This simplistic approach proved quite successful throughout the 1990s. However, investors facing retirement investment decisions today are in a far more precarious position.
Just a few years ago, investors witnessed the culmination of a multiple-decade bull market for large U.S. stocks. Despite the recent three-year bear market, large U.S. stocks, historically speaking, are still in the top 10 percent of highest valuations ever. The outlook for bonds is not much better.
We are facing what appears to be the finale of a 20-year bond bull market. This is because bond prices tend to move in the opposite direction of interest rates.
With interest rates steadily declining for the past 20 years, bonds enjoyed an unprecedented period of excellent performance. Now that interest rates are near all-time lows, continued strong performance from bonds is unlikely.
Timeframe is critical
For investors with a lengthy investment time horizon -- 20 years or more -- an extended market correction may not be so damaging. But for those who have an intermediate timeframe -- 10 to 15 years -- substandard returns in both the equity and fixed income markets may prove disastrous if they are nearing or are already in retirement.
To add to these difficulties, inflation is likely to gradually increase. With bonds and stocks poised for at least a decade of mediocre performance (4 percent to 5 percent, according to legendary investors Warren Buffett and Bill Gross), where will retired investors and those nearing retirement turn?
The well-diversified portfolio, much as it has in years past, will serve the retired and near-retired investor well. The difference this time is that investors must be willing to incorporate different asset classes into their portfolio, asset classes that do not normally move in the same direction with one another.
This means they typically react differently to market conditions and thus offer downside protection when one class may be underperforming. Examples of such asset classes are hedge-like investments, commodities and real estate, in the form of Real Estate Investment Trusts.
While these may sound complicated and risky, they aren't. Most are less risky than most domestic stock portfolios and are available in a standard mutual fund format. These types of investments have helped investors essentially avoid losses for the past three years.
When combined with more traditional investments like stocks and bonds, these investments can produce superior performance with significantly less risk; in fact, almost bond-like risk. Although bonds do not fare well in rising interest rate markets, certain fixed income investments do well when interest rates rise because their rate of return adjusts upward. Examples include stable value funds, bank loan funds, and TIPS (Treasury Inflation-Protected Securities).
By investing their portfolios in this manner , retired individuals and those nearing retirement will be able to preserve wealth, receive cash flow from their portfolio and stay ahead of inflation while obtaining returns not possible from the standard large U.S. stock and bond mix that served investors so well in the 1980s and 1990s. Louis P. Stanasolovich is president Legend Financial Advisors Inc.
In the last two issues of the SBN, I discussed the definition of Participant Investment Education Programs and how to set them up. This month, I will take the topic one step further and discuss the message content of such programs and what measurable goals can be used to evaluate their effectiveness.
First, a review of the content of a quality educational program is helpful. This includes an explanation of the company's retirement plans; an explanation of basic investment concepts such as an historical analysis of the different asset classes (stocks, bonds, cash investments) over five, 10 and 20-year cycles; the attributes of each retirement-plan investment option; the importance of asset-allocation decisions and how to make those decisions; the benefits of dollar-cost averaging; and the impact of preretirement withdrawals on retirement income.
Estimating retirement income
Retirement income goals are among the first things you will need to convey in your program. Typically they're going to vary from person to person, but to maintain the same standard of living before retirement, it is estimated that most individuals will need approximately 80 percent of their final year's salary annually.
Worksheets or software programs can be used to estimate income needed for retirement, but employees should be walked through this process so that they gain a realistic sense of their anticipated expenses. Employees should be encouraged to track annually their expenses both before retirement (to see if their resources are adequate) and after (to see if they are staying on course).
Among the factors to consider when determining how much is needed to retire: 1) what are their other assets; 2) what is the desired retirement age; 3) what is the health of the retiring individual; 4) what is the long-term expected rate of inflation; 5) what are the expected long-term investment returns based on the individual's risk tolerance; and 6) what income sources does the individual have available (for example, Social Security or pension).
