Kristen Hampshire

Just as people need annual check-ups to maintain their physical health, businesses also need check-ups to help maintain their financial health.

Businesses that are dedicated to creating solid business plans with both short- and long-term goals, and that habitually refer to those written documents and measure their success against those goals are better positioned than their competitors to access capital for growth and go after market opportunities, says Stewart Beach, executive vice president, Old Second National Bank, Aurora, Ill.

“With the economic climate in recent years, it’s critical for business owners to constantly evaluate their position in the market, to review goals and objectives, and to determine what action items are necessary to carry out their business plans,” says Beach. “A business’s bank wants to make sure that management is actively leading the business toward success and future growth, making performing regular financial checkups so vital.”

Smart Business spoke with Beach about how to perform a regular review of your business and its performance, and what to consider during these financial checkups.

What metrics should a business focus on when performing financial checkups?

A business plan is a roadmap for an organization’s goals, both short term and long term, and all businesses should have this document in place and on paper. But the plan doesn’t do any good if you simply create it and put it on a shelf; instead, the plan should evolve over time, be edited frequently and revisited regularly so a business can determine whether it is hitting key goals and objectives.

In particular, the budget is a primary checkpoint that should be carefully analyzed on a regular basis. Is the business meeting its projections? If not, why? What factors are causing the business to derail from the plan? While a business plan seems like an inevitable foundation for any business, the fact is that many organizations do not have a formal plan in place.

But every business needs to dedicate the time and resources necessary to assemble those goals, lofty ideas, strategic opportunities and, most important, those numbers into a sturdy, well-crafted business plan, creating a document that will serve as the basis for regular checkups.

What value do these regular checkups have for a business’s relationship with its bank?

While access to capital is better today than it was a couple of years ago, banks still approach business opportunities with cautious optimism, much like any business would consider a deal in these more fragile economic times. Banks want to know that their business clients have a solid plan in place and that they regularly review financials. This is evidence of a strong management team that is actively leading the business and meeting financial targets.

Management that is on top of the budget and on task with achieving business objectives is likely open to growth opportunities, and this is a win-win for banks and the businesses that partner with them.

How does the economy impact the way businesses should evaluate their organizations?

In the current economy, the markets change more rapidly and business cycles move faster than ever before. Businesses might need to go back to the drawing board and review their business plans to ensure that there is enough flexibility to meet changing demands, whether from the customer base, vendors or delivery sources.

The key word is flexibility. Flexibility should be a way of business life today. But an organization can only be flexible when it has a solid anchor, a business plan or similar document that serves as a benchmarking tool. From there, a company can measure and celebrate its successes.

By regularly taking the pulse of the business, management is in a better position to act on market opportunities. For instance, one of the fastest growing segments today is exports. Businesses that produce all products in the United States and have not considered international business might want to investigate how to gain a presence in the export market. Perhaps a company wants to develop an export business to grow its existing domestic revenue. Or a retail organization might begin to explore online sales opportunities to add muscle to its current in-store sales.

The key is to constantly be looking for what’s next, and the businesses that continue to check in with their plan and ensure that the budget is in line, that goals are being met and that key people are in place to help the business grow have a better chance of succeeding when they venture into some of these market opportunities.

A business that is not on top of the budget, receivables, personnel and sales will not be in a position to capture new market opportunities. The economy today demands that businesses run lean, and that means understanding where every dollar is spent. This is why regular financial checkups are crucial to the future of any business.

Stewart Beach is executive vice president of Old Second National Bank in Aurora, Ill. Reach him at sbeach@oldsecond.com or (630) 906-5478.

Corporate budget cuts and head count reductions have forced a lot of valuable C-suite talent into the market, making it readily available to fill your needs. And if your company has a demand for critical niche skills, or it needs to complete a project such as an internal audit or other tasks that require the skills of a high-level professional, you may want to consider hiring an interim CFO.

“Companies still need to complete critical projects despite economic constraints, but they may be gun-shy about hiring a permanent professional,” says Tyler Ridgeway, director of the Human Capital Resources Group at Kreischer Miller. “Your existing CFO might need some additional short-term bench strength.”

Although top-notch CFOs may be predominantly in the market for full-time positions, many can be lured into temporary roles. In addition, some CFOs simply prefer to work on a consulting basis for multiple firms as an “interim,” rather than working for just one company as a full-time employee.

All of this is good news for companies with a demand for CFO-level skills.

“Many CFOs are excited by interim opportunities because they are getting paid and they can use their skills to do some hands-on work,” Ridgeway says. “Companies are ecstatic because they can get the talent they need without making a permanent hire.”

Smart Business spoke with Ridgeway about what to look for in an interim CFO and how to approach the hiring process.

Why would a company hire an interim CFO rather than a full-time executive?

This arrangement is ideal for companies that need help executing a project or that require extra high-level manpower to fulfill demands within the organization. For example, a company that is conducting an internal audit might need extra resources to complete it. The firm can hire an interim CFO to perform the tasks of a controller while it gains the strategic expertise of an executive-level professional who will fully take ownership of the project.

