Think differently to save cash instead of saving taxes this year

By Greg Crabtree, CPA

Every business owner knows the drill; you made a profit this year so you need to spend your cash to save on taxes. Try to think differently this upcoming year to “save cash” not “save taxes.”

The inherent flaw in spending your cash is that you have to spend a dollar to save 40 cents in tax, which just seems like a bad idea. You come up with excuses to spend money you think you would have spent anyway—you buy new computers, some extra supplies, a new vehicle because you heard you can “write it off.”

The point is that if you did without those costs up to December, maybe you did not need to spend it after all! Most successful entrepreneurs spend a dollar at the last possible moment it is needed.

Build wealth or save taxes?

You can only build wealth from “after tax” income, so every attempt to lower your taxes lowers your ability to create wealth. The number one key performance indicator of wealth creation is “how big of a check did your write to the IRS.”

If you did not write a big check, you either cheated or you did not make any money—both are bad. Do not pay more taxes than you should, but you should be focused on building wealth above savings taxes.

What if I am cash basis?

For those who are a cash-basis businesses, you can easily fall into the trap of draining your cash paying off vendors at year end. While this seems enticing, you eventually take it to the illogical extreme and have such a huge amount pushed forward it causes you to make sloppy decisions at year end.

Here are just a few of the issues that you could encounter:

•Bank financing. Your year-end financials are more important than ever these days. By focusing on taxes instead of good business fundamentals, you distort your balance sheet at year end and spend the next year explaining why your balance sheet looks bad at December so you can get your line of credit or bonding renewed.

•Missed opportunities. Because you dumped all of your cash in December, it takes longer than you think to build it back in January and February. By not having cash available to start new projects, you delay or miss out on new opportunities. To delay acting on an opportunity wastes a day of potential productivity that can never be recovered.

•“Deferring Taxes” versus “Saving Taxes.” Did you really save taxes or did you just defer them? Be honest with your language when you spend your year-end cash. It is not saving taxes unless you are saving at a high rate this year and you pay a lower rate in the future.

Not likely to happen. Most entrepreneurs defer taxes at year end and push their rates down into the lower brackets to end up paying at a much higher rate in the future when they have kicked the can as far down the road as they can.

•Borrowing money to finance that year-end equipment purchase. This is the ultimate tax trap. You borrow $100,000 to buy that new piece of equipment (that could have been delayed) and you end up taking the expensing election on the equipment. Inevitably, this purchase pushes you down into the 20% or lower bracket.

The only way to repay debt is to make after-tax profit. To make enough profit to repay the loan, it pushes you into the higher brackets and you end up paying close to 40% tax to generate enough cash flow to get out of debt (if you are lucky).

A better way to think

You need to approach taxes as the logical outcome of a profitable business that is your primary wealth-building engine. These are the keys to make this happen:

•Owners wages. Set your wages out of the business at a market rate for the job you have in the business. Then live off of that wage. Do not fall into the trap of consuming the profits of the business.

•Get profitable with the business you have. Once you properly set your wage as an owner, your net income gives you a true picture of the profitability of your business. If you are not profitable, the key is to make all labor productive and eliminate any labor that does not add value. You have to get your current business model profitable before you grow.

•Grow your own capital. Once you are profitable, retain after tax business profits until the business is fully capitalized. One definition of being fully capitalized is having two months of operating expenses in cash with nothing drawn on a line of credit. A business that has two months of cash can act on opportunities as they come up and you do not need to “get permission” from your banker.

•Get shareholders healthy. Once the business is fully capitalized, you can then take distributions to get your personal finances healthy. Get out of debt first (yes, that means all debt… including your home!), and then build up your emergency fund.

•Strategically redeploy profits. Once your business and personal finances are stable, then you can make strategic decisions about the after-tax profits of the business and decide if you want to grow the business larger or just continue to harvest the profitability of the business.

•Beware of “consumption cancer.” Everything you buy owns a piece of you and creates a financial drag. If you learn to live off your wages and leave the profits of the business for wealth creation, you have mental clarity of what produces wealth, what is investing and what is consumption. If you set a lifestyle target before you have the income to act on it, you will stand a better chance to control consumption.

