Archive for January, 2007

Each year the IRS updates a half dozen numbers that small business
finance professionals use for both compliance and wealth building
reasons.  Here’s a quick review…

Income tax brackets, personal …….. varies

As one CPA so succinctly stated for us: you want to be at the top
of the lowest possible tax bracket.
Recent posts on tax planning can be found here and here.

Income tax brackets, corporate….varies

In addition to the rule above for individual tax brackets, closely held
C Corporations offer the opportunity to “play the brackets” i.e. balance
taxable income between the corporation and its shareholders individually
to achieve the lowest possible overall effective tax rate.

Section 179……………….$112,000

Opportunity to accelerate depreciation and reduce taxable income in
the current year.

Business mileage rate…………..$0.485

Maximum (but not mandatory) tax deduction for business miles driven,
non-company-owned vehicles.

Retirement plan limits………..varies

Ability to tax shelter from $4K to $45K with maximum compensation
considered @ $225,000.

Social security wage base…$97,500

When your W-2 exceeds this, the 6.2% Social Security payroll tax drops
off for both employer and employee, leaving only Medicare
(1.45% with no wage base limit). Income tax withholding continues, though.

Also important are your state rates, which might differ from federal
with respect to income tax brackets, section 179 treatment, payroll
and sales taxes.

[tags]Small business finance, 2007 mileage rates, retirement plan limits,
tax planning, section 179 depreciation[/tags]

Section 179 refers to a widely known IRS tax break that lets your business dramatically accelerate depreciation expense on fixed asset purchases. What many entrepreneurs don’t know, however, is that you can use Section 179 to drive down taxable income reported to the IRS yet report higher profits to bankers and investors, increasing your access to the money you might need to grow your business.

The 2007 Section 179 limit is $112K. You can buy up to that amount of fixed assets and deduct it 100% on your 2007 business tax return. The benefit is clear: a corporation with a marginal federal tax rate of 39%, for example, would pay $35K less in taxes this year vs. not using Section 179.

But here’s the rub: expensing that all up front weakens your P&L and Balance Sheet, maybe to the point where bankers and investors might not fund your business, or do so only with more expensive money. So if you run a fast-growing, capital-hungry business with weak financials, how do you save on taxes today without limiting your access to capital tomorrow?

The solution: depreciate the assets on your books more slowly than on your tax return. Take five years, for example, instead of one, to expense them on your books. Your net income will be higher, your balance sheet will be stronger, and your business will look better to the money people. This is both legal and ethical provided it’s disclosed to whoever reads your financial statements.

There’s always some fine print. Bookkeeping costs are higher. The tax benefit is limited by differing state rules, the ineligibility of certain asset types, if your company buys a lot of fixed assets, and you can’t use Section 179 to generate a loss on your tax return. And for book basis depreciation, you need to follow guidelines re: how long to depreciate your assets.

Nevertheless, for certain businesses, this is a great way to have your cake and eat it too.

A few months ago we wondered whether the Mac version of QuickBooks might be headed for the scrap heap since Mac users can now run the superior, PC version of QuickBooks. Today an article at CNNMoney.com added fuel to that fire by describing the emergence of Parallels, one of the companies writing code that turns the Mac into a dual-platform computer. That’s good news for those who want the best of both worlds: the user-friendly Mac operating system and Intuit’s best offerings – desktop or Online editions – which are written for the PC.

Before investing in a separate CRM solution, QuickBooks users should first make full use of the tools already at their fingertips. For instance, we can borrow a page from non-profit organizations to increase repeat business. In their never-ending pursuit of maximizing the economic value of donor relationships, non-profits have elevated to an art form how to get customers (“donors”) to buy (“donate”) more, and to buy more frequently. Many use sophisticated, specialized software to help them do this, but your QuickBooks file, too, can offer valuable insight.

Take for example the notion of LYBUNTs. This is non-profit-speak for donors who donated Last Year BUt Not This year. To identify your company’s LYBUNTs, pull this report in QuickBooks:

• REPORT CENTER / SALES / SALES BY CUSTOMER SUMMARY.
• Customize the date range to span 3-5 years
• Make COLUMNS = YEAR
• FONTS & NUMBERS / EXCEPT ZERO AMOUNTS (this makes the data patterns pop out, easier to see).

Which customer relationships have waned? Look for gaps. Who bought from you one year but hasn’t been heard from since? If these are your target customers and they’re no longer buying, call them. Send an e-mail. Your company does good work. You help people. You provide a valuable product or service. Let your customers know that. Let them know you still very much want their business.

This quick quantitative analysis speaks volumes about your customer relationships and like all QuickBooks reports, it can be tweaked to fit your needs. Try pulling, for example, a 2-year report and spreading columns by quarter. Or pull a 1-year report and spread columns by month – this shortens the time that you let customers drift away. These reports don’t tell the whole story, of course, but their dispassionate perspective can help us all better understand where we succeeded with customers, and we might do better to meet their needs.

Cleaning up problems costs more than doing things right in the first place, especially in accounting, and January is prime time for certain errors. Before sending the books to your CPA for tax prep, your accounting department should review them for the following easily made errors…

Enter the correct year. Because Excel and QuickBooks default to the current year, and no one’s had much practice yet with ’07 dates, it’s easy to enter a 2006 transaction as 2007 and vice versa. The bottom line impact can be dramatic.

Both bookkeepers and the entrepreneurs they work for should look at every single line of the financial statements – P&L and balance sheet. This simple act is a fantastic quality control measure.

If your business files taxes on a cash basis, make sure QuickBooks does a correct conversion from accrual to cash basis. The most common problem is a positive or negative balance in A/R or A/P on the cash basis balance sheet. Also, make sure the retained earnings account is the same as when you did last year’s after-tax JEs. Retained earnings anchor the books; if they shift after the books are closed…it can be problematic and expensive to fix.

Finally, establish a level of materiality with your CPA. “Materiality” is accounting-speak for “large enough to worry about” when resolving issues. What’s material, $10 or $10,000? It depends on what type of transaction you’re talking about, the size of your company, and the degree of audit risk. No set of books is perfect, so knowing what’s “good enough” helps you close the books more quickly and move on.