For companies that do not want to make a permanent hire, an interim CFO fits the bill — and the budget. They do not have to commit to bringing in a full-time person. Plus, should the company be interested in making a permanent hire at some point in the future, the interim period can serve as a real-life interview which tests how the candidate handles projects and fits within the organization’s culture.

How should a company prepare to search for an interim CFO?

First, determine where you are lacking in your current organizational structure. What skills would you like to acquire? Perhaps you have a big project coming up, or you may be going through a merger or acquisition and need additional resources. Perhaps your CFO is planning a leave of absence. Identify the pain and the solution that will alleviate it.

Second, define exactly what it is you are seeking to accomplish. Do you need someone to partner with your finance team or accomplish strategic planning? Do you need help with budgeting or management of internal control issues? Determine what will help you meet your goals.

Finally, reach out to your professional services partners or other business resources you rely on. Ask if they can help you identify qualified candidates to fulfill your needs.

How can a company ensure that the interim CFO is the right fit?

Interviews are a critical step in the hiring process and even though you are filling an interim position, you want to treat the process similarly to the way you would hire a permanent employee. The timeline is typically much shorter for an interim hire, but you can streamline the recruiting process by going through a professional services firm to identify the best candidates. That way, candidates are already vetted and you can bring in each candidate for a single interview.

During that conversation, describe your needs and try to get a feel for whether the individual will thrive in your company’s culture. The best interim CFOs have the ability to think strategically and act tactically. They can provide solutions and think about the big picture, but they aren’t afraid to dig in and perform necessary hands-on tasks. You want to identify an interim CFO who will take ownership of your project.

What expectations should the company clearly communicate to an interim CFO about the role?

It is important to be candid about the CFO’s temporary role with the organization and to give the candidate a clear duration for the engagement. Keep in mind that if you hire someone on an interim basis, that professional is still conducting a job search, so you want to set realistic expectations for everyone involved.

If the hire is solely for a project, say so. If you see an opportunity to hire the CFO down the road and you want to use the interim assignment as a test period, keep the relationship open-ended. Let the CFO know that the position is temporary with an opportunity for permanent employment. Then, introduce the CFO to a variety of situations that will help you determine if he or she would be a long-term fit. For example, invite the CFO to a board meeting or ask for assistance on special projects. And remember, the process works both ways. Not all interim CFOs are interested in permanent employment.

Hiring an interim professional can be a win-win proposition, fulfilling a company’s need for expertise and a CFO’s desire to be compensated as a valued resource.

Tyler Ridgeway is the director of the Human Capital Resources Group at Kreischer Miller. Reach him at tridgeway@kmco.com or (215) 441-4600.

If you’re in a position to grow your business to the next level and you need working capital to make that happen, you may be worried about your ability to receive credit. But banks today are extending loans and lines of credit to businesses that have a solid track record, a strategic plan in place and a strong relationship with their bank, says Don Pilmer, executive vice president of Old Second National Bank, Aurora, Ill.

“What has changed in banking over the years is that many community banks used to be able to do business based on relationship and reputation,” Pilmer says. “A longtime customer could say, ‘You know my business is good for it, we’ve been around for 20 years,’ and sometimes that was enough for a community bank that really knew that customer and the company well.”

With heightened regulatory lending requirements, “Underwriting is much more stringent in today’s world than it has ever been,” Pilmer says, citing the mortgage industry fallout and economy as factors.

That said, banks are eager to do business with commercial customers as government stimulus programs and various elements of the Small Business Jobs and Credit Act of 2010 will improve access to capital.

“The government is doing what it can to stimulate activity, and there are various SBA initiatives that are supporting expansion of existing businesses and allowing for some fairly attractive financing initiatives,” Pilmer says.

Smart Business spoke with Pilmer about how business owners can position their companies to secure loans and credit lines in today’s stricter lending environment.

What are banks looking for in a borrower?

Banks are always interested in doing business with borrowers who show that they have a strong handle on where their businesses are going, what they need to do to succeed and what risks they will confront.

Sure, banks appreciate optimistic owners who see bright, profitable futures for their businesses and need the working capital to reach goals. This type of entrepreneurial spirit is what keeps small businesses going and, as a banker, it is refreshing and gratifying to work with ambitious people.

But banks also want to know that owners have developed a plan for how to manage the downside, that they have analyzed the risks, the worst-case scenarios and the what-ifs, and how to manage those scenarios. Banks would also like to see the owner’s plan for how he or she will turn the business back toward the goal if things don’t go as planned.

What should businesses be doing to get their bank loan/credit line paperwork in order?

The best way for a borrower to impress a banker is to be prepared. Assemble a detailed application package, which should include three years of financial statements and tax returns and, depending on the time of the year, financial projections to finish up the present year. It’s also helpful to furnish two years of financial projections or more.

Plan to supply personal financial statements of owners with supporting documentation, and create a summary of the request and how the loan/credit line will be applied to help grow the business and make it more profitable.