Basic investment concepts
Some of the basic concepts that need to be covered in a quality investment-education program are:
- Risk and return. This includes market risk, where you lose money in a down market; business risk, where you lose money when a single company falls on hard times; interest-rate risk, where you lose money when interest rates rise; and credit risk, where you lose money on bonds purchased from a company that defaulted on interest or principal payments.
- Time horizon. This means you need to identify major goal dates and invest your money to achieve those goals by the set dates.
- Diversification. Diversification is a means of spreading investments, including different asset classes and investment styles, around to cut down the various types of risk and reduce market fluctuation of the portfolio.
- Inflation. How should retirement monies be invested to stand the best chance of beating inflation both before and after retirement while being invested at a risk level that is acceptable to you.
- Investment vehicles. A detailed discussion of the various types of investments, as well as their pros and cons, should take place with employees.
Asset allocation decisions
Asset allocation is how money is divided among stocks, bonds and cash investments. Allocation decisions are based on a participant's investment time horizon (life expectancy) and risk tolerance. Risk tolerance, which is measured by looking at age, temperament, financial circumstances and investment knowledge, can be determined by using a risk-tolerance questionnaire. The questionnaire should direct plan participants to think about such concerns as living expenses, career changes, financial emergencies and investments.
Dollar-cost averaging is a method of moving money into an investment gradually, thus averaging out the cost over time. For example, if shares of a particular fund are purchased at regular intervals, weekly, monthly, etc. regardless of market price, the cost of the shares is the average price over the acquisition period. This method works for long-term investors, but not for those who want a quick gain. This method of investing is excellent for contributory retirement plans such as 401(k) plans.
Some employees may want to make a withdrawal or receive a loan from their retirement plan monies before retirement. The education program should discourage this for the employee's own good. The best way to educate them is by making them aware of the penalties on withdrawals, taxation of those withdrawals, as well as losing tax-deferred compounding inside the plan, or if it's a loan, the high cost of non-deductible interest on the loan in addition to lost opportunity on investment returns.
This is where all of the effort pays off. How does a plan sponsor know a participant investment-education program was effective? These are some indications to help plan sponsors determine if the program was a success: Participation rates increase; employee contribution levels increase; plan asset allocation decisions improve; plan appreciation and satisfaction rates improve; and the plan sponsor reduces liability.
If even one of these indications has occurred, then the program was a success.
Lou P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a North Hills-based Securities and Exchange Commission Registered Investment Advisory firm that provides asset management and comprehensive financial planning services on a fee-only basis to individuals and businesses. The company's Web site is www.legend-financial.com.
The one mistake many business owners makeafter working hard for years to build profitable venturesis they dont plan for the next step: What will happen to the business after they retire or pass away?
Succession planning is what keeps a business thriving after the owner steps down. But because it requires emotional thinking, especially a critical assessment of ones own thoughts, and perhaps the hurting of some feelings along the way, the majority of business owners may put it off or not do it at all. Following are the how-tos of successful succession planning.
First, you must understand a business is never too small or too large for succession planning. Its extremely important for larger businesses simply because of the responsibility to employees. Smaller businesses, at the very least, need to plan for temporary succession in the event that the owner becomes disabled. Succession planning also becomes very important if one or more nonfamily member serves as owner.
During stage one, you must realize you need to relinquish some control. According to Michael Gerber, author of The E Myth (E standing for entrepreneurial), the key to letting go is delegating. You must realize you cannot continue to do everything yourself. The more you can make your business independent from you, the more easily it will become transferable.
Second, you need to develop a management team and a business structure. This means you have to think about who will be buying the business and running it: family members, key employees or outsiders. When passing on the business to family members, many owners make the mistake of assuming their children want the business. Leaving the business to a child who doesnt want it is counterproductive to succession planning.
Identifying the management team not only is the hardest part, it will also take the longest time. To achieve the best results, this period usually is no less than five years but sometimes can stretch as long as 10.
