In business it aint always what it seems to be regarding taxes, deductions and perception. 10 things to watch!
1. Big tax refunds Good or Bad?
We all are greedy and are enticed by riches. Sometimes preparers inflate deductions and the taxpayer claims they were not fully aware? If IRS comes a calling you are responsible for the additional tax not the preparer. Additionally you are allowing IRS to use your capital preventing it from being used for other activities. Personally I am ok with owing them money and keeping my money in 401k and other investments that have an upside.
2. Inflated returns – PONZI Schemes
I have known several people who have lost money in these. They are all not the size of Madoff nor get the national attention. Two of the folks are accountants go figure. The amounts ranged from 10k to 100k. How well do you know the company offering this and is it using sound business principles. Most of these offer returns are well above market which should raise a flag immediately. Too good to be true normally is.
3. Tax credits – Can we use them?
Tax credits are great when applicable. Recently I have had clients invest in solar which produced big tax credits last year. Most credits though are not refundable though. I have had Business owners spend money acquiring enterprise zone credits but could never use them as the business did not pay tax. Some of the refundable credits are excess social security, health coverage and the American Opportunity credit (education) partially at 40%.
A big one for manufacturers is the Research and Experimentation credit but we must pay tax to use. Changes were made recently to alternative minimum tax which used to limit this credit frequently. Be on the look out for this one as it is missed frequently.
4. Financial accuracy when a business is looking to sell?
Many businesses do not have strong accounting and do not pay taxes. When thoughts come of selling the business the owner realizes the game must change. Be careful here to get professional help and be skeptical. A cash basis taxpayer can make their business look stronger by stopping to pay its bills. So dig, dig and dig some more. Financials can be deceiving and manipulated so be careful and take the emotion out and be willing to walk away.
5. Equipment leases less can be more
Leasing Equipment can be a consideration for a business. There is many times low or no down payment and seemingly an ease of transaction. Many times the pain comes on the exit side. Notification periods and other language that if missed can be costly. Leasing is usually a more expensive option due to interest rate. There are also early termination fees present so if needs change your lease payment could still be a cost.
6) Projections – Fact or fiction?
Beware as I have seen a few bad projections or resumes for that matter. Optimism is usually rampant and none of us are perfected predicting the future. My feeling these normally present the best case and should be adjusted downward significantly to bring reality into play. Especially for a new business that does not have a track record to go by. Projections are a great internal tool to financial model but be cautious if you are buying off them!
7. Interest free credit cards
Some businesses use these for financing and get skilled at changing them over to avoid paying interest. I personally found out the hard way you must only use the card for that purpose or you can interest on all other balances until paid off. If you use a card for this purpose you more less shut down its use until the balance is paid. Also you normally pay a fee to transfer the balance so this is interest so things are not always as they appear.
8. Bank credit lines – Here today and gone tomorrow?
I have seen over the past few years several business owners pay down or off lines to have them reduced substantially or closed altogether. We have counseled some owners to draw on their lines to avert this. Credit has become a complicated issue and it does not appear to be changing anytime soon. Try to get multiple year agreements to avoid this and term out old lines that cannot be paid and try to get a new one for short term needs.
9. Tax Planning – Is paying no tax the right choice?
Many people would brag I do not pay taxes and are sure this is a good thing. Rate maximization is the goal to tax planning and 15% is the best rate unless we can get zero but that is hard to do unless we have large deductions. Profit will eventually need taxes to be paid. Paying tax at favorable rates can exceed paying none now and higher rates in future years. I always say it takes years to measure the merits of any decision.
10. More sales versus less sales at better margins?
Sales are down for many business owners the past few years. Margins are also down. It is very tempting to lower margins to try and stimulate sales. A business with a 30% margin not bad in today’s world would need sales to increase 50% to make up for a 10% drop in margin. We all have a limited capacity to do work (hours in the day), machine capacity etc so why not max this out and be careful if we take too much lower margin work, along comes high margin work and we have no capacity to take it on.
Author: Stephen Williams, CPA, Partner