When Wall Street is going gang-busters, even the most conservative investors loosen up and take on more risk in their portfolios than usual. Confident in the market and riding the “good times,” they forget the golden rules of investing.
“The fundamentals of investing are to diversify and balance your risk,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich. “I think a lot of people forgot those fundamentals when the stock market was so good.”
Every employee with a retirement plan is watching his or her savings erode, though long-term investors which is anyone in the market for five years or longer will see the market rebound eventually. For some, the current economy is a hard-learned lesson in being prudent in good times and bad. But regardless of one’s financial position, news headlines are sparking serious concern for retirement dollars.
As employees consider their 401(k) contributions and re-evaluate investment portfolios for fiscal 2009, business owners can do a great service by offering education and access to financial advisers who can provide practical retirement planning insight.
Smart Business spoke to Johnson about what employers should communicate to their staff concerning retirement plans and the investment alternatives that banks offer.
What should employees understand about their company 401(k) plans in light of Wall Street’s volatility?
As an employer, you have employees who contribute to a company 401(k) plan, and they are afraid because they see their money evaporating. Some may be tempted to stop participating in the program or to decrease their contribution level. Explain to employees that neither is a wise, long-term investment decision. Here’s why. A 401(k) plan offers two features not available anyplace else. One is tax savings. Contributions to a 401(k) are not subject to federal income tax upon deposit. There is no bank mutual fund or credit unit that will provide that instant return on your investment. Two, most employers match a certain percentage of employees’ 401(k) contributions. Because of this, a 401(k) is probably the most lucrative, long-term investments out there. Finally, by contributing to a 401(k), employees essentially are buying in to the stock market. You know the old saying, ‘Buy low, sell high.’ Now is the time to buy everything is on sale.
What about pre-retirees who are considering pulling all funds from their retirement accounts?
One of the biggest mistakes people make near retirement age is getting too conservative with their plans, thereby limiting their returns. The goal is to not outlive your money. Pulling funds from an investment account to invest in a low-interest CD, for instance, may feel ‘safe,’ but what’s safer? Taking a little risk and maintaining higher returns for longer or cashing out of the market with the reality that the money will dry up in less time? Individuals are asking bankers about rolling retirement funds into CDs because they get FDIC insurance and avoid stock market volatility. Make sure this decision is not based on the events of the day. Stop and count to 10. Make rational decisions, not emotional ones.
Are there alternative bank products or other retirement savings vehicles that satisfy those with low risk tolerances?
An individual might consider a bank CD for a portion of savings, though exiting from the market completely is not a sound, long-term decision. An honest discussion with a financial adviser should preface discussion with a banker concerning savings products and mutual funds. Some banks provide wealth management services; take advantage of those offerings. Ask about annuity products. Traditionally offered by insurance companies, these products have evolved over the years. Wealth managers are offering them as an option for individuals who want more risk protection and ‘upside’ opportunity. Also, companies can attach a Roth 401(k) feature to their 401(k) plans. Unlike traditional Roth IRAs, with the Roth 401(k), employees can contribute up to $15,500 if they are under the age of 50. That money grows tax-deferred and is tax-free at retirement.
What education can managers provide employees to help them make wise, long-term fiscal decisions concerning retirement plans?
Employers can ease concerns about participating in company retirement plans by connecting their work force to experienced bankers and advisers. Let employees know that the company is partnered with a financial institution and team of advisers. Now is a great time to invite a professional to speak about the market, retirement planning and the importance of thinking long term. Most financial advisers partnered with retirement plan providers or banks will give presentations and consult with employees for free. Arrange a mandatory meeting at your business, and allow employees to sign up for one-on-one sessions after the talk. The confidence employees gain through education will help them make wise investment and banking decisions.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at CLJohnson@franklinbank.com or (248) 358-6459.
New Year’s Day may be a great time to start a new diet and set fresh goals for personal growth, but it’s a little late for reflection and goal setting in the business world, especially concerning tax planning. And, in this economy and election year, planning has never been more important.
“Business owners and shareholders should be looking no later than November at how they think their year will unfold from an income tax perspective,” says Robin Bell, co-leader of the tax practice at Brown Smith Wallace LLC. “It’s important to be proactive. Ask yourself questions and engage in tax-related and financial-planning discussions with your team of advisers before year-end.”
Smart Business spoke to Bell about tax mitigation tools and planning techniques so business owners are aware of opportunities to minimize their tax consequences.
What are the opportunities in research and development?
Evaluate your research and development to determine if your company is eligible for the Research and Development Tax Credit.
The credit is based on a percentage of total, eligible expenditures, which includes wages, subcontractors/hired professionals, the cost of trial and error studies, and costs incurred during product development. The amount of credit depends on the specific business type and the amount of qualifying expenditures. If you have not determined previously that you qualify for the credit, you are eligible to amend prior ‘open’ year returns.
