Want a Successful Business? Delegate

Want a Successful Business? Delegate

by | Apr 23, 2018 | Business Consulting, Business planning

Like it or not, you must learn how to delegate work to your employees. It’s easy to get in the mindset that if you want things done the right way you have to do them yourself. But that isn’t always the best approach at work, even if you firmly believe you’re the best person for the job. There simply isn’t enough time in the day, especially if you have a business to run.

Here are some helpful hints:

  • Develop a game plan. Start by deciding which tasks to delegate and which employees will be assigned responsibilities. The workload doesn’t have to be etched in stone, but you need a basic plan to subdivide jobs.
  • Find your most reliable, autonomous employees. You will need to rely on people who can think for themselves. Don’t rely on employees who you anticipate will be constantly seeking your guidance. If you have to show someone what to do every step of the way, it defeats the entire purpose.
  • Don’t hinder your employees. Give them the authority to act independently and make decisions on the fly. Don’t hinder the process by requiring employees to obtain your approval on every decision. This will only turn into a variation of doing things the same old way.
  • Keep track of work progress. This aspect must be handled with sensitivity. You’ll want to keep an eye on employees, but you can’t keep looking over their shoulders either. Find the proper balance.
  • Analyze the results. Do this to determine if the work met your expectations. If it didn’t, offer constructive criticism for improvements. Make this a learning experience for both of you.

As you become more comfortable delegating work, you can continue to loosen the reins. When you spend less time on routine matters, you’ll have more time to devote to growing your business profits.

Incorporate or Not: What’s Best for Your Business?

Incorporate or Not: What’s Best for Your Business?

by | Apr 16, 2018 | Business planning, Financial planning, Tax planning, Uncategorized

If you’re a business owner, one of the first questions to ask yourself is whether you should incorporate or not.

The biggest advantage of incorporating is that it limits your legal liability. Your responsibility for debts and other liabilities incurred by a corporation is generally limited to the assets of the business. Your personal assets are not usually at risk, although there can be exceptions to this general rule. The trade off is that there is a cost to incorporate and, in some cases, tax consequences.

So, should you incorporate or not?

Truth be told, you might not need to incorporate. Depending on the size and type of your business, liability may not be an issue or can be covered by insurance. If so, you could join millions of other business owners and operate as an unincorporated sole proprietor.

If you do decide to incorporate, you’ll face a choice of corporate forms. All offer limitation of your liability, but there are differences in tax and other issues. Take a look at the options:

  • C corporations. The traditional form of corporation is the C corporation. This type of corporation has the most flexibility in structuring ownership and benefits. Most large companies operate in this form. The biggest drawback is double taxation. First the corporation pays tax on its profits; then the profits are taxed again as they’re paid to individual shareholders as dividends.
  • S corporations and LLCs. These forms of corporations avoid this double taxation. Both are called “pass-through” entities because there’s no taxation at the corporate level. Instead, profits or losses are passed through to the shareholders and reported on their individual tax returns. S corporations have some ownership limitations. There can only be one class of stock and there can’t be more than 100 shareholders who are U.S. citizens or U.S. residents according to tax law. State registered LLCs have become a popular choice for many businesses. They offer more flexible ownership rules than S corporations, as well as certain tax advantages.

Whether you’re already in business or just starting out, choosing the right form of business is important. Even established businesses change from one form to another during their lifetime.

Call our office (and your attorney) for guidance in selecting the form that is best for your business.

Tax Checklist for Business Startups

Tax Checklist for Business Startups

by | Mar 23, 2018 | Business Consulting, Business planning, Financial planning, Tax, Tax Tips

Starting your own business can be equal parts thrilling and intimidating. Complying with regulations and tax requirements definitely falls into the latter category. But, with some professional help, it doesn’t have to be that way. You can get started with this checklist of things you’ll need to consider.

