Thursday, August 29, 2013

Good News and Bad News About Business Finance Planning

The past decade has provided an array of changes and problems for business finance planning. Because of the growing need for flexibility and contingency plans, a recurring piece of wisdom has emerged from some of the business and finance chaos: 

Always Have a Plan B.

Plan B is the good news.

So that I do not bury the lead, I want to make it crystal clear that the expanded appreciation of how important Plan B can prove to be for any individual or business is at the top of my list for the good news portion of this business finance planning discussion. Of course, I have never hidden how I feel about the critical value of having a Plan B. As you can see from the mosaic image which I produced above, I rarely miss an opportunity to feature Plan B in a front-and-center kind of way.

Another purpose for the business finance planning mosaic was to demonstrate in a visual way that everything can fit together quite nicely with a little (or a lot) of planning energy. Key concepts like strategy, solutions, experts, and help also deserve a seat at the table when formulating your own Plan B.

How important is Plan B?

To say it as succinctly as possible, always having a Plan B is a winning strategy. Having a solid Plan B mentality during the past five years has more often than not proven to be a critical difference between business survival and failure. What is your Plan B?

business finance planning
Always Have a Plan B

The bad news:
You can tell there is an oversupply of bad news when the primary good news is the increased appreciation about the importance of having a Plan B.

I am sorry to say that there is more bad news than there should be. This is due in large part to a political climate that is increasingly governed by the largest corporations, big banks, and of course their lobbyists. When the incomes for average individuals decline during what is hailed as a "recovery" by some biased politicians, you have the first clue as to the underlying problem that small businesses and individuals are currently facing.

During the last three years, the average income for individuals has shrunk from $51,000 to $45,000. Meanwhile corporate profits and the stock market have done very well. As they say, the rich get richer and the rest are still searching for Plan B.

Banks are still hoarding their riches and not lending normally to either small businesses or most individuals. In their own little good news bubble, the banking industry has launched an aggressive campaign to move into what they see as the next front. The world of payday lending programs is beckoning to the bankers. How could any respectable banker not pay attention to payday loans when they offer the easy opportunity to charge annualized interest rates of 300% to 600%? Never mind that they are illegal in some States (as they should be). This is why banks pay the big bucks to their lobbyists, isn't it?

The bad news lesson to be learned from what banks are now doing with the money used to save them just five years ago is to realize what they are not doing with it at the same time. Commercial mortgages and working capital financing are just two of the things that most banks are not presently doing with their money in any significant way. By the way, many banks have also resumed their investment activities involving financial derivatives. For those who are not aware, the use of risky real estate derivatives by the banking wizards brought the economic world to its knees several years ago. I can only suppose that the bankers have figured out what they did wrong and are going to test their new theories with more taxpayer money.

Unsurprisingly, my small business finance planning solution for addressing the abundance of bad news is as follows:

Always Have a Plan B.

Friday, August 23, 2013

Are There Tax Deduction Limits for a Limited Liability Company (LLC)?

tax deduction

There are many small businesses established as a single-member LLC (Limited Liability Company). In most cases there was a primary reason for a business owner to use this form of legal organization, and except in a few circumstances special tax treatment was not one of them.

Equally important, for the many individuals contemplating a business start-up or buying a business, the limited liability company structure is probably at least under serious consideration. For those of you who are still making up their mind about a legal form of ownership, detailed discussions with your tax and legal advisors should be a top priority. Although an LLC can have more than one owner (member), my discussion here will focus on the single-member version which is permitted in most States.

It is worth noting that LLC members can be individuals, other LLCs, corporations, or a foreign entity. Two examples of businesses that cannot legally operate as limited liability companies are insurance companies and banks. When there are two or more LLC members, the Internal Revenue Service will treat the LLC as a partnership unless Form 8832 (Entity Classification Election) is filed in order to declare the desire to be treated as a corporation.

Whether or not tax considerations were a secondary issue in your decision to operate as a single-member Limited Liability Company, filing our annual tax returns often raises some new issues and questions. If you have questions about some LLC aspects that you think are unique for your situation, you should have another visit with your tax expert.

As for an answer about the tax deduction limits for an LLC, there are no limits in the strictest sense. The IRS does have tax rules about what assets are actually at risk from losses, and based on the at-risk rules deductions cannot be greater than the assets actually at risk.

With the Internal Revenue Service, there can always be the risk of an IRS audit if reported tax losses appear unusually high. It is somewhat more realistic for a company in its initial year to justify losses in general. Once an LLC has existed for several years, the Internal Revenue Service is likely to review any patterns in losses versus profits. A general IRS expectation is that a business should be profitable for three of every five years.

If an LLC reports losses for three or more years out of a five-year period, it is at risk of being treated as a hobby. The primary tax consequence if this happens is that there will be some additional restrictions imposed on tax losses.

Wednesday, August 14, 2013

Get It in Writing

Get It in Writing

“Get it in writing” is a common piece of legal wisdom often shared by attorneys and business experts. It is true that many verbal agreements become disagreements under a wide variety of circumstances. But getting it in writing does not always prove to be a magical solution.