Ideally, this information should be organized into a single package, as opposed to bringing a banker financial statements and promising the rest of the information ‘next time,’ or saying, ‘I have tax returns, what else do you need?’ Anticipate what financial information the bank will ask for and bring all information to the table at once.

This helps make the credit application process or renewal process much smoother.

What common mistakes do business owners make when applying for a loan/credit line?

Don’t take the process lightly, and be realistic about how you will manage the downside. In today’s world, cash flow and credit-worthiness are two keys to securing a loan/credit line, and you have to prove that you can support and service the debt.

If you have historical financial statements and projected financial statements that show you can’t service the level of debt you are requesting, that makes it difficult for a banker to get an approval. Even if you have a history of always making payments on time, if you cannot provide financial support and documentation to justify a credit decision, a bank will have a tough time extending that opportunity in today’s market.

What else should business owners know before trying to secure a large credit line or other large-scale financing?

Banks are looking to develop strong relationships with their business clients because it’s important for us to be much more than a commodity supplier of financing. At the same time, businesses must understand that banks are taking on risk by approving loans/credit lines, and borrowers have a responsibility to service their debt. That’s why business owners need to communicate openly with their bankers and share both good news and bad.

Bankers are trusted advisers who can provide business tools and referrals to other professionals who can assist borrowers if they experience tough times. Both parties have a vested interest in borrowers’ success: Businesses want to grow and profit; and banks want their customers to reach their goals and fulfill their financial promises.

Don Pilmer is executive vice president at Old Second National Bank in Aurora, Ill. Reach him at (630) 844-8750 or dpilmer@oldsecond.com.

As technology makes doing business overseas an option for more and more companies, American firms are exploring their international options.

Once a business decides to open operations in one or more countries outside the United States, the tax hurdles crop up and executives are faced with complicated decisions concerning acquisitions, hiring employees, tax structure and transfer pricing. Getting it right is critical to protect a business from multiple layers of taxes and fines as both the federal government and foreign governments focus on enforcing complex international tax laws, says Doug Eckert, member and international tax practice leader, Brown Smith Wallace LLC, St. Louis, Mo.

“U.S. businesses with international operations should develop a tax strategy in conjunction with international expansion to minimize tax costs from the beginning,” Eckert says.

Smart Business spoke with Eckert about what businesses should consider when expanding their operations beyond U.S. borders.

What should a business know when venturing beyond U.S. borders for the first time?

The greatest challenges a company faces are personnel hiring outside of the U.S. where human resource laws are significantly different, managing foreign customer expectations and managing cross-border tax consequences, including transfer pricing, an area where significant penalties can arise for companies that do not transfer goods at ‘arm’s length pricing.’

The initial business plan needs to take into account each of these areas.

What key tax issues do companies face when expanding internationally?

Once a company makes the decision to expand outside of the U.S., it first has to determine how it will distribute its products or services, and whether to use third-party distributors or its own employees to manage its foreign operations.

The initial determination of whether a U.S. company needs its own foreign subsidiary is often determined by its customers. This usually occurs when the customer requests that import taxes, duties and VAT (value added tax) are managed by the U.S. seller. At this point, a foreign subsidiary is generally required to manage these taxes within the local country.

Then several key questions arise.  Should the company be a corporation or branch (income or loss is subject to immediate U.S. taxation) of the U.S. parent? How should the company be funded, whether through debt or equity? How can profits be transferred tax efficiently to the U.S. parent?

The U.S. has the second-highest corporate tax rate in the world. Careful international tax planning is required in order to repatriate overseas profits to the U.S. to avoid paying the disparity between the U.S. and foreign tax rates, or even more. Governments are ready and willing to take your money if you don’t plan carefully.

What challenges does a business face when making an international acquisition?

The ultimate challenge is how to repatriate earnings to the U.S. to service the acquisition debt in a tax-efficient manner and avoid paying the incremental U.S. tax in the process. This process is managed by setting up a tax-efficient acquisition structure and, in many cases, pushing acquisition debt into the overseas operations. Managing foreign currency risk as part of this process is also an important consideration.

An example of what not to do is to enter into a structure in which cross-border payments, dividends and interest will be subject to withholding taxes. In some situations, this could cause the overall rate of tax to exceed the U.S. statutory tax rate of 35 percent. To avoid this, it is important to design an acquisition structure that will allow cash to be flexibly managed within the structure in a tax-efficient manner.

What new legislation could impact a company’s international tax position in the next year?

In 2010, Congress enacted several new tax laws that impede the ability of U.S. multinational corporations to credit foreign taxes paid. The most significant of these laws are the ‘foreign tax credit splitter rules’ and the ‘covered asset acquisition rules.’

The foreign tax credit splitter rules preclude foreign taxes from offsetting U.S. taxes until the related foreign earnings are subject to U.S. taxation. The covered asset acquisition rules deny U.S. companies from taking a portion of their foreign tax credits in cases where the value of the foreign assets is stepped up to fair market value. This generally occurs in the context of an acquisition.

Both of these rules narrow the options available to U.S. corporations to avoid paying the difference between foreign tax rates and the U.S. tax rate when repatriating funds to the U.S.