If you have taken the R&D credit in the past, it’s a good idea to re-evaluate your calculations and determine whether there is an opportunity to increase your benefit. This credit opportunity has cash flow impact.
How can efforts to improve energy efficiency pay off?
The Energy Efficiency Deduction rewards companies, large and small, that have built a new facility or renovated an existing building between Jan. 1, 2006, and Dec. 31, 2008. The facility must be in service by the end of this year. The new building or renovation must increase energy efficiency by 50 percent. This can include heating and cooling systems, water heaters, and interior lighting. If you meet the 50 percent energy-efficiency requirement, you may deduct up to $1.80 per square foot. The minimum deduction for energy efforts (that qualify) is $0.60 per square foot. Certification is required to qualify for an energy-efficiency deduction. Keep this deduction in mind and ask contractors and other professionals to document the energy-efficiency level of items that possibly qualify. Some contractors offer certification as a part of their building services.
What opportunities can businesses that produce and sell domestically realize?
If your company produces goods, constructs property, develops software, or produces electricity or gas, you may qualify for a Domestic Production Activities Deduction. This deduction is available to companies that have taxable income. The past few years, businesses could deduct 3 percent of ‘qualified production activities income.’ For years 2007 through 2009, the percentage increases to 6 percent. Depending on what happens after the election, that deduction is scheduled to increase to 9 percent for 2010 and beyond. Increasing deduction percentages could make calculating ‘qualified production activities income’ worth your time and effort.
Have tax benefits improved or changed for businesses that export goods?
If you export a minimum of $1 million in goods each year, you should think about a tax-advantaged Interest Charge-Domestic International Sales Corporation (IC-DISC). Here’s how this benefit works: If ‘Company A’ realizes $1 million taxable net income on exported goods, it would normally pay a 35 percent tax on that $1 million. By setting up an IC-DISC, Company A can pay a commission to the IC-DISC, with certain limitations. The commission income to the IC-DISC is then paid out of the entity as a qualifying dividend and taxed at 15 percent to the stockholders of the IC-DISC. Depending on the company’s export scenario, this arrangement can significantly mitigate tax consequences. This is one of the last tax advantages specifically available for exporters and could likely suffer if the qualifying dividend rate of 15 percent changes after the presidential election.
What if you have obsolete inventory?
If you have obsolete inventory that is taking up costly warehouse space, you should work to reduce or completely remove this inventory for tax purposes. Consider donating inventory, recycling it or discounting it to sell it quickly. For GAAP financial statements, the inventory would be written down or off when the value is less than cost or worthless. The deduction for tax purposes is different. You must dispose of the inventory.
What about capital expenditures?
The service has reinstated ‘bonus’ depreciation for 2008. For eligible property, you can deduct 50 percent of the eligible cost, with no limitation. These rules are very similar to prior ‘bonus depreciation’ rules.
Bottom line, take a proactive approach to tax planning and set aside time with your adviser well before year-end to discuss potential tax reduction opportunities. There are opportunities available today that can provide relief to growing businesses. You just need to know what business activities may result in tax benefits.
ROBIN BELL is co-leader of the tax practice at Brown Smith Wallace LLC. Reach her at (314) 983-1217 or RBell@bswllc.com.
Whether or not you are satisfied with your current bank, abundant media attention covering the financial industry may inspire you to shop around. When was the last time you “interviewed” banks? When was the last time you considered your own business goals in relation to your bank’s objectives for the future?
“Before you make any moves, evaluate your business in terms of size, life cycle and growth expectations,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich. “Once you figure out who you are, so to speak, you can focus on choosing a financial institution with products and services that complement your needs.”
Prior to starting a new banking relationship, consider Johnson’s advice to Smart Business for selecting an institution that will serve your business years down the road.
What ‘inside work’ must business owners do to be prepared to ask the right questions?
Before you do anything, evaluate your own business. Where are you today, and where do you see the company heading in the next three to five years? What will revenue look like? Will you expand your facility, move to a new location, potentially add more products to your lineup or hire more employees? What are your immediate growth goals, and what are your objectives for sales/growth in five years? Will your lending needs be great, or is acquiring capital not an issue in coming years? This is important because you want to make sure the new bank you partner with is equipped to handle your lending needs down the road. Be sure to ask this question.
Finally, spend some time defining your company culture and business philosophies. The financial institution you choose should share these mindsets. You will share intimate business information with your banker. You should feel comfortable and ‘on the same wavelength’ as him or her.
What mistakes do business owners make when choosing a new bank?
The bank on the corner or across the street from your office isn’t necessarily the best match. In real estate, location is king. In banking, convenience is critical, but that doesn’t necessarily mean the bank should be located within eyeshot of your headquarters. You want to partner with a bank that provides the best service and products you need.
Should you decide to do business with a financial institution across town, you could always retain a payroll account at a neighbor bank for the convenience of employees’ with payroll accounts at your business. With the ease of today’s electronic banking, you can seamlessly transfer dollars online from one bank to another. This arrangement is necessary in some instances, but ideally, once you decide to move your banking business, you should move all of your business, including loans and deposits.