 

  • Are you a hobby or a business? This may seem basic to some people, but the first thing you’ll have to consider when starting out is whether you really are operating a business, or pursuing a hobby. A hobby can look like a business, but essentially it’s something you do for its own sake that may or may not turn a profit. A true business is generally run for the purpose of making money and has a reasonable expectation of turning a profit. The benefit of operating as a business is that you have more tax tools available to you, such as being able to deduct your losses.
  • Pick your business structure. If you operate as a business, you’ll have to choose whether it will be taxed as a sole proprietorship, partnership, S corporation or C corporation. All entities except C corporations “pass through” their business income onto your personal tax return. The decision gets more complicated if you legally organize your business as a limited liability corporation (LLC). In this case you will need to choose your tax status as either a partnership or an S corporation. Each tax structure has its benefits and downsides – it’s best to discuss what is best for you.
  • Apply for tax identification numbers. In most cases, your business will have to apply for an employer identification number (EIN) from both the federal and state governments.
  • Select an accounting method. You’ll have to choose whether to use an accrual or cash accounting method. Generally speaking, the accrual method means your business revenue and expenses are recorded when they are billed. In the cash method, revenue and expenses are instead recorded when you are paid. There are federal rules regarding which option you may use. You will also have to choose whether to operate on a calendar year or fiscal year.
  • Create a plan to track financials. Operating a business successfully requires continuous monitoring of your financial condition. This includes forecasting your financials and tracking actual performance against your projections. Too many businesses fail in the first couple of years because they fail to understand the importance of cash flow for startup operations. Don’t let this be you.
  • Prepare for your tax requirements. Business owners generally will have to make quarterly estimated tax payments to the IRS. If you have employees, you’ll have to pay your share of their Social Security and Medicare taxes. You also have the obligation to withhold your employees’ share of taxes, Social Security and Medicare from their wages. Your personal income tax return can also get more complicated if you operate as one of the “pass-through” business structures.

This is just a short list of some of the things you should be ready to discuss as you start your business. Knowing your way around these rules can make the difference between success and failure, but don’t be intimidated. Help is available so don’t hesitate to call if you have any questions.

Why Walking Away From “Sunk Costs” is the Best Option

Why Walking Away From “Sunk Costs” is the Best Option

by | Mar 1, 2018 | Business planning, Financial planning, Hawkinson Muchnick & Associates PC

Emotions make us human. They can also cause us to make rash decisions. Business owners and managers often let emotions dominate the decision-making process. This is especially true when choices are based on “sunk costs.”

Why sunk costs can lead to trouble

Broadly defined, sunk costs are past expenses that are irrelevant to current decisions. For example, many firms hire consultants who sell and install software. In some cases, a company is left waiting for years for a functional and error-free system. Meanwhile, costs continue to escalate. But are those costs relevant?

Managers, especially those who initially procured the software and contractor, may reason that pulling the plug on a failed contract would be wasting all the money spent. Not true. That money is “sunk.”

Other examples of sunk costs may be found in the areas of product research, advertising, inventory, equipment, investments and other types of business expenses. In each of these areas, companies spend money that can’t be recovered — dollars that become irrelevant for current decision-making.

Sunk costs are a waste of time — move on

Truth be told, the only relevant costs are those that influence the company’s current and future operations. Throwing good money after bad won’t salvage a poor business investment — or a poor business decision.

 

Tax Rules for Small Business: Changes to Pass-Through Entity Rules

Tax Rules for Small Business: Changes to Pass-Through Entity Rules

by | Jan 23, 2018 | Business planning, Financial planning, Tax, Tax Tips

One of the most important – and complicated – changes in the new tax reform act is to the tax rules for small business that are treated as “pass-through entities.”

The good news is that if you own one of these businesses you may get as much as a 20 percent reduction to the taxation of business net income under the new rules.  However, calculating the actual deduction can become very complex. It depends upon several factors, including your level of income, your profession, the amount your business spends on wages and property acquired during the year.

