in his name and died first, and the wife had $10 million, she could use all $10 million of the combined exclusion between them.
However, the executor has to have made an election on the husband’s estate tax return. You have nine months after the date of death to file that document, and if you don’t, you lose that portability.
How can you make gifts as part of your estate plan?
That $5 million exclusion applies during your lifetime or when you are deceased. So you can give away $5 million today, or $5 million when you die.
One of the best things you can do is give away appreciating assets now. If you have an asset worth $1 million today, but in 10 years, it will be worth $5 million, you are better off giving it away today at that $1 million value than if you die in 10 years and give it away at that $5 million value.
You may not want to give up stock in your business, because you lose that control, but you may have other assets you can give away.
How can a grantor trust benefit an estate?
With a grantor retained annuity trust, you put your assets into the trust, and you, as the donor, get back a stream of annuity revenue for a number of years. When you pass away, the assets then go to the beneficiary at little or no gift tax cost. This is because the present value of the annuity is close to the fair market value of the property, thus, the remainder gift is small.
How can having an estate plan help avoid probate?
No one wants to go through probate. Probate is public, so anyone can know what you have, and there are time and monetary costs involved. In addition, it usually takes a long time to go through probate. But it is very easy to avoid.
The purpose of probate is for the court to determine what should happen to your assets when you die. But if you have a trust document that dictates what happens to those assets, there is no need for probate.
How can having an estate plan benefit your family after you pass away?
Being the executor of an estate is very time consuming and messy. The children may not know where the parents had the insurance policy, or what their brokerage accounts are. The great thing about an estate plan is that it marshals assets and gathers them in one place. If everything is in a trust, it makes it much easier.
An estate plan also protects your beneficiaries. If you have minor children, you may not want them to have $1 million in their bank account. If you have older children, you may want to protect them from creditors. By placing those assets in a trust, if they are sued by creditors, or go through a divorce, those assets will be protected.
How often should the plan be reviewed?
In today’s uncertain tax world, it should be reviewed at least every couple of years. Things change, relationships change and tax laws change, and the plan should be addressed frequently. I’ve seen wills and trusts that have not been updated since the 1970s, from before someone had children and grandchildren. That does you no good whatsoever. Rules that were in place even 10 years ago don’t exist any more, so you need to have something drafted that takes advantage of rules that are in place now and be flexible enough to take advantage of the future.
Steven C. Hartstein, CPA, JD, is a partner in the Tax Planning & Preparation Department at Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.
If you own real estate, a cost segregation study is one of the best tools to help you reduce taxes and improve cash flow. Although a cost segregation study will not provide additional tax deductions, it will enable the taxpayer to accelerate a portion of the depreciation on the building, says David R. Walter, CPA, MBA, tax manager at Skoda Minotti.
“Cost segregation is the process of breaking out a portion of a building’s cost that can be depreciated quicker than the standard life of 39 years,” Walter says.
Smart Business spoke with Walter about the benefits of performing a cost segregation study and how doing so can help keep money in your business.
Where should a property owner start when considering a cost segregation study?
The purchase or construction of a building is the starting point for any cost segregation study. Any building is eligible, but the owner must determine if it is cost beneficial to perform a study. Any cost segregation study should start with a cost-free estimate to quantify the potential tax savings from doing the study. These estimates usually do not take a large investment of time, as only a few items of basic information are needed.
How can an owner determine if a cost segregation study is worth the investment?
Most firms that provide cost segregation studies provide a cost-free analysis of the potential tax savings. This analysis gives you a conservative estimate of how much could be saved, the net present value of those savings, and the fee for conducting the study. This allows you to compare the net present value of what you could save, versus what you’re going to pay for the study, allowing you to make an educated decision.
At worst, you’ve invested half an hour to pull together information to get an estimate and see whether it makes sense.
What is the minimum building value at which a study is worth the investment?
There is no true value that answers this question. It depends on the size and type of building. If you’re talking about a traditional warehouse, which is essentially just four walls, $500,000 would be a general rule of thumb. But if you have a specialized facility, that rule of thumb could drop down to $200,000 or $300,000. I tell clients that while these may be general guidelines, because an estimate is free, any building owner should get an estimate to determine if a cost segregation study makes sense.
When should a study be performed?
Ideally in your first year of ownership. The sooner you break down the costs and depreciate them over those shorter depreciation periods, the sooner that you’re going to reap those benefits.
However, it is still worth doing a study even if the building was purchased/constructed in a prior year. With a cost segregation study, you can go back and determine the amount of depreciation that should have been deducted if a study was done at the beginning, and compare that to what actually was deducted. The current IRS rules allow you to deduct, in the year of the study, the difference in depreciation up through that year, thus getting the taxpayer caught up all in one year.