It is time for entrepreneurs to get back to fundamentals and build profitable businesses that do useful things and grow your own capital. Stable businesses are the ones that create jobs that last and build a strong economy that can weather the storms of the market.

Greg Crabtree has worked in the financial industry for more than 30 years and founded Crabtree, Rowe & Berger, PC, a CPA firm dedicated to helping entrepreneurs build the economic engine of their business. In addition to serving as the firm’s CEO, Crabtree leads the business consulting team—helping clients align their financial goals with their profit model and their core business values. He is the author of Simple Numbers, Straight Talk, Big Profits! He can be contacted through www.seeingbeyondnumbers.com.

By Chris Bryan

Are you struggling to see the benefits of your lean initiatives? If so, you’re not alone. You started your lean journey with the expectation that the benefits would flow to the bottom line. Unfortunately, the early financial numbers may not be what you expected.

Many companies abruptly take an exit from their lean journey when early indications don’t show expected benefits. Implementing the principles of lean is a long-term initiative, however, and will ultimately provide a significant competitive advantage—but it will test your vision and leadership mettle.

Lean principles

The goal of implementing lean principles is to find and eliminate waste along the value stream. Most companies appoint a lean champion. Employees are trained and lean teams are formed to map key production processes. This process is called value stream mapping.

The objective is to identify steps and resources that add no value to the consumer of your product. Once non-value added steps are identified, the value stream map is redesigned and waste in the process is eliminated. Production planning changes dramatically. Manufacture-for-stock is reduced or eliminated in favor of manufacture-to actual-demand. When a lean team has redesigned the process, an implementation event, or kiazen event, is planned to execute the changes.

Kiazen events usually take one to several days of intense work. When the event is complete, production resumes using the new lean production flow. It is common for lean teams to shorten manufacturing times, free floor-space, reduce in-process part movement and shrink (or eliminate) inventories. Compelling evidence shows that firms, large and small, benefit from implementing lean principles.

Nothing rivals the excitement and energy generated during the early stages of a lean journey. You will feel great about gathering your employees for training, forming lean teams and redesigning your value stream maps, and everyone will be eager to participate in the initial kiazen events. The optimism is intoxicating. Soon, however, you will face the task of measuring the progress of your lean initiatives.

Challenges measuring lean initiatives

Looking to your standard financial statements in the first few months of a lean journey is likely to give you a confusing picture. Unfortunately, standard accounting methods don’t reflect the progress made by lean teams in the early stages.

Costs associated with training employees, reconfiguring production space, relocating inventory, and conducting kiazen events all hit the profit and loss statement immediately. Liquidating excess inventory, an important initiative in lean, may hit profit margins and increase trade accounts receivable in the short-term.

Worthwhile lean projects that may not result in significant costs, such as clearing production floor-space and establishing point-of-use inventory locations, may not result in immediate cost decreases (rent or depreciation).

If that isn’t enough, standard production cost accounting methods actually reward operations managers for over-producing. Often, manufacturing overhead allocations are based on direct labor hours and other activity-based metrics.

When lean teams work to reduce excess inventory, production quantities may decline, direct labor hours and other metrics may decline and create unfavorable absorption variances. When new, lean production processes are implemented and production is limited to actual customer demand, unfavorable variances may persist.

The good news is that variable manufacturing costs can be reduced immediately; however, it takes time for you to reduce semi-variable and fixed costs that make up the manufacturing overhead pool.

When your generally accepted accounting principles (GAAP) financial statements and traditional product cost reports don’t represent the early progress being made, it’s easy to be distracted from the ultimate goal. To keep your direction and focus, develop a system of specific measures that will ultimately drive broader measures of performance.

Use specific measures to motivate

It is necessary, especially at the beginning of a lean journey, that you implement a system of measurements that can be communicated back to your lean teams. Specific measures and short-term incentives based on achievement are key tools to motivate your lean teams to exert extra effort, develop creative ideas, and to challenge inefficient but deeply entrenched processes.

These measurements will encourage you and your staff to keep driving the right events even when your financial statements do not yet show the fruits of your labor. The benefits of implementing lean principles will, in time, improve your financial statements and become a testament of your leadership skills.