Once you start the process of finding a management team, that doesnt mean the paperwork has to be signed and you lose some or all control. It simply means that systems are created and people are sought to fill the management positions.
Take a serious look at family members and honestly ask yourself who will be capable of running the business. Do the same for key employees. If no suitable person or team is available, identify outsiders who might be capable of running the business. Under the right circumstances, your family may be better off if the right key employee or outsider is found to run the business.
The training process of the new management team then begins. To ensure effective training, you need to involve the new team in more and more of the day-to-day decisions.
The third step is preparing for the sale. When youre ready to sell, maximize the profitability of your business by eliminating some of your perks (i.e. country club memberships, expensive company vehicles, sports tickets, lavish dining expenditures, etc.) that are paid through the business.
This process should start a minimum of three, but preferably five, years prior to the sale. Why? Many potential buyers want to see the last three to five years worth of financial statements and tax returns. This pruning of unnecessary expenditures will increase bottom line profits and result in a better sales price for the business.
The next step is to contact a lawyer and/or accountant/business valuation expert, since sale negotiations can take several months to complete, especially if the buyers are not family members.
Another major task is to create a buy-sell agreement. This is a contract created for the transfer of closely held business interests that identifies how the purchase and sale of one or more of the owners interests are to be handled with the remaining owners, including how the sales price will be calculated.
These types of agreements are typically between shareholders of a corporation or between the corporation and each shareholder. They can also be between partners of an unincorporated business as well as a sole proprietor and his employees. Buy-sell agreements require shareholders, partners or owners to offer their controlling interests in the company to those named on the agreement prior to offering it to outsiders. The agreement is usually triggered by events such as death, disability, retirement, divorce or bankruptcy of one of the owners.
After you pass on your business, however, you probably should stay involved to some degree. This becomes important during the transition. If you choose to stay on, you could be involved as an adviser, or if the business is a corporation, sit on the board of directors.
Keep in mind, even if youre in your 30s or 40s, you should start your succession plan now. At the very least, stage-one planning can begin. The degree of success in succession planning is almost always determined by how early you begin. If succession planning is not tackled at some point, your family may end up paying unnecessary estate taxes or the business may be left without leadership or direction and could eventually collapse.
Lou Stanasolovich is president of Legend Financial Advisors Inc., a North Hills-based SEC-registered investment advisory firm that provides asset management and comprehensive financial planning services on a fee-only basis to individuals and businesses. He can be reached at (412) 635-9210. His Web site is at www.legend-financial.com.
As home-based businesses continue to grow, a new rule, which took effect Jan. 1, 1999, has made it easier for business owners to deduct their home offices. But how does this change affect the average business owner? And, perhaps more importantly, is it worth it?
The new rule allows business owners to take a home office deduction if:
1) They use their home office for administrative or management activities on a regular basis.
2) They dont have another fixed location where they do a large portion of their administrative and management activities.
Managerial and administrative activities include billing, book and record keeping, ordering supplies, making appointments, forwarding orders, or writing reports. A fixed location would be another office. Cars and hotel rooms do not qualify as fixed locations.
Youre still eligible for the home business deduction under the new rule even if you:
- Outsource certain administrative or managerial tasks such as invoicing;
- Perform administrative or managerial tasks in non-fixed locations such as a car or hotel room; and
- Choose to work from home, even if a suitable fixed space is available outside the home, but used only on an occasional basis. The amount of any home office deduction would still depend on the size of the office as compared to the rest of the house.
This may seem like a wonderful tax break for professionals who work primarily out of their homes, but is it worth it? That depends.
From the perspective that you would, in fact, receive a tax deduction, the home office deduction may be worth it. However, the home office deduction may decrease the amount you can save under the new capital gains law that was passed by the Taxpayer Relief Act in 1997.
If you are deducting a portion of your home under the new home office rule, the part being deducted would be taxed at a special 25 percent capital gains rate if the house is sold. Heres why. To qualify for the homeowners $500,000/$250,000 capital gains exclusion, the property must have been your primary residence for two of the last five years before the sale.