How important is pricing?
Pricing lures business owners to the front door of a bank, but prices are deceiving. Is the bank truly offering the level of service and product portfolio that your business requires? As with anything, you get what you pay for. Be sure to shop more than one bank. Interview several prospects and do not rely on a single referral from your accountant or attorney. Do check out the bank your advisers suggest. Don’t limit yourself to that ‘one.’ Also ask peers in the business community who they bank with and why. During networking events, pose the question: Who is your banking partner? Most business owners are open to providing candid feedback. From there, visit several banks that can fulfill the objectives you identified for your business. Just because a bank coins itself as ‘business friendly’ doesn’t mean it will retain that philosophy. Look for a bank that communicates a consistent message about its culture and philosophies.
Who should be involved in choosing the bank?
Usually, the CEO or business owner, along with a chief financial officer or lead accountant at the business, will be involved in the banking decision. Be sure that everyone is on the same page, priori-tizing relationship, cultural fit, products, services and the financial health of the bank. When visiting a bank, speak with more than one representative. Talk to the senior lender, a retail manager or someone in treasury management. Ask to meet with a member of senior management. Be sure each associate communicates the same ideas and that you ‘click’ with more than one person at the bank. In case of turnover, you want to develop relationships with several associates who will take the time to understand your business and needs.
CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield, Mich. Reach him by calling (248) 386-9860 or e-mailing firstname.lastname@example.org.
Business owners and executives who do not allot the time and budget for valuations could suffer unexpected consequences, including tax penalties and lack of compliance with financial reporting rules.
“Post Sarbanes-Oxley, auditors are taking fair value measurements and related requirements seriously,” says Donna Beck Smith, who leads the financial advisory services (FAS) practice at Brown Smith Wallace LLC.
But, before enlisting a professional for a valuation, check for certification and, for highly specialized or regulated industries like health care, banking or insurance, be sure the individual is experienced in those fields.
“Valuations require extra training and experience, and it’s risky if you consult with someone who does not have that expertise,” says Brad Pursel, a principal in the FAS practice at Brown Smith Wallace LLC.
Smart Business spoke with Smith and Pursel about how to prepare for a valuation and how to select a reputable appraiser.
When should business owners or executives call on a professional for valuation services?
Closely held businesses cannot easily convert their interests into cash equivalents for gifting to individuals or charitable organizations. A proper valuation establishes the worth of interests so owners can pursue estate tax planning. To comply with tax and financial reporting rules, there are requirements related to the granting of stock-based compensation. Those grants must be at fair value or the recipient and grantor may suffer negative tax consequences. Valuation frequency will depend on how often the company grants equity-based compensation but the valuation must not be more than 12 months prior to the grant date. Additionally, whenever a company makes an acquisition, financial reporting rules require a fair value analysis of assets and liabilities acquired as part of any transaction. Valuations are also necessary when a company owner wants to buy out a partner or invite another individual to take ownership in the company.
How should you prepare for a valuation?
First, a valuation professional will ask for audited financial statements, and if those are not available which is often the case with smaller, privately held companies the owner will be asked to supply past tax returns. Owners should prepare to discuss their projections for the future and goals. Where do they see the business going? What are the company’s cash flow drivers? Who is its customer base and supplier base, and who are key industry competitors? Common mistakes business owners make is waiting until the last minute to find a valuation professional and choosing a service provider based on price. In most instances, owners should really plan on a minimum of four weeks for a proper valuation. Six weeks or more is even better. Rather than shopping price, find a professional who is best qualified to work up a valuation that will withstand scrutiny. Getting an inferior product that might be lower-cost can have serious implications down the road if the IRS reviews the valuation and assesses penalties. For valuations necessary for financial reporting purposes, an inferior work product may lead to increased accounting and valuation fees if the company’s auditor finds problems with the methodologies and/or assumptions used by the appraiser.
What due diligence is necessary before performing a fair value measurement?
Start by checking credentials. Valuation experts should have a long history of relevant experience. They must keep abreast of changes in the appraisal and valuation industry, which is ever-changing. Valuation should not be an area of occasional practice. With evolving financial reporting rules, there is a pretty good chance that an accountant moonlighting as an appraiser will overlook details. That said, find out if the person you want to hire for the valuation is a member of the American Institute of Certified Public Accountants, the American Society of Appraisers or the National Association of Certified Valuation Analysts. These organizations require a course of education with written exams, field experience and continuing education to maintain accreditation.
What do business owners need to watch for in the financial reporting world?
There are new standards that will be effective at the end of this year that could have significant implications for companies that make acquisitions and the financial reporting consequences associated with those acquisitions. In the past, companies have not had to value certain contingent considerations that were included in the transaction. If the seller was eligible to receive an earn-out based on post-acquisition performance, in most instances, there was no recognition of the earn-out as of the acquisition date. Going forward, companies must value such contingent considerations of the acquisition date and any changes in value will flow through the income statement. In this situation alone, the scope of valuations will increase.