The value of a study is based on the time value of money saved. If you buy a building today, the sooner you get the study completed, the more beneficial it will be.
Are there benefits of performing a study beyond accelerating depreciation?
There may be some potential benefit on the insurance side. With a cost segregation study, you’re detailing the cost basis of the building. With this detailed cost basis, the replacement cost of the property may be better determined, which could lower the insurance premiums on the building.
Is this something building owners can do on their own?
No. The IRS has stated that an engineering-based approach must be used to substantiate the cost breakdown. If the segregation of costs is not supported by an engineer’s report, it will not stand up under audit of the IRS. Although that means investing in a professional, the cost is typically worthwhile when compared to the savings you will realize.
Why should owners pay for a study when they still get those deductions over time without one?
It’s all about timing and the ability to push those deductions into earlier years. From a time value of money standpoint, the sooner a deduction can be taken, the more valuable it is.
If you look at a $1 million building, either way, you’re going to deduct that cost over 39 years, but by moving 25 percent of that million-dollar depreciation into earlier years, for example, you are decreasing your taxes in earlier years and getting that money back in your business sooner.
Everyone needs cash, and one of the best ways to get it is to reduce taxes in earlier years. Most tax planning strategies are based on the deferral of taxes, and that’s what you’re getting here. You’re deferring the taxes for a number of years and using that cash to grow the business.
What role should your CPA play in the process?
As much as this is an engineering approach, there is also a tax side. Your cost segregation study may produce a deduction, but you want to make sure you are working with a knowledgeable CPA to figure out how those tax deductions are going to play into your tax situation.
You don’t want to be in a position where you have paid for the study and then later find out that because of your situation, the deduction didn’t quite work out.
David R. Walter, CPA, MBA, is a tax manager at Skoda Minotti. Reach him at (440) 449-6800 or email@example.com
Growing your business is a big job, and you can’t do it yourself.
In order to successfully grow, you need to have a dedicated team of advisors who are working together to identify the issues your business faces and develop a comprehensive plan to move it forward, says Robert E. Coode, CSA, partner-in-charge of the Financial Services Group at Skoda Minotti.
“Any business executive, regardless of the age or size of the company, should make sure that an appropriate team of professionals is in place to serve on an advisory board,” says Coode. “That includes an attorney, a CPA, a financial advisor or planner, and an insurance agent or consultant.”
Smart Business spoke with Coode about how an advisory board of professionals working together can take your business to new heights.
How can all these disciplines working together help a company succeed?
Each of those advisors is working in a different discipline. The problem that occurs in many businesses is that while they may retain someone in each of these disciplines, each is operating in a vacuum as it relates to his or her client’s business.
Too often, when business owners have a legal problem, they call an attorney. Or when they have an accounting problem, they call their CPA. The problems arise when each is working independently because there are discussions taking place and decisions being made on the legal side that may have implications on the accounting side that the attorney is unaware of, and vice versa.
All of these advisors need to be in a room with the business owner to develop a comprehensive overview of the company. And it is the financial planner or advisor’s role to coordinate, because unless you have a quarterback coordinating those meetings, they are not going to happen because people are just too busy. This should be happening at least once a year, if not twice.
What would you say to business owners who are reluctant to invest in such a meeting?
It can be a difficult sell. Business owners are so involved in the day-to-day operations that it can be difficult to coordinate. They are majoring in the crisis on their desk today and the things that have to get done right now.
That is where the quarterback comes in. If the owner comes into work and has 10 problems on his or her desk, that person is not going to be thinking about coordinating a meeting of an advisory board. But if they have chosen a quarterback and given them the authority to plan the meeting, a meeting will be on the calendar, making it much more likely to happen. There is rarely a situation where the business owner says he or she is too busy to attend such a meeting. More than likely, that person wants to do it but is just too busy to put it together.
How should the meeting be structured?
The financial planner will provide an agenda and lead the discussion. At the initial meeting, there is a lot of time spent getting to know each other.
In subsequent meetings, each participant is encouraged to bring his or her major concerns relating to the client and the client’s business as it relates to structure, accounting, financial planning and insurance needs. Each participant brings an agenda item, and the owner will present three or four topics that he or she would like covered, such as transitioning the business or how his or her estate plan may be affected by the business.
But the meeting shouldn’t be too structured, because you want people to offer their input and be able to discuss new ideas as they arise.
What are the benefits of such an advisory board?
First of all, it forces the owner to go back and re-examine a variety of issues. For example, how the business is structured. Is it the right entity, be that a C Corp., an LLC or an S Corp., and what are the ramifications of that choice? Should the business be structured that way from a legal standpoint?