Essentially, these rules will likely increase U.S.-based multinationals’ U.S. tax liability. Given this legislation and the current complexity of U.S. international tax law, companies should talk with a professional to understand how these tax rules interplay.

Ultimately, all these rules come down to a large modeling exercise to minimize your global taxes.

Doug Eckert is a member and international tax practice leader at Brown Smith Wallace. Reach him at (314) 983-1268 or deckert@bswllc.com.

There is a lot of buzz around businesses going green, but opportunities to do so are still limited.

Despite ambitious plans to implement renewable energy tools and programs, “the green economy has not yet emerged,” says Nick Lombardi, manager of risk services and energy services practice leader at Brown Smith Wallace LLC.

While some states have adopted renewable energy portfolios, there is no federal standard. And most of the sweeping, green-minded efforts that have been discussed in Washington, D.C., the past few years are still on the table.

That said, there are still things that businesses can do to improve energy efficiency and take advantage of tax credits and incentives for retrofitting commercial property and purchasing equipment.

“Only use what you need,” Lombardi says. “And consider purchasing more efficient lighting, training employees and replacing inefficient motors and other equipment to save on energy costs.”

Smart Business spoke with Lombardi about how to realize savings and reduce energy consumption by taking advantage of available tax credits and incentives and implementing efficiency measures.

How can a business take advantage of green initiatives?

There is no real answer. When the current administration stepped in, there was a lot of hype around developing a green economy. However, much of that has not been implemented, as incentives and government programs remain stalled. How can a business take advantage of a systematic program that doesn’t yet exist?

The good news is that there are some specific opportunities for businesses that are interested in undertaking renewable energy projects. These have been in place for some time and will continue to be available for businesses moving forward. For example, the EPACT (Energy Policy Act of 2005) tax credits apply to commercial buildings that implement energy-efficient measures. If an organization meets certain energy-efficiency standards, it can earn a tax deduction for the facility of up to $1.80 per square foot. Additionally, there are federal investment tax credits available for renewable projects such as installing a wind turbine, or photovoltaic equipment to produce solar energy.

Businesses should also check into local renewable energy programs that may be available through utilities. For instance, some of the most accessible incentives are earned through installation of high-efficiency lighting. Before making any retrofits, however, you should talk to a professional who is well versed in energy consumption and green tax credits.

What are other ways companies can reduce energy expenditures?

Initiating an internal training program to educate employees about energy-saving basics will go a long way toward reducing energy costs. Your mantra should be, ‘Don’t use what you don’t need.’ Highlight the importance of simple things, such as turning off lights when office spaces are not in use, and powering down computers at the end of the day.

Computers demand a lot of energy, and companies can reduce their usage by simply adopting conscientious habits, such as not allowing employees to disable a computer’s standby mode.

Utilize natural light whenever possible, and use occupancy sensors as a cost-effective way to ensure that lights are only on when necessary. Also, daylight harvesting systems are more accessible and affordable to install now. These systems involve lighting that dims and brightens depending on available natural light in a space. There are rebates and incentives available for installing this type of technology.

What is electric power factor, and what impact does it have on utility bills?

Electric power factor is the ratio of the ‘real power’ flowing to the machine to the ‘apparent power,’ the amount of energy a machine uses versus the energy the machine produces. It’s complicated to understand, but essentially, the measurement is the portion of electric energy that is doing the work and not stored or captured in back-and-forth magnetic energy.

There is a misconception that improving this ratio will drastically reduce utility bills. The way electricity is metered, only energy that is ‘doing the work’ is measured. Analyze your utility bill and you will see that the power factor component is an infinitesimal portion of your expense.

The best way to save on utility costs is by focusing on efficiency and considering upgrading to high-efficiency motors, especially those used in pumps, fans and other long-running machinery.

How do usage spikes affect my bill?

There is another utility myth — that huge spikes in power usage drive up costs. When you turn on a large bank of lights, or power up a big machine, the energy surge is depicted on a utility bill as a significant uptick. These energy surges last a fraction of a second, or a couple seconds, at most. Many believe that by reducing these spikes, one can control energy costs.

However, utilities measure electric demand over 15-minute intervals, and those brief, though enormous, spikes hardly change the average. So don’t get sold on devices that claim to reduce those huge spikes and reduce your electric bill. If you want to save money on electricity, the tried-and-true methods are to upgrade to more efficient equipment, monitor usage of items such as lights and computers, and educate employees about wise energy use.

Meanwhile, talk to your utility company or a professional about your rate structure to be sure you’re on the right rate.

Nick Lombardi, PE, is manager of risk services and energy services practice leader at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1323 or nlombardi@bswllc.com.

You take careful measures to protect your business facility, installing alarms and other security devices to keep the operation safe. But what are you doing about guarding your business against the significant but intangible threat of bank fraud?

“Every time you write a check, your information is out there, available for the general public,” says Keith Gottschalk, executive vice president of operations and IT at Old Second National Bank.

Counterfeit checks, Automated Clearing House (ACH) fraud and criminal wire activity are hotspots in the bank fraud arena, and every businesses needs to understand them. Economic conditions certainly contribute to an increase in bank fraud activity, but so does exposure through computer networks that become open doors when antiviral software and firewalls are not in place.