Tax reform background

Most small businesses in the U.S. use pass-through business structures, which pass their profits on to their individual owners. Owners pay tax on those profits at their individual tax rates, in conjunction with other income. The new tax rates range from 10 percent to 37 percent in the 2018 tax year. Pass-through business structures include S corporations, partnerships and LLCs. Sole proprietorships handle business income in a similar way using Form 1040 Schedule C and are also covered by the new rules.

Because the Tax Cuts and Jobs Act signed in late December 2017 changed the corporate tax rate structure to a flat 21 percent rate from a progressive scale with a top rate of 35 percent, that meant many pass-through business structures would pay more than regular C corporations. To offset this, Congress gave pass-through owners the new 20 percent business income deduction.

But Congress also put in place special rules limiting the ability of “specified service trades” to take the full deduction. The list includes health, law, consulting, athletics, financial services, brokerage services, accounting firms, “or any trade or business where the principal asset … is the reputation or skill of one or more of its employees or owners.” An earlier version of the bill included the engineering and architectural professions, but those were later taken off the list, so they are considered exempt from the limits.

How to figure out your deduction – easy cases

First, make a rough calculation of your expected qualified business income (QBI), which is generally your net income other than income in the way of compensation. This figure excludes business losses, as well as factoring in amortization and capitalized expenditures. QBI is figured separately for each business activity, not on a per-taxpayer basis.

Easy Case 1: If your QBI is less than $157,500 as an individual filer, or $315,000 as a married couple filing jointly – you can take the full 20 percent deduction.

Easy Case 2: If your QBI is greater than $207,500 as an individual filer, or $415,000 as a married couple filing jointly, AND you are in one of the specified
service professions (health, law, consulting, athletics, financial services, accounting, brokerage services, etc.) – you can’t take anyof the deduction.

How to figure out your deduction – hard cases

If you don’t fall into either of the easy cases, figuring out your pass-through deduction gets much more difficult.

Who is affected: Small business owners with QBI of more than $157,500 as individual filers ($315,000 for married filing jointly) but less than the phaseout of $207,500 as an individual filer ($415,000 married filing jointly).

After your QBI passes the threshold amount of $157,500 as an individual filer, or $315,000 as a married couple filing jointly, special wage and capital limits that reduce your deduction start to apply.

After your QBI passes the threshold amount PLUS the phaseout amount, which is $207,500 as an individual filer, or $415,000 as a married couple filing jointly, the wage and capital limits are applied fully to reduce your deduction. You’ll still get a reduced deduction (unless you are in one of those specified service professions – then your deduction is eliminated completely).

The formula for calculating the wage and capital limits is based on the greater of 50 percent of the W-2 wages paid by your business, OR 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis of all qualified property acquired by your business during the year.
Sound confusing? In most cases the calculation will be straightforward – but not for everyone.

REMINDER: If you’re familiar with the wage and capital limits calculation, it may be because your small business used the Domestic Production Activities Deduction (DPAD) in the past, which uses a somewhat similar calculation. The DPAD was repealed in the Tax Cuts and Jobs Act for 2018 and subsequent tax years, so keep that in mind as you chart your business plans.

The rules are in flux

Every tax reform bill is subject to technical amendments that clarify and adjust what is confusing or not working as lawmakers intended. The Tax Cuts and Jobs Act will likely be no different. The pass-through rules are among the most complicated parts of the act, so many of the moving parts will change over the coming months. We will know more as 2017 taxes are completed and the focus turns to the 2018 rules.
If you own a pass-through business, you will need help navigating the choppy waters of tax reform. When the storm of the recent passage subsides and the details are clarified, reach out to schedule a consultation to chart a course for your business in 2018.
Note: The threshold amounts cited in this memo are for tax year 2018 and are indexed to inflation in subsequent years.