According to many experts who have analyzed these new rules, if the home office has been in use for more than three of the five years before the sale, the square footage being used for the office of the home will not qualify for the new capital gains exclusion and will be taxed at the higher capital gains rate.
If the office square footage is taxed at the higher rate and the house will be sold in the near term, the depreciation deduction is probably not worthwhile. On the other hand, the home office deduction is worth it if youre not going to sell your home in the near future.
Louis P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a fee-only North Hills Securities and Exchange Commission registered investment advisory firm that provides asset management and comprehensive financial planning services to individuals and businesses. Reach him at (412) 635-9210. Legend Financial Advisors, Inc.s Web address is www.legend-financial.com.
The problems surrounding the Year 2000 issue (Y2K) are widely reported, and by now most business owners have strategies in place to deal with these issues. Theres one area, however, for which many of you still may not be prepared: The effect Y2K may have on the stock market and, consequently, on your companys retirement savings plan.
Defined-contribution plans (this typically includes 401(k) plans, but can be any plan for which the employee selects the investments) have become a major source of retirement savings for employees. As employee participation in defined-contribution plans has grown, so too has the proportion of assets invested in equities. Many employees have only experienced a rising market. As a result, they may not be prepared to handle a market downturn. This is where you must step in.
Fiduciary liability is the reason business owners need to be prepared. Having a strategic plan in place to deal with a potential market downturn as a result of Y2K shows fiduciary diligence. Even though you cant predict the market, you still can be responsible and limit your liability by planning for this possibility.
What will happen if a market downturn does occur Jan. 1, 2000? The results of a survey conducted recently by William M. Mercer, Inc. suggest that employee confidence will erode, leaving many employers rushing to deal with these concerns. This is where investment education programs become the crucial part of a strategic plan.
If your company or the vendor of a defined-contribution plan already provides investment education programs, its important to include specific details regarding market downturns. You should address the following:
- Long-term investment strategies
- Risk/reward trade-off
- Portfolio building, asset allocation, and diversification
- Performance history of the retirement plans investment options
- Performance history of different asset classes and investment styles
- Investment strategies at different life stages
These topics must be covered in addition to the basic topics, such as an explanation of company retirement plans; how to estimate income needed for retirement; an explanation of basic investment concepts; an historical analysis of the different asset classes (stocks, bonds, cash investments) over five-, 10- and 20-year cycles; the attributes of each plans investment option; the importance of asset allocation decisions and how to make those decisions; the benefits of dollar-cost averaging; and the impact of pre-retirement withdrawals on retirement income.
I would advise, however, that you, as the employer, need to put more emphasis on risk tolerance and risk/reward trade-offs, as well as on issues and events shaping current market trends in your investment education message.
Even if Y2K has no effect on the stock market, you should remain proactive in keeping your defined-contribution plan participants educated, informed and satisfied. Louis P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a fee-only Securities and Exchange Commission-registered investment advisory firm located in the North Hills that provides asset management and comprehensive financial planning services to individuals and businesses. Reach him at (412) 635-9210. The firms Web site is www.legend-financial.com
Retirement plans that are typically offered by employers include: 401(k)s, profit-sharing plans, money-purchase pension plans, defined benefit pension plans, tax-sheltered annuities or 403(b)s, simplified employee pension plans or SEPs, savings incentive match plans for employees or SIMPLEs.
Before choosing a retirement plan, it's a good idea to meet with an actuary, pension attorney or pension consultant to discuss the various options available. Choosing the right plan and performing the ongoing administrative and testing is complex and should not be handled by amateurs. Listed below are the types of profit-sharing plans available that make the most sense for small-business owners.
The 401(k) plans give participants the power to defer part of their pay on a deductible basis. This plan can be used in conjunction with a qualified profit-sharing plan or as part of an employee stock-ownership plan, or ESOP. Participants can defer up to $10,000 of their pay as long as the deferred amount is no more than 25 percent of their total compensation. The investments that can be used with these plans are numerous, from stocks, bonds, government securities, and mutual funds, to annuity contracts, insurance contracts, and bank-commingled trust funds.