Considerations in measuring lean

Shareholders, owners, partners and other financial stakeholders all rely on your financial statements to measure the performance of your operation. It’s a great advantage when you can link the benefits of your lean activities directly to improving numbers and trends from your audited or reviewed statements.

This is especially true if your business needs to acquire new, more efficient equipment through financing. Consider preparing a three-tiered reporting pack that links production-floor activities to broader performance measures that drive financial metrics.

The first tier reporting can be used to summarize each kiazen event. The summary should include a brief description of the event and how the changes implemented are expected to benefit either the profit and loss statement or balance sheet. (For example, the event may reduce costs or lower inventory.)

The expected cost and benefit of the event can be estimated with your accountant, but the estimate need not comply with traditional accounting rules. One of the benefits of documenting specific kiazen events is that it allows lean champions to later revisit the event and check if the results are meeting or exceeding the estimate.

The second tier can present monthly lean team metrics that don’t show up on financial statements, but will drive the top-tier metrics directly derived from the financial statements. Examples of middle-tier metrics to support inventory reduction metrics include takt time, consigned inventory value, and JIT supplier performance.

The top tier should contain four to six broad measurements of business performance that can be derived with at least one key piece of information from the financial statements such as sales per employee, inventory turns, return on net assets, return on sales, profit to operating cash conversion ratio, and gross profit margin.

Your vision and focus will become evident over time. One of the most significant and often immeasurable benefits of implementing lean, however, is the ability to take advantage of market opportunities in your industry. Lean initiatives can provide your company with additional capacity to capture new customers and make solid gains in market share.

This reporting pack proposal will help you concentrate on the proper metrics early in your lean journey. If you maintain focus, your business will gain a substantial advantage against your competition through operational excellence and market leadership.

Chris Bryan is a CPA and CFE with Christopher S. Bryan CPA, Inc. offering CFO services and fraud prevention services to local and national clients. He is a six-year veteran of measuring and reporting the lean journey. He can be contacted at 904-437-7022, cbryan@christophersbryancpa.com or through www.christophersbryancpa.com.

By Lewis Hunter

As a business owner, you are accustomed to, and perhaps even thrive upon, solving today’s pressing problems and pushing on totomorrow. But have you looked beyond this week, this month, or even this year?

The average owner spends 80,000 hours building their company but only six hours planning its transfer. As a result, 80% of business owners fail to get top dollar when they sell. That is like winning a free lottery ticket on a drawing for a $1 million jackpot—you may have won, but you missed out on a much bigger prize.

Just as winning the lottery is not a viable strategy for achieving your dreams, nor is hoping that you will sell your business for enough money to support your future lifestyle.

Use a business transition plan to control your exit and maximize your payout. Plan now when you will exit, how and for how much, rather than leaving it to chance.

Analyze your current situation

As with any journey, you must know where you are before you can determine where you are going. Transition planning involves reviewing your business and personal life.

Review your personal finances; focusing on the wealth gap you must close to support your goals for life after your business. If you want to retire, how much money will you need and what price would you have to sell your business for to net that amount?

For your business, document your vision and strategy for the company. Identify critical success factors and measure performance against them through operational metrics. Undertake legal and taxation reviews to ensure compliance with regulations and to protect against risks.

Identify your objectives

Set clear, measurable, attainable objectives for your life after your business, and your business’s life after you.

Business owners typically start planning transitions for one of three reasons:

•A personal health scare, or death or illness of someone close to them, has reminded the owner of their own mortality. They contemplate what would happen to their business and their loved ones if they suddenly stopped working.

•The owner has tired of their work and wants to do something different, such as go into public service or spend more time with friends and family.

•They desire to leave a legacy, ensuring the company survives them and that their work continues to benefit others.

Don’t wait for one of these to occur. Identify your long-term financial and lifestyle needs, the needs of family and stakeholders, and your desired business legacy.

Select your options

Whether you will transfer your business, continue working or retire, there are many ways to accomplish your objectives. Some options to consider and factors to review:

•Internal transfer—Consider whether the next owner(s) would be capable of running the business. Be impartial, even if they are one or more of your children or a long-time employee. Also, ensure you achieve your personal financial goals without irreparably impairing the company. Use trusts, buy/sell agreements, employee stock ownership plans or management buyouts, for example.