To protect your bank accounts, reputations and credit rating, take advantage of your bank’s security offerings and implement internal checks and balances.

“We see a lot more fraud involving small businesses and online banking, but there are tools you can use to prevent a hacker from violating your accounts,” Gottschalk says.

Smart Business spoke with Gottschalk about how businesses can take proactive steps to improve security.

What are the biggest challenges businesses confront when working to prevent fraud?

General awareness is key, and bank fraud simply isn’t top of mind at many businesses, especially in smaller organizations where an owner is wearing many hats and focused on day-to-day operations. Businesses without internal IT departments are often exposed to security risks without realizing it.

Also, there is a general belief that the bank is protecting businesses against all fraud. And while banks certainly have tools to help prevent fraud and notify businesses when suspicious activity occurs on an account, it is ultimately the business’s responsibility to serve as watchdog. Businesses must recognize that fraud is out there and it’s happening every day to organizations like theirs. A business can protect itself by simply taking the time to put safety measures in place.

What are some recent trends in bank fraud?

ACH fraud is huge in the industry now, and this is attributed to people stealing the log-in credentials of smaller businesses and altering ACH files, or creating new files.

Also, criminals are using legitimate business names to conduct these types of fraudulent transactions. The business has no idea and, therefore, its reputation and credit history are at stake. Imagine a business owner’s response upon discovering several bounced checks when, in fact, those checks were counterfeit and the business had no idea they existed.

A business can’t be too careful in monitoring checks and tracking bank accounts regularly.

What are some clues that fraud has occurred against a bank account?

First, the business will notice transactions that are not familiar. That’s the obvious sign.

Depending on how accounts are set up, the business might receive e-mails from the bank warning of suspicious activity, such as changing a user ID, or wiring money, or creating an ACH batch. Don’t assume that these notices are errors; these are huge red flags.

Investigate communications that the bank sends. Businesses should be proactive and set up alerts with their bank, and designate an individual to monitor messages.

What type of fraud protection do banks offer, and how can these tools help businesses?

Positive Pay is a system that confirms every check a business writes. The service matches each check for payment against a list of checks authorized and issued by the company. All components of the check must match; otherwise, the bank will issue a warning to the business. This service is also applicable to ACH.

Additionally, the use of RSA tokens adds another layer of security to the typical username and password. An RSA generates an authentication code at fixed intervals, usually every 30 to 60 seconds. The user uses the token, then keys in the code and gains access to the account.

Banks also offer multifactor authentication, as well as e-mail and text alerts. While single-factor authentication involves only a user ID and password, multifactor authentication also requires a physical token, such as a card. An ATM transaction is an example of multifactor authentication: Someone inserts a token (card) and enters a user ID and password.

The key is for businesses to communicate openly with their bank about available services and what companies can do internally to prevent bank fraud.

Protection can be as simple as remembering to renew antivirus software so no computer goes unprotected, or discussing IT security with a professional who can implement systems.

Keith Gottschalk is executive vice president of operations and IT at Old Second National Bank, Aurora, Ill. Reach him at (630) 966-2474 or kgottschalk@oldsecond.com.

When talking about tax strategy for 2010 and beyond, the only sure thing is change.

Some tax laws are expiring and others are being enacted to stimulate the economy, presenting tax deduction opportunities for businesses and individuals.

While keeping track of those changes can be difficult and time-consuming for a busy executive, an experienced tax consultant can help you identify opportunities to benefit from the changes and develop your tax strategy, says Cathy Goldsticker, CPA, member, tax services at Brown Smith Wallace LLC.

“As the government works to reduce unemployment and stimulate jobs and the economy, tax strategy is the low-hanging fruit, and an expert can help you identify it,” says Goldsticker.

Planning is critical, and businesses should begin working now with an adviser to start identifying tax strategies to help minimize taxes, says Martin Doerr, CPA, member in charge, tax services, Brown Smith Wallace.

“There are lots of details to finalize and decisions yet to be made, such as the 2011 tax rate or whether certain tax cuts that are expiring this year will be renewed,” says Doerr. “However, businesses should look at everything on the table so they don’t miss any tax opportunities.”

Smart Business spoke with Goldsticker and Doerr about how to plan your rapidly approaching 2010 year-end tax strategy in a fast-changing tax environment and the steps you can take to maximize deductions.

What items can trigger Alternative Minimum Tax (AMT), and what steps can be taken to mitigate the loss of valuable tax deductions?

AMT was created to ensure that wealthy individuals and businesses pay a minimal level income tax. When calculating regular income tax, minus deductions, a separate alternative calculation is also figured.

The taxpayer must pay the higher of the two, and with all of the tax changes coming down the pike, more individuals and businesses will be paying AMT in fiscal 2011 and beyond.

That said, it’s important to consult with a tax adviser and determine how taking deductions or allowable depreciation will affect the overall tax picture. With AMT, certain business and individual tax deductions, such as property taxes, state/local taxes and investment expenses, are not recognized, thereby preventing taxpayers from getting the full benefit of these deductions.