For-profit businesses, such as corporations, sole proprietorships, partnerships, limited liability partnerships, and not-for-profit organizations such as hospitals, trade associations, schools, and charities can offer 401(k)s.
The advantage of a 401(k) for an employer is the minimal costs that would be incurred. Usually the fees for an employer with fewer than 250 employees is $1,000 to $2,000, plus an annual per-participant fee of $25 to $50. The disadvantage for the employer is that some employees might choose not to participate. Sometimes, this may limit the higher-compensated employee's ability to invest larger amounts in the 401(k) plan.
Qualified profit-sharing plans
This is a type of defined-contribution retirement plan. Contributions are made by the employer and may be from current or accumulated earnings and profits. The contribution, which is flexible, ranges between 0 percent to 15 percent of each employee's salary. To determine how much is to be given, the employer must create a formula and explain it in the plan documents. This formula can be geared to favor certain age groups, employment tenures, pay levels, or divisions-as long as it passes nondiscrimination tests. Also, certain groups covered by collective bargaining agreements can be excluded.
Any company that offers a 401(k) plan can offer a profit-sharing plan feature as well. Also, profit-sharing plan assets can be invested in the same type of assets as 401(k) plans. The benefit of profit-sharing plans to the employer is that it enables them to make contributions, but they aren't locked into a fixed annual commitment regardless of bottom-line performance.
Simplified employee pension plans
SEP plans were created for small-business employers to encourage them to set up retirement plans for their employees. Under this plan, contributions of up to 15 percent of each employee's compensation is made to an IRA account established and managed by the employee. SEP plans make the whole process easy and less costly on the administrative end for employers. They simply make a contribution to an IRA account. The amount, however, must be the same percentage for all employees regardless of tenure or position. This may mean that contribution costs could be higher than what the employer would like to contribute.
Employees eligible for SEP plans can be required to be at least 21 years old and have worked for the company during any three of the last five years, and earned at least $400 in pay for the plan year in question. Anyone who meets these requirements must be covered, except those who are covered by collective-bargaining agreements. Companies sponsoring SEP plans can use all funding vehicles available with IRA accounts and must follow all restrictions.
Under a Savings Incentive Match Plan for Employees, employees can defer part of their pay into an IRA account, and the employer will match it. In many ways, this is similar to a 401(k) plan. Salary deferrals are limited to $6,000 per year. Also, employees eligible for SIMPLE plans must have earned at least $5,000 in a two-year period and are expected to earn at least $5,000 during the present year. Employers provide a 100 percent match on deferrals of up to 3 percent of compensation. This match limit can be reduced if notice is given 60 days before the deferral election period. Thirty days before year's end, each participant must receive a statement showing the amount in the account and the account's activity.
Companies with fewer than 100 employees and which are not offering other qualified plans can offer SIMPLE plans. The employer benefit is that SIMPLE plans are easier to administer than 401(k) plans. However, due to decreased flexibility and the fact that the required match-contribution costs may be more expensive than 401(k)s, they may be less attractive.
Louis P. Stanasolovich is founder and president of Legend Financial Advisors Inc., a North Hills-based Securities and Exchange Commission-registered investment advisory firm that provides asset management and comprehensive financial-planning services on a fee-only basis to individuals and businesses. Legend Financial Advisors, Inc.'s Web site is at www.legend-financial.com.
In 1998, the IRS decided to allow employers the right to automatically enroll employees in 401(k) programs. Is this the answer to increased employee retirement plan participation? Simply put, probably not.
This tactic may appeal to small business owners who have fewer employees and a poor participation rate in the plan. However, such a move will probably build resentment from those forced to participate.
Still, here are some of the benefits of such a program:
- It does boost participation in your 401(k) plan.
- It reduces the likelihood that the plan will fail nondiscrimination tests.
- It allows you to enroll lower-paid employees, who typically dont plan for retirement, into the program.