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Bonus Questions and Answers

You likely have more questions about the new 20 percent income deduction rule than anyone can possibly answer right now. Clarification from the IRS is coming in the following months. Until then, here are answers to some common questions businesses are asking.

Q.  Why is there a wage and service business limit calculation in the deduction?

A.  Lawmakers were concerned that the owners of service businesses would change how they pay themselves in order to reduce their tax burden. They said they intended to “deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the 20-percent deduction.”

Source: U.S. Congress Conference Report, page 37.

Q.  I’ve heard that rental property owners could possibly get this deduction. Is this correct?

A.  Yes, in all likelihood Schedule E filers will also be eligible for the deduction. While most of these entities do not have wages, the capital portion of the calculation may result in a deduction for these businesses.

Q.  What about losses? Do they affect my ability to get the deduction?

A. Yes, losses will lower your eligible income. Excess losses will carry over to future years, limiting your ability to take the deduction in the future.

Q.  How is qualified property calculated? How does bonus depreciation and Section 179 expensing affect the 2.5 percent property calculation?

A.  These answers can get pretty complicated and will require clarification from the IRS. While we wait for that, here is a short explanation based on what we know now: Qualified property must be tangible property subject to depreciation and available for use in a qualified trade or business. The calculation for businesses subject to limitation will be based on 2.5 percent of the property value. The value of the property appears to be its basis after it is placed into service, and it must be actively used as of the end of the year. There will be provisions to account for the leveling out of different recovery period calculations and the prior use of accelerated depreciation methods. But stay tuned; this area could be full of further clarifications and guidance.

Q.  Where is the deduction taken on Form 1040?

A.  The deduction probably will be taken on page 2 of Form 1040, following the calculation of adjusted gross income.

Q. What about my hobby activity, does it get this deduction?

A.  Probably not. It’s likely that you would need to pass the threshold rules relating to hobby versus business activity. But this area too, could use some help with clarification.

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This brief summary of the pass-through rules in the tax reform act is provided for your information. Any major financial decisions or tax-planning activities in light of this new legislation should be considered with the advice of a tax professional. Call if you have questions regarding your particular situation. Feel free to share this memo with those you think may benefit from it.

Is it Time to Update Your Beneficiary List?

Is it Time to Update Your Beneficiary List?

by | Jan 5, 2018 | Business planning, Financial planning, Hawkinson Muchnick & Associates PC, Money Safety

Simply said, it’s extremely important to update your beneficiary list and keep it up to date. Consider making it a priority or things might not go as you planned.

It’s not uncommon to lose track of your beneficiaries, including which accounts have them, and who you designated. However, it is important to keep them current.

Make your beneficiary designations a priority

When you designate a beneficiary for an account, that person inherits the assets in the account, regardless of what your will says. That’s why updating your will periodically may not be enough.

Typically, you’ll have beneficiaries for each of your IRAs, your 401(k) or other retirement plans, annuities and insurance policies. Your designations could be out of date just because of life’s changes. Since you made your initial choices, you may have married, had children or divorced. Some of the beneficiaries you chose could have died, divorced or married. Their circumstances could have changed so you no longer want them to be the beneficiary.

Tax laws change frequently as well, and they can have an impact on your choices. Choosing the wrong beneficiary, or failing to name a contingent beneficiary, can affect the long-term value of your IRA assets after you die. That’s why it’s important to review your choices with tax consequences in mind.

How to update your designations

At a minimum, you should have copies of your beneficiary designations in one place. If you don’t, call the trustees of your retirement accounts and your insurance agent and request copies.

Then review the documents and decide what changes you’d like to make. Make an appointment to review your decisions with your tax- and estate-planning advisor. Discuss matters such as naming secondary beneficiaries and whether to name your estate as a beneficiary (which is sometimes not a good idea).

Finally, send your changes to the account trustee, ask for a confirmation, and keep copies in your records. If you have questions about tax consequences or other tax matters related to your estate, contact our office.

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