There are some steps businesses can take to mitigate AMT: Slow down allowable depreciation on qualifying property by using a straight-line rather than accelerated depreciation method; defer certain deductions to a subsequent year because these deductions will not provide tax benefit in a year when a taxpayer owes AMT; and project whether AMT is likely in 2011 to plan future tax strategies accordingly.

How can self-employed individuals, such as partners, sole proprietors and S corporation shareholders, minimize self-employment tax?

Consider ways to receive business funds without owing self-employment taxes. Set up rental property and establish supporting operations.

For instance, rather than a business purchasing equipment, the individual buys it and rents it back to the business at fair market value. While that income is subject to income tax, it is not subject to self-employment tax.

Another suggestion that applies only to S corporations is to withdraw income as distributions rather than taking income as wages once reasonable wages are paid. Investor distributions are not subject to Social Security and Medicare taxes, but wages are.

Finally, for business owners of C corporations, now is a great time to consider taking dividends out of the company because they will be taxed at 15 percent this year, without incurring self-employment tax. Next year, that dividend tax will increase to 20 percent, and perhaps more, depending on how tax law plays out.

What should taxpayers know about selling a second home at this time?

Now may not be the time to sell a second home. In today’s environment, sellers who are fortunate to have a profit will pay 15 percent capital gains rates (plus sales tax where applicable) on that profit. This is different from when you are selling a primary residence, where sellers are usually exempted from capital gains tax.

But here’s the real clincher with selling a second home now: Not only do you pay capital gains tax if you make money on the sale, if you sell it at a loss, you do not get to take a deduction. Selling is a lose-lose situation.

Also bear in mind that if you have a foreclosure on the property, there could be hidden tax consequences. Hold out on selling that second home and consider renting; it may be your best option.

Does retirement plan funding still make sense in today’s tax environment?

Employer-sponsored plans, such as 401(k)s or certain IRAs, provide a tax deduction for the employer, and the employee is not taxed on the income. Employers wanting to fund benefits for their employees are wise to consider a retirement plan. A lot of businesses already have these plans in place, they just need to maximize them. The old adage to ‘buy low and sell high’ is a popular strategy, and that’s exactly what’s going on now in the retirement plan funding environment.

Tax law changes are approaching, but, with uncertainty as to which changes will occur, a proactive tax strategy will position businesses to maximize the benefits. Tax planning is essential in times of change.

Cathy Goldsticker, CPA, is a member, tax services, Brown Smith Wallace LLC. Reach her at (314) 983-1274 or cgoldsticker@bswllc.com.

Martin Doerr, CPA, is a member in charge, tax services, Brown Smith Wallace LLC. Reach him at (314) 983-1350 or mdoerr@bswllc.com.

Nearly seven months after the Patient Protection and Affordable Care Act (PPACA) was passed into law, most businesses haven’t come much closer to understanding how health care reform will impact their costs.

“With an estimated 35 million additional people becoming eligible for services in an already overextended health delivery system, it’s not logical to think that costs will decrease,” says Robert DiCosola, executive vice president of human resources/training and development, Old Second National Bank, Aurora, Ill.

DiCosola says that employers can expect to carry a heavier cost burden in order to provide health insurance to employees.

“The good news is that all employers are in the same boat of uncertainty,” DiCosola says. “Employers will have to closely monitor what their competition is as the health care legislation unwinds.”

Smart Business spoke with DiCosola about strategies businesses can begin to implement now to combat rising costs.

How can employers begin to prepare now for the upcoming changes?

There are three critically important considerations. First, human resources practitioners and business owners don’t have to be experts on this behemoth. However, they do need to stay close to the experts. Solicit, rely on and act upon the consultation and advice of your insurance brokers and other providers.

Second, make sure your employees and senior management know you are on top of the reform issue by communicating via the intranet, information sessions and the company newsletter. Share the timeline of critical PPACA mileposts with senior management and let them know how you have the organization in compliance.

Finally, don’t panic. There is still time to make sure that your organization is in compliance with each critical incident milepost. And parts of this legislation could look very different by 2014, when major parts of the reform plan become effective.

What are some strategies to alleviate the burden of rising health care costs?

For years, employers with fully insured plans could consider a number of options in an attempt to keep health care expenses from going through the roof, including raising deductibles, co-pays or other employee out-of-pocket expenses; putting the health care insurance contract out to bid; and restructuring the drug delivery system to steer employees toward less expensive generic drugs.

The PPACA could dilute these options for employers who ‘grandfather’ their health care plan from certain new mandates. If an employer grandfathers its health insurance plan, the plan is exempt from certain mandates, such as limiting employee cost-sharing for things including out-of-network emergency room visits and preventive-care procedures.

However, grandfathering could come with costs that make offering the plan unsustainable. An employer can make only minimal increases to employees’ cost-sharing provisions, such as deductible limits and out-of-pocket maximums, and zero increases to employee coinsurance percentages. Such restrictions could result in employers rethinking the cost benefit of offering insurance.