But while all of this is well and good, you could risk losing one of your most valuable resources in the process: your employees.
The way the required participation feature works is that if employees dont specify an amount they want to contribute or dont elect to stay out of the program, you can automatically reduce their salaries by 3 percent, which goes into their 401(k) plans. Employees must be told annually what percentage is diverted from their pay and they then have the option of changing that percentage.
In addition to building resentment, this required participation does nothing to educate employees about the purpose behind saving for retirement or why such a program is implemented. Keep in mind that one of the purposes of establishing a 401(k) program is to give employees the power to make their own investment decisions. Without a proper investment education program, mandatory contributions could cause even more resentment.
A good investment education program should have three main components: good content, good explanations and frequent education sessions. Many companies run their investment education programs at specific times during the year, usually during plan enrollment, retirement or termination of employment, or upon request by employees.
A better way to enhance participation in a 401(k) plan to match a portion of whatever employees contribute, say 50 cents for every dollar they contribute up to 6 percent of their salaries.
The bottom line on mandated participation is that, even though its approved by the IRS, its likely effect on your employees makes it a poor option. Perhaps thats why so few employers have required participation to date.
Louis P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a fee-only North Hills Securities and Exchange Commission registered investment advisory firm that provides asset management and comprehensive financial planning services to individuals and businesses. Its Web site is at www.legend-financial.com.
They seem unimportant and even a nuisance to keep track of, but come tax audit time, corporate minutes can save a business a lot of money in additional taxes and related expenses.All corporations, regardless of how large or small, must keep corporate minutes. If your corporation doesn't have minutes documenting key elements of transactions, the IRS will, in an audit, reinterpret the transactions in what may prove to be the most unfavorable way to your company. In the eyes of the tax code, the taxpayer is guilty until proven innocent.
When a corporation is audited without minutes, owners are just about guaranteed to suffer through audit time and related expenses, lost business expense deductions and additional income owners are responsible for paying taxes on.
Corporate minutes must be kept for everything, including the annual shareholders' meeting and special board of directors' or shareholders' meetings to document what happens between annual meetings. Minutes also must be kept for key transactions, such as:
Corporate earnings accumulations. Penalties are due if a C corporation accumulates earnings beyond the reasonable needs of that business. Owners must document why certain profits were not distributed. The reasons should be as specific and detailed as possible.
Loans to employees and shareholders. When a company makes a loan to an employee or shareholder, this transaction must be documented, including a payback schedule and interest charges. If this isn't done properly, the IRS will treat this as additional salary or dividends.
Salaries. Corporate minutes need to explain in detail why certain salaries were given and why they were considered reasonable. When the IRS sees a salary that it considers unreasonable, it will treat the salary as dividends.
Benefit plans. The board of directors must formally adopt pension plans and fringe benefits, and the corporate minutes must list the major provisions of these plans.
Buy-sell agreements. If corporate minutes show that valuation reports used for buy-sell agreements were adopted each year, the IRS is more likely to accept them. If the minutes don't show this, however, the IRS will use its own valuation when determining gift and estate taxes.
Reasons for not keeping adequate corporate minutes are understandable. Owners of corporations tend to be very busy, and keeping detailed minutes is just one more item on an already too long to do list.
But good corporate minutes can end an audit very quickly. As a rule of thumb, no corporation should close its books on a tax year until the corporate minutes are completely finished and formally adopted. Louis P. Stanasolovich, named one of the best financial advisers in America the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm located in the North Hills. Reach him at (412) 635-9210. The firm's Web site is www.legend-financial.com.
Bankruptcy doesn't necessarily mean the company is closing its doors. It does mean hard choices will need to be made, such as layoffs, salary cuts, not paying creditors on time, if at all, and trying to keep employees who are looking to leave like rats off a sinking ship. Bankruptcy is traumatic for everyone involved in the business, but the demands on board members are particularly difficult. They sometimes view laid-off workers as the lucky ones.
