Archive for the ‘Tax’ Category

Protection, Benefits & Accountability: Smart Planning for Start Ups and Small Business

Monday, August 6th, 2012


Protection, Benefits & Accountability may not be at the forefront of new and small business owners’ minds, but they should be.

 

Often ignored and/or glossed over by startups, these components are an essential part of basic business planning and can make the difference between success growth and failure.

 

You know the old adage: No one plans to fail, they just fail to plan. Use this overview to kick start your protection, benefit and accountability planning:

 

Equity Protection

 

New businesses often start with no consideration for the “What Ifs”.  What if my partner wants/needs to quit the business unexpectedly? What if my partner becomes incapacitated? What if my partner suddenly dies? A lack of planning for unforeseen circumstances such as these can literally ruin a business overnight.

 

In the case of unexpected death, when one partner passes away within a 50/50 ownership agreement, the deceased partner’s heirs would then become entitled to the deceased’s 50% share. Would this be an acceptable arrangement to you as a surviving partner? Typically, this would not be an acceptable arrangement. The last thing a start up business should have to bear is paying out to someone who is not contributing to the business, in this case, heir(s).

 

This is why smart planning also includes Buy Sell Agreements. Buy/Sells are like prenups for business – legal documents which site a buyout price for remaining partner(s) in the event of a departure/disability/death of another partner. They are typically funded by purchasing life and/or disability insurance to cover the predetermined agreed to buyout amounts.

 

►Examine all potential exit reasons thoroughly and be prepared for them.

 

Property and Liability Protection

 

Equally important to insuring buildings, equipment, and product lines, new businesses should make sure they properly protect themselves from lawsuits. People generally embrace adequate property protection but they rarely lend the same credence to liability protection – this goes for individuals too.

 

Unfortunately, in our litigious society, liability protection is something that must not be ignored because situations like these can arise quickly without warning and ultimately have a tremendous impact on your business.

 

A simple example of this type of situation could happen if an employee gets into an accident during working hours. Your company could be found liable – though the accident is no fault of your company – simply because of the employee’s affiliation with your company.

 

Industry statistics provide that businesses will bear the most financial burdens from liability issues versus the costs of property replacement.

 

►Seek the right amount of liability protection needed to fully protect your business.

 

Retirement Planning

 

Most people have heard of the terms: 401(k), IRA, SIMPLE, SEP, and Profit Sharing. For new business start ups, the real question is which one is best for your business?

 

Many plans are specifically designed to appeal to certain demographics. A SIMPLE Plan, for example, is by design targeted to small businesses interested in offering a plan but without the IRS compliance headaches of a 401(k).

 

Depending on the wants and needs of the owners and employees, each plan has a specific list of attributes and drawbacks. It is also tough to think about retirement when you’re just starting a business, but that is exactly when retirement planning should be done.

 

Engage in retirement planning at the onset of your journey.

 

Health Coverage

 

As a new business owner, you now have health insurance considerations to keep in mind. Some new businesses opt to not provide coverage for the employees. However, highly qualified employees often require this benefit in order to consider working for an employer – do not overlook the possibility.

 

Cash Options – Employers can opt to give a cash stipend to employees in lieu of health insurance to be used as they see fit. While this is often a great option for young and healthy employees, it can prove problematic for a potential employee who may not be able to qualify for individually underwritten plans.

 

Group Health Plans – Starting a group health insurance program is the other alternative: group health plans guarantee coverage for all in the group regardless of underlying health conditions. However, it is equally important to understand that insurers can rate the entire group above the standard cost range depending on the underlying conditions of members within the group. Group coverage also requires a certain percentage of eligible employees participate in order for the group to be issued and operated.

 

If you choose to go the group health plan route, the different types of coverage should then be explored: HMO, PPO, Point of Service, Indemnity. Considerations for, optional dental, long-term disability, short-term disability and long-term care should also be made.

 

Select a health plan which best serves your company objectives first.

 

Books, Banking, Tax & Law

 

Technology makes accounting, banking and tax transactions easier to record, budget and track today. Knowing what to look out for and ask about on the other hand, can easily remain under the radar.

 

If you opt for using accounting and payroll services, consistent examination of your records is still a necessity. Regardless of who does your books; your business will bear the liability of errors in reporting, depletion of funds, penalties, etc.

 

Choosing an accommodating bank is imperative: Will they process credit cards for you? Provide a line of credit when you need it? Are they fee crazy? Are they the type of bank known for working with new and small businesses?