•External transfer—Your influence over your company’s future may wane with an outside buyer. Their plan should align with your vision for the business and the needs of your stakeholders, including employees and customers. Would the buyer be making a strategic acquisition with the intent of operating, and perhaps growing, the business over time? Or would they be a financial purchaser, hoping to squeeze cash and profit from a future sale? Will you solicit bids for the company or negotiate with a single prospective buyer?

Identify the options available to you and evaluate each one based on your objectives. Choose one and put a contingency plan in place so the business can operate and your personal goals can be achieved if you cannot complete the transition as hoped, perhaps due to health or performance issues. Use insurance and legal protections.

Create your plan

When will you transition and for how much? What will the acquirer look like? How will your family’s and stakeholder’s needs be met? Compile the answers in your plan and state how you will attain your objectives. Be specific.

The wealth gap between what your business is worth and what you need to sell it for can provide your timeline. If it is worth $1 million today and you need to sell it for $2 million, will it take three years to close the gap? Five?

Decrease the company’s dependence upon you. Allow time to build business value by grooming leaders, implementing systems, improving processes and increasing revenues and profits.

Your transition should occur when you want and in your accordance with your wishes for the future ownership of the business and at a value that fulfills your wealth objectives. Spell out roles and responsibilities for key individuals, draft the management structure, and detail how you will be paid.

When your transition plan is complete, break it down further into tasks with due dates and responsibilities assigned.

Create your plan, build your business’s value and transition when you are ready—then you won’t need to win the lottery to achieve your dreams.

Lewis Hunter is a Jacksonville-based business transition specialist with ROCG Americas, LLC, an international consulting firm that helps owners of small- and medium-sized companies start, build and exit. He can be reached at 904-400-6610, lewis.hunter@rocg.com, or through http://business-transition.com/.

Get ready

•Set up a team of advisors.

•Draft a letter to your spouse or loved one, stating whom to contact and what to do if you die or are incapacitated before you transition.

•Perform a business valuation.

•Measure the wealth gap between your company’s current value and what you need to sell it for to achieve your personal financial goals.

•Create your transition plan.

•Optimize your business.

•Build business value by eliminating the company’s dependency on you as much as possible.

By Mark Bajalia, Esq.

As a business owner, you will very likely need to make a claim under one of your insurance policies at some point. If you do, you may receive a “reservation of rights” letter from your insurer.

A reservation of rights letter often leaves insured parties confused and unsure about how to respond; however, you will find information about what a reservation of rights letter is and the various options and opportunities it presents for an insured party follows.

What it is

A reservation of rights letter does not necessarily mean the claim is not covered under the insurance policy. It does mean that the insurer thinks it may have grounds to deny coverage for some part of the claim or the entire claim. For example: Most policies have what is called an “intentional acts” exclusion. If it appears that the damages or injuries were the result of an intentional act on the part of the insured party, then the insurer may send a reservation of rights letter indicating that, under the terms of the policy, it may have grounds to deny coverage.

In some cases there may be claims that are covered and claims that are not and the insurer may send a reservation of rights letter indicating that it is providing coverage for only a portion of the claim.

Why they are sent

Insurers send reservations of rights letters to keep their options open. If the insurer does not reserve its rights and provides a defense to the claim, but later discovers that circumstances exist that trigger an exclusion or otherwise call into question coverage under the policy, then the insurer will be stopped from raising a coverage defense.

Under those circumstances, courts could, and have, said that the acts of the insurer in providing a defense without reserving its rights constitutes a waiver of its right to deny coverage. Thus, rather than deny coverage outright, the insurer will send a reservation of rights letter and keep its options open.

Essentially, the insurer is letting the insured party know there is going to be an investigation but is preserving its right to deny coverage if the investigation shows that it is not a covered loss.

What are your options?

You have several options when you receive a reservation of rights letter:

•Ignore it: The insurer may be correct in reserving its rights as to part of the claim.

•Dispute the reservation: As the insured party, if you disagree with the reservation of rights and your insurer’s interpretation of the policy language, you should go “on record” that you dispute the reservation and set forth the reasons that you dispute it.