There are frequent examples of litigation and legal proceedings when a written document is the subject of argument and lawsuits. Is that contract clause enforceable? Did the officers and directors of the corporation really mean what they said in the corporate by-laws?

But the Uniform Commercial Code does in fact require that certain agreements be put into writing. Whenever personal property is being leased or a security interest (collateral) is part of a financial transaction, “Get it in writing” is mandatory. If the parties believe that anything in a contract cannot be completed within a year, “Get it in writing.” Another case where a written agreement is not optional is based on the monetary amount of goods to be sold ($5000 or more).

There are also many important and valuable forms of business writing which have little or nothing to do with legal conditions and contracts but nevertheless serve as excellent examples of another useful “Get it in writing” perspective. As a primary illustration of this, business proposals provide cost-effective solutions for several common small business problems.

Companies of all sizes are interested in increasing their sales and operating revenues. Small business owners are constantly in search of business development strategies which will consistently deliver effective marketing results. While some small businesses are still actively looking for the best solution to this common problem, many companies are relying on a dependable and trusted sales communication strategy that they discovered many years ago:

Business Proposal Writing

It is not totally clear when some businesses lost interest in the business writing activities that surround the proposal process. One tentative conclusion is that expansion of the internet and related technologies caused some executives and marketing managers to go in new directions for developing business and proposals were simply left behind. Another theory is that corporate downsizing targeted specialized employees such as those whose primary mission was responding to Requests for Proposals (RFP).

Whatever the explanation, quality business writing has been in a steady decline for several decades. Without talented business writers, most attempts at preparing proposals are doomed to failure. This self-fulfilling prophecy is yet another reason to explain why business proposals have become virtually extinct in some quarters.

There are several different kinds of business proposals, and some companies will benefit by using every possible variation. For businesses wanting to stick their toe in the water to see whether they should jump in or not, the use of an unsolicited business proposal strategy is both prudent and cost-effective. This approach is diametrically-opposed to the RFP process mentioned earlier and will involve a delicate balance of high-quality business writing and business development skills. It is an ideal solution for small business owners who are willing to be aggressive, proactive, and creative.

Writing is the key to it all.

Many businesses have individuals who possess average to above-average sales skills but somehow the sales results keep slipping. In an explanation using some logic terminology, selling is what is referred to as a "necessary but not sufficient" condition for business success. In other words, sales abilities only go so far but often fall short of the mark. Could it be possible that effective and high-quality business writing is the key missing ingredient?

While everyone should indeed have a Plan B, writing effective business proposals should probably qualify as a Plan A in the great majority of everyday business life. Get it in writing.

Wednesday, August 7, 2013

Do We Need Three Credit Reporting Companies?

Consumers dealing with credit report problems have to deal with three credit reporting companies (Experian, Trans Union, and Equifax). This frequently leads to problems such as one or two of the consumer companies fixing the error, and the mistake is still "out there" for a prospective lender or employer to see. A recent example of how bad this can be was publicized this week when a court in Portland, Oregon awarded a woman over $18 million in damages from Equifax because of the financial problems created by credit report errors. In this case it should be pointed out that the victim tried to fix her credit report for two years unsuccessfully before taking legal action.

I continue to wonder why there are still three credit bureaus for consumers to deal with. For those who are not aware, the origins of three consumer report companies has its origins in the days before personal computers and the internet. Experian was originally TRW and was based in the western United States and focused on consumer debt information in the western U.S. Meanwhile Trans Union was based in Chicago and primarily worked with financial clients in the Midwest and central United States. Equifax was based in Atlanta and adopted an emphasis on the east and southeast regions of the country.

The regional specialization disappeared with the advent of high-speed computers and the internet. Now when a banking institution, mortgage company, utility, employer, or insurance company wants to check the credit history for someone, they routinely "pull credit" from all three credit reporting companies. This is usually in the form of a credit score which assigns a number to rate how good or bad someone's credit payment history is based on data received from lenders, businesses, and lenders all over the country.

The unending problem with this picture is that when there are credit report problems, consumers have to deal with each credit bureau separately. This story almost never ends well.

Of course the individual companies have their own profitable reasons to stay in business even as doing so causes one financial nightmare after another. Where are corporate mergers when we really need one?

Saturday, August 3, 2013

Estate Tax Audits by the IRS

Income Tax Audits and Estate Taxes

There is something special about an income tax audit by the IRS (Internal Revenue Service) that causes more stress and anxiety than many other financial events. The possibility of tax returns being audited is actually quite rare so in most cases the stress levels are relatively unwarranted. 

The one tax return area that seems fully-deserving of a taxing level of anxiety is estate taxes. I could not help but sit up and take notice when I saw the most recent tax return examination data reported by the IRS. Just keep these two numbers in mind: 30% and over 100%. (How can you have over 100%, you might ask?)

It is normal for tax return audits to be based on a small representative sampling of all available returns. For higher incomes, this is usually between 2% and 3%. However, for estate tax returns this number becomes 30%. As representative samples go, this is a very big number. But because audits of estate taxes also frequently result in reviewing tax returns for previous years as well, the total audit percentage for larger estates (over $10 million) is closer to 110%.

Perhaps that IRS tax audit anxiety is closer to fact than fiction after all is said and done.