How can a wellness program help reduce costs?

Healthier employees translate to lower use of medical services, with an accompanying decrease in health-insurance-related costs. But quantifying that correlation is tricky.

We began our wellness program in 2004. It includes annual blood draws to screen vital indicators such as cholesterol levels, and the completion of an annual risk assessment. Each employee receives an assessment from a third-party administrator, along with annual goals that must be met to receive a wellness program discount. For the first year or two, there was a slight increase in employee use, as employees went to their personal physicians for consultations and treatment of conditions uncovered by screenings. But results were amazing: A number of screenings uncovered potentially serious conditions that were caught early and treated. The success of the program hit a high point in 2008 when the health plan experienced an unheard-of premium equivalent increase of 0 percent due to the favorable claims experience.

A decrease in health insurance expenses is one way to quantify success. Another is gains in employee productivity, potentially measured by decreases in unscheduled days off due to illness. No matter how you measure it, employees’ well being is definitely a byproduct of a wellness initiative.

The PPACA allows for premium discounts up to 30 percent that employers can offer for successfully participating in a wellness program. The current limit on discounted premiums as set forth under HIPAA is 20 percent. Another potential impact of PPACA is the award of grants to small employers that implement comprehensive workplace wellness programs post-enactment of the legislation.

How can a business determine if offering an employer-sponsored health insurance program is a smart option?

It boils down to two issues: Can the company afford it, and what is the competition doing? This is one of the most important cost/benefit analyses a company will take part in over the next couple of years. Under the PPACA, beginning in 2014, employers will have to determine whether to provide employees with health insurance or pay the government-imposed penalty. If a company is in growth mode, stock price is high and it is flush with cash, it might be more inclined to keep providing coverage. But if a company is struggling, that difference in cost outlay for one benefit might be a deal-breaker. There are other issues that come into play, for example, what are other local companies in your industry doing? The fact is, offering health insurance coverage may no longer be the recruitment and retention carrot it once was if health care becomes much more widely accessible.

Robert DiCosola is executive vice president of human resources/training and development at Old Second National Bank, Aurora, Ill. Reach him at (630) 906-5546 or rdicosola@oldsecond.com.

If your business has been underpaying its taxes, look out: States are seeking ways to increase their budgets by increasing their sales tax audit activity on companies that may not even realize they are underpaying.

In the ever-changing landscape of state tax law, many businesses have a difficult time understanding how much sales tax to pay and which transactions are taxable. As a result, businesses can end up paying hefty assessments.

“The keys are to set up your accounting system to accurately capture the data used to calculate the amount of sales tax due, know the laws in the state in which you operate and consult with a professional who understands the application of the sales tax laws and procedures in that state,” says Susan Nunez, state and local tax services principal at Brown Smith Wallace LLC.

Smart Business spoke with Nunez about how to make sure you’re compliant with state sales/use tax laws and how to work through a sales tax audit.

If a supplier does not charge sales tax on the purchase of tangible personal property, is the purchasing company still required to pay the tax?

Yes, if the transaction occurs in a state that imposes a sales tax on the transaction. However, it is important to note that many states, including Missouri, have numerous sales tax exemptions for different industries and/or types of purchases that may apply to transactions otherwise subject to sales tax.

If you conclude that the transaction is exempt, you should provide the supplier with an exemption certificate for the state in which the item will be used. It is still your responsibility to maintain documentation that your claimed exemption is valid under that state’s laws.

What can a company do if it determines that it overremitted sales tax to a state?

Most states offer a mechanism for taxpayers to request a sales tax refund. The process generally involves submitting a refund claim, filing amended returns and attaching supporting schedules and invoices within a certain time period. The time period or statute of limitations is typically three to four years to file a refund claim. Most states require the seller to give the amount refunded back to the purchaser; others, however, do not have such a requirement.

What should a company do if it did not collect and/or remit sales tax on transactions it suspects are taxable?

If a company never remitted tax in a state in which it was doing business, the best course of action is to enter into a Voluntary Disclosure Agreement (VDA) with the state. This allows the company to anonymously ‘come clean’ with the state. The benefits of this approach include a limited look-back period of typically three to four years and, in certain circumstances, an abatement of certain tax penalties.

Because this filing is anonymous, a consultant can negotiate with the state to reach the best result for the company. In some cases, this can be prospective filing only, which means not having to pay any taxes for prior periods. If you’re in this situation, you should talk to a tax professional about the VDA process in the relevant state.

If a company sells a product, does it have to collect tax in every state where it has customers?

That depends on whether the business has a physical presence in the state in which the sale takes place. Nexus includes a state’s right to assess tax on an out-of-state business. A nexus-creating activity usually means a physical presence in the state for sales tax purposes, such as a store front, equipment or employees.

What is the typical sales tax audit process?

First, a company will receive a letter from the state that includes a request for documents. You are generally asked to sign a waiver, which, when signed, gives the state authority to waive the statute of limitations period. It’s best to sign this waiver; cooperation will generally make the audit process go more smoothly.