Also, as baby boomers that are running privately held or family businesses begin to pursue succession planning, there will be greater ownership turnover and, as a result, demand for valuations to ensure fair measurement of company interests. You know the saying about being ‘penny wise and pound foolish’? That applies to valuation. You may be enticed by a low-priced valuation service, but on the back end, after you go through an IRS review, you may rue the day you made the decision to go with a less qualified purveyor.
DONNA BECK SMITH leads the financial advisory services practice at Brown Smith Wallace LLC. BRAD PURSEL is a principal in the FAS practice at Brown Smith Wallace LLC. Reach Smith at DSmith@bswllc.com or (314) 983-1259. Reach Pursel at BPursel@bswllc.com or (314) 983-1344.
In light of today’s turbulent banking environment and news of bank failures, business owners are wise to reevaluate the nature of their deposits and their bank’s financial health. Many banks have been negatively impacted by the economic climate caused in part by issues in the housing market.
What does this mean for the banking public and business owners who rely on financial institutions for capital to help grow their businesses?
“It’s critical to find out how your bank is performing, make sure its regulatory ratios are above well-capitalized and that it is in a position to continue serving as your partner as you rely on it for important banking products,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich.
Smart Business asked Johnson for advice on how you can ensure your bank is safe and your liquid money protected.
How much of an individual’s money is protected?
The Federal Deposit Insurance Corp. insures deposits of up to $100,000 per depositor per bank and $250,000 for most retirement accounts, including accrued interest. If your deposits are less than these limits, your money is safe. If not, there are no guarantees. It’s hard to pick up a newspaper or watch TV today without hearing about problems in the banking industry. The fact is, the vast majority of the banks around the country are well-capitalized and will survive this current economic cycle. If your deposits are less than $100,000, you’re safe with any bank. But many individuals and businesses do carry much higher balances. If this describes your accounts, you should make sure to do your homework on the financial institution and take precaution-ary measures if deemed necessary.
What should those with deposits that exceed $100,000 do to spread their risk, so to speak?
Don’t overact; do your due diligence. Discuss with your banker alternative ways to maximize FDIC insurance coverage. Do some research on your own by checking the bank’s Security and Exchange Commission (SEC) filings. Review their online press releases. Make sure the bank is well-capitalized any quarterly press releases or public statements will spell this out clearly for you. You can also check into private rating agencies, such as Bauer Financial (www.bauerfinancial.com), where you can search your bank and find out how it rates based on quarterly call reports and SEC filings. You can find this information on the FDIC Web site. All banks are marketing heavily now to earn your trust and your business. Before you open an account anywhere, find out if their message matches their true financial position.
What red flags should business owners look for to determine the financial health of a bank?
While an individual quarterly write-down isn’t necessarily a sign of trouble, a series of write-downs and consecutive quarterly losses tell a different story. Look at the bank’s core earnings. Those are earnings outside of any extraordinary income or expensed line items. If the core of your bank’s business is not producing consistent quarterly profits, that’s a potential red flag. Be frank with your banker and ask him or her, ‘What is the nature of your bank’s business?’ Ask your banker about loan delinquency and charge-offs. Has the bank remained profitable? All of this is public information.
What sort of business loan environment can an owner expect as a result of all this?
Because of the current economic cycle added on to the pressures on deposit growth, it’s not unrealistic in today’s market that banks will be more conservative in how they underwrite business loans. As a business owner, you need to be aware of this and have ongoing conversations with your banker, so he or she understands your future needs and you can understand where the bank stands from a lending perspective and whether it is in a position to meet your future needs.
At what point should a business owner consider reallocating deposits or coming up with a ‘Plan B’ for liquid money?
First, talk to your banker. Ask him or her pointedly, ‘What do you think?’ There is no enterprise in sugarcoating the situation, so you can expect an honest assessment of where the bank stands. Next, take a look at your deposits and retirement accounts. Do they exceed the FDIC-insured limit? If so, makes sure you are comfortable with the financial condition of the financial institution and if not, diversify the deposit among several institutions. There are programs in the marketplace that provide increased FDIC insurance coverage. Ask your personal banker for more details. Essentially, you need to follow the rules of investing: Be prudent and do your homework.
CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield, Mich. Reach him at email@example.com or (248) 358-6459.
International business is practically mandatory for companies that expect to grow and prosper in today’s global economy. If you ignore overseas opportunities to sell or acquire goods, set up subsidiary companies or develop partnerships, you’ll fall behind the curve. However, entering the international marketplace requires careful tax planning and a knowledgeable group of advisers.
“There are many opportunities overseas, but business owners must understand that the international component adds a level of complexity that they may not be used to,” says Henry Grzes, associate director in international tax at SS&G Financial Services, Inc.
Smart Business spoke to Grzes about international tax traps and opportunities.