So, how do board members deal with a bankruptcy filing?
1. Legal duties shift. Boards have a fiduciary duty to shareholders, but when a company goes bankrupt, creditors become an important piece of the puzzle. Once a company nears bankruptcy, board members are legally required to be fair to creditors.
All creditors must be treated equally. The question is, when does the board of the troubled company have to apply this new treatment of creditors? The answer varies by state, type of business, financial situation and the creditor structure.
2. Seek legal counsel. The board needs to discuss its options with counsel -- not only legal, but auditors and outside experts -- immediately. Unfortunately, these do not work for free, but expert advice is necessary.
3. Maintain a higher level of contact with the management team. Management needs to develop a business plan to keep the company solvent and communicate it to the board. Continual financial reporting is necessary. Key items to monitor include tax payments, receivables, payables, collections and cash, wage payments, insurance coverages and communication with key customers. If these issues are being addressed, a change in management may or may not be necessary.
4. Board members must take a more proactive role in the company. The management team must be monitored, contacts worked and favors called in.
5. Recordkeeping is essential. During bankruptcy, board members run the risk of being sued. The best defense is a good offense. Document everything. Take detailed notes regarding the alternatives that were evaluated and how final choices were made. Include agendas and minutes. Document formal meetings, impromptu ones and phone calls.
6. Avoid negative actions. This includes having board members resign. They may run into greater legal problems if they dessert the company; they are still held accountable, even if they leave the firm.
7. Check the directors' and officers' liability insurance. Make sure the premiums are paid.
Board members are fiduciaries. However, when a bankruptcy filing is near, their fiduciary liability is even greater. Louis P. Stanasolovich, CFP, is founder and president of Legend Financial Advisors Inc., a fee-only financial advisory firm located in Pittsburgh's North Hills. Legend provides wealth advisory services including comprehensive financial planning and investment management to individuals and businesses. Reach him at (412) 635-9210 or www.legend-financial.com.
Here are some ideas to consider if your business is on a calendar year basis, in which Dec. 31 is the close of the tax year.
Monitor billing. If a business is on a cash basis, invoices for services rendered or goods sold can be sent out so that payment won't be received until 2002. However, given that we are likely entering a recession, invoicing shouldn't be delayed if there's a chance this may prevent you from receiving payment or if the business's cash flow needs require immediate payment.
Stock up on supplies. Supplies are expensed as soon as they are purchased, and purchasing supplies now for next year could significantly lower this year's tax bill. Paying multiyear subscriptions or multiyear insurance premiums, however, will not generate a full tax deduction this year, since the IRS requires prorating over the period for which the payment relates. You may, however, want to prepay monthly bills like postage and medical insurance prior to year's end.
Make last-minute equipment purchases. In 2001, the cost of equipment can be expensed up to $24,000 instead of depreciating it over a number of years, provided that taxable income is sufficient. For example, when buying a computer for $3,000, the entire cost can be deducted this year as long as it's in service before Dec. 31. If cash is a problem, purchase equipment on a credit card and claim the same write-off .
Establish a retirement plan if the business doesn't already have one. This only makes sense if the business is profitable. Contributions can be made up to the due date of the return, including extensions, and the business can receive a deduction on its 2001 tax return as long as the plan is established by Dec. 31.
Simplified Employee Pension Plans (SEPs) can be established up to the filing date of the return, including extensions. Those wanting to establish a SIMPLE IRA retirement plan are out of luck, though; those needed to be established by Oct. 1.
For those with a sideline business, a retirement plan can be established even if that person participates in a plan through his or her regular employer. However, limits on contributions may apply.
Lastly, meet with your financial advisory team prior to year's end so planning can be proactive. It may save you tens of thousands of dollars.
Louis P. Stanasolovich, CFP, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm with headquarters in Pittsburgh's North Hills. Legend provides wealth advisory services including comprehensive financial planning and investment management to individuals and businesses. Reach Stanasolovich at (412) 635-9210 or www.legend-financial.com.