You should also send it to the claims representative by certified mail and request a response. This will cause the insurer to reassess its position and even if the insurer’s position does not change, you have created a paper trail, which may be useful if the coverage dispute ends up in court.

•Ask for more information: Some insurers will intentionally keep the reservation of rights letter vague to keep their options open. An insured party should counter by asking for specifics as to the purported basis for the coverage issue and the rationale for it.

•Start the clock: Once an insurer reserves its rights, it must eventually declare whether or not it is going to provide coverage for the loss. If the insurer continues to investigate the claim but never conclusively disclaims or accepts coverage within a reasonable time frame, then the insurer may be stopped from doing so. Keep following up with the insurer and periodically ask the insurer to state its position.

•Explore new opportunities: If an insurer reserves its rights, you may have the right to hire your own lawyer to defend the claim, not one picked by the insurer. The insurer will nevertheless be required to pay for your lawyer of choice.

Courts have said that when an insurer hires a lawyer for the insured party, it creates an inherent conflict of interest, which may allow the insured to retain its own counsel. Thus, when confronted with a reservation of rights, it may create an opportunity for the insured party that didn’t previously exist.

•Seek a declaratory judgment: Despite the reservation of rights, if you or your attorney feels that coverage for the loss does exist, then you can seek to have a court review the policy language and the facts as presented and make a determination as to whether coverage exists.

In essence, you are asking the court to “declare” what the policy language means and whether coverage exists. This forces the insurer to address the coverage issues before proceeding on the merits of the underlying lawsuit or claim. The prospect of spending more on legal fees to defend itself in a declaratory judgment action may also encourage the insurer to go ahead and provide coverage and defend the claim.

If you feel strongly that the insurer is reserving its rights on false grounds, you may want to sue the insurer for breach of contract and bad faith claims handling as well. Ultimately you need to understand your rights and protect your rights when you receive a reservation of rights. When in doubt, consult an attorney with experience dealing with insurance matters.

Mark Bajalia is a partner and a managing member in Brennan, Manna & Diamond’s Jacksonville office. He is an experienced commercial, business and insurance litigator, having prosecuted and defended numerous cases in state and federal courts and in arbitration. He is rated AV Preeminent by Martindale Hubble, has been recognized as one of Florida’s Legal Elite by “Florida Trend” Magazine and has been selected as a Florida Super Lawyer in the field of business and insurance litigation.

By Cindy Stover

Attention Jacksonville small business owners: What measures are you taking to protect your company from fraud?

According to a 2010 report from the Association of Certified Fraud Examiners (ACFE), incidents of occupational fraud are 31% more likely to occur at small businesses as opposed to larger companies. To add insult to injury, as many as 40% of small business owners are embezzlement victims, and a staggering one-third of all bankruptcies are the direct result of internal theft.

More alarmingly, a recent TD Bank Small Business survey found that although nearly three-quarters of American small businesses polled are incorporating some steps to protect their business, only 1% of respondents cite falling victim to fraud as a top business concern, even as cases of criminal fraud are on the rise.

Five proactive steps

Here are five proactive steps you can take immediately to help prevent fraud. Remember, the best defense is a good offense!

#1. Manage finances using secure online banking. Banks and other financial institutions are at the forefront of developing and using security measures that help ensure financial information remains confidential and safe.

Online banking is a secure and essential tool for any small business owner. The benefits of this useful service include 24/7 access to real-time information, account transfers and payment management. You can easily schedule and manage your payments, submit remittance information, and have an audit trail of all transactions.

It’s important to check your account activity regularly. Having instant access to your history helps you closely monitor your account for any discrepancies. If you see any, contact your financial institution immediately.

Many banks also offer free (and secure) online bill pay—saving you money on postage costs and mitigating the chance of a paper check being lost or stolen in the mail.

#2. Protect computer systems and practice online awareness. Being complacent about cyber protection can lead to the compromise of critical information and detrimental consequences for your business. Every computer at home and in the office should have installed and regularly updated firewalls and anti-virus software.

While conducting business online, be aware of “phishing”—an electronic scam that attempts to obtain confidential personal or financial information from its target. It takes the form of a fake message, usually an email, which appears to be from a financial institution or service provider.