What are the key drivers for businesses that explore international opportunities today?
Twenty-five years ago, mainly large companies the Fortune 500 crowd pursued international business. But with advances in transportation, logistics and technology, along with aggressive economic development in nations like China and India, small businesses can just as easily take advantage of overseas opportunities. Companies that do not consider international endeavors are leaving out a significant piece of the puzzle: the global market, which is growing rapidly.
What tax risks do companies confront when they enter the global arena?
Businesses that are new to the international game may revert to old tax habits and assume that all’s well as long as they are paying the Internal Revenue Service. However, every country has its own independent tax structure. U.S. tax rules do not automatically apply to other countries. You may realize after the fact that the proper type of entity was not formed or that an overseas business was not capitalized properly. As a result, you can lose the profit you expected to earn in the foreign market. Additionally, when doing business overseas in any capacity, you will confront challenges with customs and transportation, not to mention the accounts payable/receivable function. Before you jump into an international deal of any kind, you must perform due diligence.
What due diligence is necessary before conducting international business?
First, decide how you will pursue international business. Will you just test the waters or commit to a formal overseas presence? Will you acquire goods from foreign entities or just sell to international customers?
Due diligence is critical when partners are concerned. Because U.S. business owners cannot easily travel to visit with potential international associates, they rely on instinct and may dive into a deal too quickly. It’s always a good idea to include your accountant, attorney and banker in the due diligence process to ensure you enter into agreements with trustworthy foreign entities. When evaluating an opportunity, how will you know if you are looking at records that properly reflect the foreign company’s actual profit? Again, rely on advisers who know their way in the international arena.
What international tax opportunities might business owners overlook?
One often-overlooked opportunity is the ability to access start-up losses from your international subsidiary to offset current U.S. income. Say you establish a Chinese subsidiary, and it is not profitable the first few years. If a proper election is made, the Chinese operation can be treated as a division of your U.S. company rather than a separate entity for U.S. tax purposes. You may be able to apply those losses against your U.S. income. Absent this election, the Chinese company losses would be trapped in that foreign entity and would only be accessible once that entity became profitable.
What common international tax traps can U.S. companies confront?
When setting up a foreign subsidiary, be sure to keep careful records that support intercompany transactions between U.S. and foreign entities. This is especially pertinent in the following case: You set up a foreign manufacturing subsidiary that produces widgets that you will buy to supply your U.S.-based company. The U.S. tax rate on the profit from the sales of those widgets is 35 percent; the foreign tax rate is 10 percent on the profit from the sale to the U.S. parent. The arms length price if you were to purchase the widget from a third party is $5. Your U.S. company buys the widgets from your own foreign company for $7.
By inflating the profit in your foreign subsidiary and depressing profit in your U.S. subsidiary, you take advantage of the lower tax rate in that foreign country. However, you must have support for this $7 price so the IRS can verify that you paid a reasonable amount compared to market average.
Will the IRS scrutinize the tax returns of companies that do business overseas?
With better training and technology to identify issues and the reporting of transactions, the IRS is equipped to audit taxpayers and issue penalties to companies that are not in compliance with the various international tax rules and regulations. Therefore, you need to do your due diligence and enlist a team of advisers with international experience. When you cross the U.S. borders, you are playing by different rules.
The significant tax value of charitable contributions makes donating to organizations, such as museums, churches and educational groups, a win-win for individuals seeking an effective wealth planning strategy.
“The donation of art and collectibles is a tax win for the donor, both from an income tax perspective and because it removes the respective asset from the donor’s estate,” explains Harry F. Murphy, a director in the tax strategies group at Kreischer Miller, Horsham, Pa. “The charity also benefits since the tax exemption is perpetuated.”
Smart Business discussed with Murphy the tax treatment of charitable donations and how donors should plan gifts to realize the most benefits.
Do all charitable gifts qualify for tax deductions?
Prior to any gift transaction, the donor must verify that the charity is a qualified organization. This is easily accomplished by requesting a copy of the organization’s most recent IRS charitable status letter. This should also be verified by checking the IRS’ list of qualified charities in IRS Publication 78 or on its Web site: apps.irs.gov/app/pub78.
Are there deduction limitations based on an individual’s determined tax status?
Artwork and collectibles are tangible personal property and, for income tax purposes, have certain tax limitations. It must be first determined who is the owner of the property for tax status purposes. Is the owner or donor a collector, the creator, an investor or a dealer? Although the terms appear to be self-explanatory, they have specific tax definitions.
An individual who buys artwork or collectibles for personal use is a collector. The creator, of course, is the individual who created the property or participated in the creation. An investor is someone who buys and sells art and collectibles with a profit motive. Personal enjoyment is not a factor. Anybody who sells art and collectibles to clients or the public is deemed to be engaged in a trade or business.
In particular, how does the IRS treat collectors’ gift transactions?