From an accounting standpoint, it’s an opportunity to sit down together and look at the numbers, income and balance sheet. It’s also an opportunity to look at expenses and how the business is spending money. Should it be spending it in different ways? How does it do business related to other similar businesses, both in the region and internationally? What are other businesses doing? By having these conversations, the professionals know that the client is serious about growing his or her business and is more likely to help that business grow by introducing it to new opportunities.
Businesses of any size can benefit from having such a board. Even if a business is just getting started, I wouldn’t advise moving ahead without the advice and input of a team of professionals.
Creating a team of trusted professionals and getting them working together for the good of your business can lead to far better results than simply meeting with them individually on an as-needed basis.
Robert E. Coode, CSA, is partner-in-charge of the Financial Services Group at Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.
Although Northeast Ohio’s construction industry is struggling, some construction companies are still succeeding.
Those that are doing so are taking a hard look at what they do and how they do it to stand out from the crowd and give themselves a competitive advantage, says Roger T. Gingerich, CPA/ABV, CVA, partner-in-charge of the Real Estate & Construction Group at Skoda Minotti.
“You need to examine your current scope of work and determine your strengths to help maximize your bottom line,” says Gingerich.
Smart Business spoke with Gingerich about several steps contractors can take to grow top-line revenue and improve their bottom line.
What can contractors do to grow their business in the current market?
The most important thing is to look at the scope of your work and determine what you are really good at. Take a hard look at whether you are better served by focusing on general contracting, or whether it makes sense to get into a different segment or trade of the construction process. Can you take on more of the project instead of subcontracting some parts out? Doing so can help you grow the top line.
Challenge the scope of the work you’re doing, and consider whether there are new skills you should add for work in different areas. Or perhaps it makes more sense to get out of areas in which you are spending resources and not making money, negatively impacting your bottom line.
What areas can a business focus on to increase its chances of success?
Two areas with the highest potential for construction opportunities in Northeast Ohio are institutional — universities and health care — and governmental, in the form of municipalities, states, government buildings and public schools.
Also consider finding an underserved niche. For example, not a lot of construction companies are building student housing. If you can find your niche and get really good at it, you will have more opportunities. Other niches include national chains, restaurants and pharmacies. If you get really good working with a certain brand or a type of chain, that can afford you the opportunity to secure a lot of work over a short period of time. In addition, national chains that are rebranding hire contractors that can do multiple stores over a short period.
Should construction companies steer away from the private sector for now?
No. No matter what, even when times are slow, you need to be developing relationships within the private sector. Stay in front of people you have done work with in the past. Even though they are not building today, there will come a day when they start to spend money on capital expenditures again. While staying front and center might not mean new business today, it may mean business five or 10 years from now.
Also, introduce yourself to people with whom you haven’t done business to build new relationships for when things turn around.
What are some other strategies to grow your business?
Bid volume. Look at your business’s history and see what percentage of bids you win. If you historically win 10 percent and you want to be a $10 million contractor, you need to bid $100 million worth of work.
Bid a higher volume of jobs with the goal that if you can secure what you have historically secured, you should be able to drive revenue.
Should local contractors keep their sights solely on Northeast Ohio?
No. To be successful, you have to be mobile. You have to go where the work is. If certain geographic markets have more work, you have to be open to bidding on jobs out of state.
The challenge is that when you go into new markets, you don’t know the players. You may have to hire unfamiliar subcontractors. As a result, you need to prequalify subcontractors and work with your bonding company.
It’s not as simple as saying, ‘I’m going to go into North Carolina and do work there.’
You have to register with the State, and there’s a lot of red tape. If you do it right, though, there are opportunities to succeed.
How can government programs help some businesses succeed?
Not everyone qualifies, but those who do can benefit from being designated a small business enterprise, woman business enterprise, minority business enterprise or disadvantaged enterprise. Doing so give gives you the opportunity to bid on projects with less competition than you otherwise would face.
How can a business position itself for growth as the economy begins to recover?
Part of growing is surviving tough times. Make sure you’re doing a good job managing overhead. Fewer jobs means you’re making less margin, which means less overhead you can cover. You have to run lean, cut back on overhead and work with your banks and bonding company so when times get better, you can get a bond or a bank loan when you need it.
You have to be able to demonstrate that you’re managing overhead and that you’re willing to put equity into the company if it needs an infusion of capital because banks are more likely to loan to you if they see you’re putting skin into the game. Show banks that you’re sophisticated, that you have a good financial reporting process in place and that you are budgeting well.
All of those things are important in a tough market to weather the storm and put yourself in a better position to grow as you come out of it.