 

Pending the legal structure and nature of your business, all potential tax liabilities should be examined at the state, local, and federal levels before you open your doors.

 

Always be aware of how your company records are being booked and tracked.

 

New business owners that can check off these considerations in confidence are heading in the right direction. For those who cannot, do not back burner them – timing can be the difference between success and failure. Seek the professional help you need and build a solid foundation.

 

Additional Reading:

 

Start Up 101 Article Index Inc.com

 

Get a Buy Sell Agreement! Forbes.com

 

5 Tips for Buying Business Insurance Small Business Administration

 

Small Business Healthcare Tax Credit  IRS Newsroom

 

Basic Business Structures Entrepreneur.com

 

Small Business Accounting Library Business Week

 

2012 Business Software Reviews Top Ten Reviews.com

 

Kurt Rusch CLU, ChFC

Questions always welcome!

 

 

 

Federal Tax Laws: More Change Coming

Monday, March 26th, 2012


There are many changes  in the Federal Income Tax Laws that have been implemented already or will be soon. Some expired last January others will expire by year end. Tax increases are also on the horizon.

 

Newly Expired Tax Laws

 

The first five were temporary tax relief items that expired January 1st of this year are:

 

1. The Alternative Minimum Tax (AMT) Patch – This expiration will subject many more taxpayers with tax preferential items such as, tax free income or substantial itemized deductions, to be subject to the Alternative Minimum Tax.

 

2. Charitable Contribution of IRA Assets – The exception allowed taxpayers to transfer assets directly from their qualified accounts to charity without paying income tax. With the expiration of this provision, taxpayers must now first pay Federal Income Tax on the withdrawal and then may transfer an amount to the charity.

 

3. State Sales Tax Deduction – The deduction was an alternative which allowed taxpayers to take the higher of their state sales taxes or income taxes paid as an itemized deduction. The change will mostly affect people living in states without state income taxes and seniors in states where retirement income is not subject to state income taxes and therefore not deducted.

 

4. Home Energy Tax Credit – This was a credit available for windows, doors, heating systems, cooling systems, etc. After January 1, 2012, these improvements no longer qualify for a tax credit.

 

5. School Teachers Expenses Deduction of $250 – School teachers who have been dipping into their own pockets for items used in their classrooms, used to be to take a $250 deduction to account for these expenses.

 

Year End Expiring Tax Laws

 

The next impending batch of tax laws which are scheduled to expire at the end of 2012, barring any intervening Congressional actions, are:

 

1. Payroll Tax Cut of Two Percentage Points – This is a reduction in the amount of social security taxes that has been withheld from employee paychecks. The expiration of this cut will result in the resumption of the scheduled 6.2% withholding for FICA taxes.

 

2. Top Income Tax Rate Cap – The rate will increase from 35% to 39.6%.

 

3. Capital Gains Tax – Both the 0% and 15% tax brackets will disappear. They will be replaced by a single 20% bracket.

 

4. Qualified Dividends Tax Rate – No longer will dividends that meet the qualifications of this category be taxed at 15%. These are scheduled to revert to ordinary income tax status.

 

5. American Opportunity Education Credit – This credit (up to $2500), was available to offset some of the costs of post secondary education, is also set to expire 12/31/2012 as well.

 

January 2013 Tax Increases

 

There is also several tax increases scheduled to become effective on January 1, 2013. Among the most noteworthy:

 

1. Net Investment Income Tax – There will be an additional tax of 3.8% for individuals with Adjusted Gross Incomes of $200,000 and couples with AGI’s greater than $250,000. The purpose of this additional tax will be for additional Medicare funding.

 

2. Phase-out of Personal Exemption – For higher income taxpayers, the amount of their personal exemptions will be phased out as income increases.

 

3. Itemized Deductions Limit – These deductions will be limited for taxpayers with incomes exceeding $150,000.

 

4. Flexible Spending Accounts – FSA funding is being cut from $5000 to $2500.

 

With this plethora of changes already in place or on the horizon, what is a taxpayer to do? The answer to that is as individual as the person reading the question.

 

If, you are in an effected tax bracket and are contemplating liquidating an equity position that you currently own, it may be in your best interest to consider this transaction in 2012 before the increased tax rates will diminish your after tax return. If there is a way to pay for itemized deductions this year, if you are possibly in jeopardy of getting them phased out next, that may be a good choice for you.

 

The bottom line is to keep these changes in mind when making financial decisions in the upcoming year.

 

Kurt Rusch CLU,ChFC