Different tax treatment depends upon the individual’s determined tax status. Let’s focus on the collector and assume that the artwork or collectible is a capital asset. Since art and collectibles are tangible personal property, the donor must confirm that the donee will use the gift in such a manner that it is related to the donee exempt purpose. This is known as a ‘use-related’ donation. A use-related donation is deductible at its fair market value (FMV). It has a tax deduction limit of 30 percent of the donor’s adjusted gross income (AGI). If the FMV exceeds 30 percent of the AGI, the remaining unused deduction can carry over for up to five years.
If the charity will not use art or collectibles in a manner related to its exempt purpose, the donation is considered ‘use-unrelated’ and the deduction is limited for income tax purposes. Any tax deduction is limited to the initial purchase price or other tax basis in the art or collectible up to the normal 50 percent limitation of the donor’s AGI. The five-year carryover rule is also applicable. Therefore, it is critical that the donor find out how the donee will use the ‘gift.’
Are there tax traps associated with collecting artwork or collectibles?
There is a tax trap if the donor also holds a copyright regarding the art or collectible. In this situation, both the property and the copyright must be transferred to the donee charity. Another tax trap is where a donor reserves the right to keep the art or collectible in the donor’s control until some subsequent event, such as the death of the donor. This ‘future interest’ donation is not deductible until the donor no longer has ‘any interest’ in the property. This rule also applies if the artwork is held by the donor’s immediate family members.
The donation of art or collectibles must be supported by a qualified appraisal if the property is valued at more than $5,000. There are special rules regarding appraisers and, if not followed, the IRS may impose penalties. For large or substantial donations, the donor may request what is known as a Statement of Value from the IRS. An IRS user fee of $2,500 must be submitted along with a complete qualified appraisal. This approach eliminates any subsequent disputes with the IRS over the FMV of the donation.
What other planning techniques provide tax benefits on charitable gifts?
The use of a charitable remainder trust (CRT) is another planning technique. An irrevocable trust is created. The CRT pays a fixed income percentage from the trust to the donor (grantor of the trust) for a term of years (20 years is the limit). At the trust’s termination date, the donated property is passed to the charity. For income tax purposes, a charitable deduction is available to the donor based upon the IRS’s value of the remainder interest that will be passed to the charity. There is no income tax regarding the trust, and the remainder interest at the death of the donor is deemed not to be included in the donor’s estate. The donor must find a charity willing to participate in such a transaction. This is usually related to the potential value of the art or collectible.
HARRY F. MURPHY is a director in the tax strategies group at Kreischer Miller. Reach him at firstname.lastname@example.org or (215) 441-4600.
Companies often waste valuable time and resources processing their own payrolls. It’s work that’s costly, detail-oriented and complex, according to Rob Gialamas, FPC, the president of Paytime Payroll Processing, an affiliate of SS&G Financial Services, Inc.
“Payroll processing generally contributes little to a company’s strategic goals and visions,” says Gialamas.
Outsourcing your payroll enables your staff to be assigned roles that align with the company’s mission. Payroll processing is a service that can be more effectively and efficiently performed by dedicated firms that can lift time, human capital and tax-liability burdens.
Smart Business spoke with Gialamas about what a company can gain by outsourcing payroll processing.
What common slips do employers make when they keep payroll in-house?
Payroll is time-consuming, and it requires constant attention. Your employees expect their regular checks, and federal, state and local governments demand that payroll taxes and returns be accurate and on time. Few employees in your organization will appreciate the mundane task of payroll, but they will be very upset if it is not processed correctly.
The government is even less forgiving. If you do not file payroll taxes or make tax deposits in a timely fashion, penalties can be steep. Most of the time, these late tax payments happen by accident when an owner gets so busy that he or she overlooks the deadline. As far as tax agencies are concerned, one day late is too late.
Meanwhile, as you store payroll information on your computer systems at your company or at home, you risk losing critical data. The most responsible, successful CEOs fall into these common traps because they simply do not have the time to oversee or manage payroll processing.
What services can an employer expect the payroll service bureau to perform?
Payroll service bureaus, through diverse methods, collect and process payroll data from your company. They offer services that make business owners’ lives easier, such as direct deposit, employee self-service (ESS), new hire reporting and payroll debit cards. They make payroll tax deposits, file payroll tax returns and assist with payroll compliance issues brought forward by tax agencies. Additionally, the service will respond to notices sent by tax agencies in error letters asking for payroll information or other minutiae.
Services have branched out to also offer time-saving solutions, such as human resources products, time-keeping, deferred compensation plan assistance and system integration. Like many businesses, the payroll service industry is evolving into a one-stop shop to alleviate the burden of mundane activities that can be handled out of house more effectively and efficiently.
What qualities should an employer look for in a payroll service bureau?