Roger T. Gingerich, CPA/ABV, CVA, is the partner-in-charge of the Real Estate & Construction Group at Skoda Minotti. Reach him at email@example.com or (440) 449-6800.
As nonprofits plan for growth in a struggling economy, they must take a careful approach to change. Failing to do so could result in a loss of donors, a missed opportunity in structuring their boards, or the potential misuse of social media, says Herzl Ginsburg, CPA, manager, not-for-profit group at Skoda Minotti.
“As nonprofits look to grow, it is critical that they not lose sight of the key resources and assets that they already have in place,” says Ginsburg. “It would be a real shame to lose something of value in your efforts to grow the organization.”
Smart Business spoke with Ginsburg about the keys to successful growth for nonprofits.
Is there a process that is critical to allow for growth at a nonprofit?
It is vital to identify your key resources, the risks to those resources as you grow, and strategies that allow you to mitigate those risks. For example, if launching a new marketing campaign might alienate a key donor, have you identified this donor and this risk? Have you planned for this risk as a part of your campaign? As appropriate, consider engaging your staff, donors and board in this process. Ask, ‘What really matters to us? What could we not do without?’ Whether that is a key donor, staff person or piece of property will vary. But the process always involves asking those questions and having a meaningful discussion around them. Organizations are working hard to change in order to meet the current economy. In that mindset, it is easy to lose sight of the related question: ‘As we grow, what will we do to safeguard our key resources and people?’
What role should professional service providers play as nonprofits looks to grow?
Your service providers should serve as your advisers. They can best fill that role when you keep them informed of what your organization is doing and planning.
You do not want to surprise the banker with financial issues, or the attorney with legal issues. Give your advisers the opportunity to plan rather than react. But beyond that, if you are working with the right advisers, they should be offering suggestions and challenging the details of your plans. The more discussions your advisers have with you, the easier it is to see where the organization is trying to go and to identify the risks it will face along the way. At that point, with the path forward clear, you can work together to plan for successful growth while mitigating your risks.
What opportunities and challenges does the use of social media present to nonprofits?
Social media offers what may be described as a double-edged sword to nonprofits. On one hand, it provides a relatively inexpensive way to reach out to a large audience, which is enticing given the cash shortfalls that many nonprofits are facing. On the other hand, there is a potential pitfall in embracing social media, that the messages will not go through the same checks and balances that traditional marketing would. For example, if a nonprofit were putting out a flyer about a new fundraising campaign, its staff and executive director would likely spend time drafting the flyer, reviewing it, ensuring everything is spelled correctly and checking that it includes the correct information. That process will need to be modified to properly and effectively capture your message in your use of social media. Nonprofits should think about this issue — balancing the ease of the message with its quality — and have processes and policies in place as they grow and use social media.
What role should the board play in its nonprofit’s plans for growth?
The board should be viewed as a pool of resources and talent, to be cherished, nurtured and grown for the benefit of the organization. Board members have talents and experience, such as in financial and legal matters, which prove beneficial to the organization. These skill sets may allow the organization to forgo, or at least curtail, the expense of a third-party adviser in the organization’s growth process.
Given this role, this impacts the selection of new board members. As you identify critical areas for the organization where additional expertise would help, take stock of your board members and how they can participate. If the need is not met by existing members, consider targeting future members who have the needed skills. Much as you develop a job description when hiring an employee, draft a description of your ideal board member, including what background would benefit the organization, as you begin your search. You may choose to select a person with passion for the organization over someone with a particular skill set; planning out the process will better equip you to weigh the factors involved and make an informed decision.
What advice would you offer nonprofits regarding employees and volunteers?
Your staff may be your strongest and most important asset; treat them that way. Given tight budgets and uncertainty in existing funding sources, many nonprofits have staff performing multiple roles, freeing up funds that would otherwise have been spent on salary. Over time, this can prove taxing for your people. You should know if your staff is overburdened, and they should know you care. Make a point of checking in and talking with each staff person on a regular basis. When I meet with nonprofit executives, I enjoy asking them what their vacation plans are. The question is innocuous and friendly; more often than not, the response is innocent as well. However, when the response is, ‘I really cannot take a vacation; I am needed here,’ we have a heightened risk of this person burning out and we need to plan for it.
Some questions to consider: If this person is essential to the organization, what can we do to remove some of his or her burden? As we are attempting to grow, will we be asking too much of this person in the process? Do we have an alternative approach we can try? Particularly when nonprofits are looking to change and grow, care should be given to their staff — and all of their key resources — to not harm them in the process.
Herzl Ginsburg is a manager of the not-for-profit group at Skoda Minotti. Reach him at firstname.lastname@example.org or (440) 449-6800.