Next, a state auditor will review your fixed asset purchases, expense items and sales transactions. The information is analyzed, and you will eventually receive a preliminary audit report. You’ll have an opportunity to reply to items flagged for assessment. This review may occur a couple of times before a final assessment is issued.

Once the final assessment is issued, as a taxpayer, you are allowed to appeal the auditor’s findings to an administrative tribunal or state court system. It’s important for you to reach out to tax professionals who are well versed in the state laws where your business operates. Having a third party represent you will ensure that audits are completed accurately and in a timely manner and that excessive assessments and unreasonable deadlines are not imposed on your business.

What can companies do to mitigate their sales and use tax issues?

One department should take responsibility for establishing procedures to assist your company in maintaining accurate records used to calculate the tax. That department should also make the tax decisions related to various purchase and sales transactions.

Creating tax matrices to use as a guide can assist in reducing tax issues. These matrices should be updated on an annual basis to stay current with state tax laws.

Your company should also consult with a tax professional who specializes in state and local tax issues so that you receive knowledgeable advice on compliance issues and on planning ideas to better manage your tax positions across all the states in which you operate.

Susan Nunez is a principal at Brown Smith Wallace LLC. Reach her at (314) 983-1215 or snunez@bswllc.com.

Many businesses think of their bank as a place to cash checks and keep their money, but if they take the time to build a relationship, that bank can offer so much more.

By creating a relationship, a business will find that its bank can do so much more than offer products that are generally similar across all financial institutions.

“There is an ongoing dialogue that is fully appreciated within a financial institution concerning what clients mean to the bank,” says June Courtney, executive vice president of commercial banking, Old Second National Bank. “A bank should do so much more than provide credit products. Banks that are re-engineering their cultures are talking to business owners about what the bank can do for them.”

Rather than answering a business owner’s questions with product solutions, bankers who are interested in building lasting relationships with clients are listening, asking questions and offering ideas. Instead of just pushing products, they are learning about clients’ industries and speaking with them on a business-owner level rather than from a banker/decision-maker pedestal.

“When bankers approach a relationship by talking about the challenges that face their clients’ industry, when they open up that way, clients recognize that bankers are interested in learning what difficulties they face and finding solutions so the bank can be a help,” Courtney says.

Smart Business spoke with Courtney about how a business owner can work strategically with a banker to the benefit of both sides of the relationship.

What is relationship banking?

Focusing on relationships can be misconstrued as wining and dining, golf dates and lunches out. But that’s not what relationship banking truly means. Instead, it involves understanding clients’ needs, listening to them and delivering products that execute on those needs. It means being there when clients really need help — and that’s the case with many businesses in this economic climate. A banker can and should serve as a sounding board and trusted adviser to the business. With a focus on the long term instead of just filling need-it-now orders, banks centered on relationship-building rather than simply selling will stand by their clients in good and bad times and help them execute plans for growth, succession or whatever the future holds. That relationship goes beyond networking — it’s truly making sure that each party leverages the relationship.

For instance, a bank can look at its own vendor opportunities and open the door to local businesses that are clients to also do business with those vendors. Then, every time employees of that bank go out into the market and talk about companies that it does business with, those companies also benefit. A relationship-focused bank will think of clients as strategic partners in every sense.

What is a business owner’s responsibility in building a mutually beneficial relationship with its bank?

All banks are not alike, and as soon as a business owner asks, ‘What’s the best price you can offer?’ the client is commoditizing the bank. It’s a silly question to ask if you consider the way businesses feel when a supplier, vendor or customer turns that question on them.

At the end of the day, businesses should carry those values over to their banking relationship, understanding that the cheapest price might not buy the services and strategic partnership they are looking for in a banker. So No. 1, look beyond price and focus on your needs and discussing those openly with a banker.

That brings up an important second point: transparency. A bank wants to understand what challenges a business faces, where it has been and where it wants to go. Clients should be open and willing to have a well-informed dialogue around their objectives. A business must tell the whole story, good and bad, to help the bank understand what role it can play in guiding the company forward.

What is an example of how this interplay between banker and business can play out?

Here’s a scenario that describes how a banker can bring ideas to the table that can change a business’s destiny. We had a customer who was a pure distributor in his industry 10 years ago. While talking about the business, the banker asked, ‘Is this all there is for you? Because I think the real value we can create for you is if you were no longer just a distributor, but, in fact, we vertically integrated you and turned you into a manufacturer where you could control more of your own destiny.’

Four hours later, that’s exactly what the business decided to do. This company is hugely successful today, evolving from a sleepy little distributor into an earnings engine and creating significant wealth for the owner and his family. It was all about idea generation between the bank and his business, and executing on those ideas.

How can a business find a banker who will work as an adviser and strategic partner?

Business owners should ask for a resume when they talk to bankers. Find out about their background and ask questions about how they have helped others.

If you really want someone who will serve as a strategic adviser or counsel, select a banker just as you would an attorney or accountant.

June Courtney is executive vice president of commercial banking for Old Second National Bank, Aurora, Ill. Reach her at (630) 801-2219 or jcourtney@oldsecond.com.