Certainly, all payroll service bureaus are not alike. Price and value are quite different, and the first question to ask yourself is how much flexibility and customer service you desire. Some services are stringent and require that payroll information be submitted by a certain day and time, no exceptions. If you are late, you can expect a fee. Always ask about payroll information deadlines, and find out how the service will collect your data. Ask about the service bureau’s capacity. If your company has a lot of garnishments, pre-tax deductions and 401(k) plans, be sure to choose a service that can manage all of these categories. Also remember, a bigger service bureau does not necessarily mean you will get better service. Many large national firms have established regional call centers. Do you want to phone a call center with a problem or be assigned to a representative that will always address your issues? Ask whom you will call when you need assistance. Find out what training the staff receives, and whether they participate in a certification process offered by the American Payroll Association. Finally, request references.
What methods can an employer use to dispatch payroll data to the service bureau?
This is a key consideration as you partner with a payroll service bureau. Again, flexibility and service is the name of the game. Some companies prefer to call or fax in their payroll information, others route data to the service bureau via e-mail. Today, most companies use payroll desktop software programs and Web-based solutions that allow them to view the data and run customized reports on-site. The payroll service can grab the information when it’s needed, and you can access it any time you want.
Web-based products are a ‘green’ form of reporting that is secure and convenient for companies that want to go paperless. ESS allows employees to log into a secure Web site and download their pay stubs and see their payroll history at their own convenience. Web-based payroll entry combined with ESS, direct deposit and payroll debit cards enable companies and employees to become much more efficient and focused. When you out-source payroll, the only task you must perform is turning the weekly or biweekly information over to the vendor to process. With Web-based programs, you can do this on the road, while on vacation, traveling for business, or from the convenience of home.
Astrong balance sheet is critical for maintaining and positioning your company. But, don’t be fooled by impressive profits. Even in a big-money year, your balance sheet may suffer if you don’t initiate tax strategies and tax-saving options.
“You need to be aware of how your company and profits will be taxed,” says Jay Williams, senior vice president of The Huntington Investment Company. “While your tax adviser will help you control your tax bill, there are 12 tips for keeping a healthy bottom line that will get you started.”
Smart Business spoke with Williams about the 12 tips and how to act on them.
What do businesses overlook come tax time?
Actually, tax season isn’t the only time when business owners should be thinking about ways to minimize taxes. Think of all that happens in your business during a year. You purchase more equipment, lease a new building, add a significant customer, give salespeople company cars, set up a qualified deferred compensation plan, etc. Include your banker/adviser on these discussions throughout the year so he or she can search for tax-savings opportunities.
What if your business is operating at a loss?
Generally, a net operating loss can be carried back two years to generate a current tax refund. Any loss not absorbed in the prior two-year period is then carried forward for up to 20 years. If business is going well, you can waive the ‘carryback’ and carry the loss forward. This could be beneficial if your marginal tax rate in carryback years is low. Also, if you confront an alternative minimum tax (AMT), the carryback could be less beneficial, so you may decide to waive it for another year. A prior year’s loss can work toward your advantage, if you discuss the options with your certified public accountant.
What are the top 12 tax-savings strategies?
Here they are, in no particular order:
- Defer income. In high-income years, consider deferring income to later years. For the cash method of accounting, you can defer billing for products and services as you approach year-end. For the accrual method, you can delay shipping products or delivering services until the next year.
- Accelerate deductions. In a high-income year, if you are a cash-basis taxpayer, make estimated state tax payments before Dec. 31 and deduct them this year rather than next year. If you don’t have ready cash, consider charging the expenses on your bank credit card. The rules are more complicated for accrual taxpayers, but deduction acceleration and deferral is still possible.
- Cash in on the manufacturers’ deduction. Section 199 presents companies with opportunities to invest in their businesses and get tax credits. In 2010, when fully phased in, the deduction will be 9 percent of the lesser of taxable income or ‘qualified production activities’ income, which goes beyond the traditional definition of manufacturing to include construction, engineering, agricultural processing and computer software production.
- Restructure your business. Are you a sole proprietor, a C corporation, a LLC or an S corporation? S corporations can reduce the Medicare tax by keeping low salaries and increasing distributions of company income.
- Get a cost segregation study. Are you maximizing your depreciation schedules? If you recently purchased or built a facility or are remodeling an existing space, certain buildings may qualify for shorter depreciable lives than the typical 27 or 39 years (using the straight-line method). Cost segregation studies identify property components and costs that can be depreciated over five to seven years. This allows you to increase current deductions. There are limitations, though, such as if your business is subject to AMT.
- Know the depreciation rules. You’ll generally want to use the Modified Accelerated Cost Recovery System (MACRS) rather than the straight-line method of depreciation. This gives you a larger deduction in the early years of an asset’s life. As you make capital purchases, consult your adviser to learn how the asset should be depreciated and what tax advantages the scenario could present.
- Manage inventory. Inventory methods can affect taxable income. At year-end, you must calculate the dollar amount of inventory. Your taxable income will be lower if the cost of merchandise sold is higher than the value of inventory. Remember, inventory is taxed, so the less you have the better.
- Maximize tax credits. The Work Upportunity and Welfare-to-Work credits were revived for 2006, combined into a single credit in 2007 and extended through Sept. 30, 2011, and expanded to include additional qualified groups, such as disabled veterans.
- Write off bad debt. Bad debts are treated as ordinary losses that can be deducted if they are not business related. Loans made to closely held corporations may be considered not business related. When not repaid, they can be reclassified as nonbusiness bad debt, which is treated as a short-term capital loss.
- Consider qualified deferred compensation plans. Benefits like pension, profit sharing and 401(k) plans attract and retain the best employees, and you can get tax deductions for your contributions to their accounts.
- Offer fringe benefits. Group life insurance (up to $50,000), health insurance, parking and employee discounts are all examples of fringe benefits. The benefits are tax-free to the employees, and the business can avoid payroll taxes on those amounts.
- Transfer your business wisely. It goes without saying that a well-thought-out exit strategy is a critical part of tax planning.
JAY WILLIAMS is senior vice president of The Huntington Investment Company. Reach him at email@example.com or (330) 498-5006.
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How well do you really know the business processes that are driving forces behind your financial statements? Your organization has systems for shipping orders, collecting customer payments, buying materials from distributors and all these systems work to your knowledge. But do you have controls in place to test their efficacy?
With new changes issued by the Auditing Standards Board, effective as of Dec. 31, 2007, public accounting firms must approach audits of nonpublic entities with a sharper eye on controls. Auditors can no longer automatically default to substantive auditing methods where they only document a general understanding of a company’s controls. The audit process now requires a “digging in” to find out how a business really works. They must analyze and test the real moving parts of an organization.
“The more visibility we have into an organization, the greater value we can provide in an advisory role,” says Anthony Caleca, CPA, a member-in-charge of the Audit Group at Brown Smith Wallace LLC. “The more moving parts an organization has, the harder it is to determine whether or not a process is taking place as it should.”
Many owners, too busy working in the business and managing daily operations, do not set aside time to work on the business, Caleca adds. Or, they intend to take time out to establish formal processes and controls, but other activities take priority.
Smart Business spoke with Caleca about ways to analyze the processes that make your business tick.
Why the focus on auditing now, and how will financial statements be audited differently?
The users of financial statements have demanded a significant increase in efforts to improve financial reporting. Publicly held companies have had to implement Sarbanes-Oxley; now private companies and organization have to adhere to these new audit risk standards. These new public and private company standards are a reaction to failed audits and financial reporting that have occurred in this marketplace. Accountants must have a real understanding of every process that drives their clients’ financial statements. Essentially, the new private company rules will prompt a fresh look at how transactions are being processed and where time and money may be wasted.
Are business owners surprised when they learn the truth about whether their processes are effective?
Yes, in many cases, they thought a department was performing a certain task that wasn’t being executed properly. Or, they thought a system was working when it was not. For instance, say you own a $50 million business and you expect all customers to go through a credit application process. You assume that your credit department is scrutinizing customers’ creditworthiness. Under the new standards, an auditor actually walks through the credit application and approval process and discovers that many customers’ accounts receivable balances exceed their pre-established credit limits. The system, if there is one, clearly does not work. The company risks shipping products to customers who can’t afford to pay for them. Our goal as auditors is to gain a detailed understanding of the processes and controls in the significant areas of a business. In doing so, we make value-added discoveries. We may notice a 10-step process that can be condensed into five steps without undermining the controls and performance of the company. This can be a real eye-opener for business owners.
What resources must businesses invest in to adopt better controls?
First, developing high-level controls takes time and buy-in from key individuals who manage significant departments in your organization. If your company doesn’t have a narrative or a relatively detailed description for every process from sales to posting customer payments and everything in between, that’s step one. Step back and consult with managers to find out how they handle every transaction. Put it in writing. Examine each system and decide whether there are holes that present opportunities for financial reporting errors. Every process must be documented before meeting with an auditor, who will begin to dissect these systems and analyze them for potential ‘leaks.’ Under the new standards, your auditor will likely be on site with you at least three times a year. Ultimately, the time and work required to test controls will drive up auditing costs by as much as 25 percent. We prepared our clients for this new effort by rolling out a readiness process and detailed information package to explain how greater scrutiny can work to their advantage. It can and it has.
What benefits result when business owners fine-tune their internal controls?
First, you improve interdepartmental communication within your organization as you assemble a team of leading managers and employees who help you define processes and understand the working parts of your company. Second, your auditor serves as an active, valuable adviser who truly understands your business, beyond your general goals and objectives. Taking time to evaluate every system the nuts and bolts of a business sheds light on areas that may need improvement. And by taking the time to step back from your business, you’ll have a clear idea of where you stand today and where your business is headed.
ANTHONY CALECA, CPA, is a member-in-charge of the Audit Group at Brown Smith Wallace LLC. Reach him at (314) 983-1267 or firstname.lastname@example.org.