While some emails are easily identified as fraudulent, including some containing enticing headlines, others may appear to come from a legitimate address. Never reply to any email or pop-up message that requests you to update or provide personal information.

Given the influx of new digital technologies and operational tools available for small business owners, it’s increasingly important to learn about the latest trends and techniques used by cyber criminals. If an offer received via email or on a website sounds too good to be true, it probably is!

#3. Safely handle sensitive documents and financial statements. The Web isn’t the only place where thieves can steal valuable information. Some of your own employees and outside parties can steal important mail, credit card information or checks and commit fraud.

Printed financial statements, social security numbers and other sensitive papers should be disposed properly using a shredder or saved in a securely locked device. To avoid the hassle of handling several papers, certain banks allow customers to opt out of paper statements and receive online statements instead.

Technological advances have even put photocopiers at risk. Most photocopiers built since 2002 contain a hard drive that stores every image scanned, copied or emailed. When a business sells or upgrades their copier, the machine is usually cleaned up and reconditioned, but often times the hard drive is left intact and isn’t scrubbed.

Once resold, it’s possible for anyone to simply pop out the hard drive, and access and sell confidential information, such as income tax and bank records, social security numbers, and birth and medical records.

Treat documents in the standard office copier just as they would any printed document, and guard that information accordingly.

#4. Obtain fidelity insurance. Crime and fraud-related losses generally aren’t covered by property insurance policies. As a result, it’s important to protect money losses from workplace fraud.

Fidelity insurance protects your business against criminal acts such as robbery, embezzlement, forgery and credit card fraud. Liabilities secured under this type of insurance usually include money loss coverage (burglary or theft) and employee dishonesty (embezzlement and forgery).

According to the ACFE, 80% of workplace crime and abuse is performed by employees. Tough economic times often result in increased incidents of fraud and embezzlement. Although fidelity insurance means an additional cost for your business, it will save a lot of headaches should your business fall victim to workplace fraud.

Search for low rates and partner with a broker who can help you shop for the best deal.

#5. Incorporate appropriate checks and balances. Every small business owner should perform an internal review and assessment of company finances on a monthly basis. Make sure payment amounts match all invoices and check for any missing documents. Running random audits or having a third-party audit your books once a year will show your employees you are serious about fraud and deter them from committing deceptive acts.

If you think you’re a victim of business fraud, immediately contact the fraud department of any of the three major credit bureaus to place a fraud alert on your credit file. Also, contact your banks, credit card issuers and other creditors where your finances and information are available.

Following these five preventive tips will help protect your finances and allow you to focus on the success of your business!

Cindy Stover is market president of TD Bank’s, America’s Most Convenient Bank, North Florida market and is responsible for the commercial, government and community banking business for Florida’s Northwest, Northeast, North Central and Mid-North regions. Stover has over 27 years in banking experience and is involved in many local community organizations. TD Bank works hard with its customers to prevent fraud and takes several measures to protect their privacy. Visit its online security center for more tips at www.tdbank.com/security.

By Keith Johnson

As a small business owner, you probably already know that in this economy, getting any kind of business is hard. In order to be successful, you need to consider expanding the variety of revenue streams—and that includes dealing with businesses that may not be based in the U.S.

Success steps

Going global with your business is not easy. Once you decide to do business with non-U.S. companies, there is a lot of work to be done.

•Understand your industry. Know your industry and how it works in the country(ies) you wish to do business in. You have to know how your product or service will attract and keep buyers in the target markets. You also need to know if your product or service is priced competitively.

The value of what you sell must exceed that of not only your competition in your customer’s home country, but also from other U.S. companies that also want to expand their business by going global.

•Knows the laws of trading. You have to understand the laws of trading with a foreign business. What may be legal in the U.S. may not be outside of it, and vice versa. While bribery is acceptable in many nations, it is highly illegal under U.S. law. Your product may pass safety regulation muster here in the U.S., but maybe not in other countries.

•Be familiar with various currencies. Having a solid knowledge of currencies is necessary to be able to track differences in currency values between the U.S. dollar and a Euro or Dinar or Yen. You may find yourself caught short agreeing to a sale that when currency differences now and during the sale period are taken into account, your expenses will exceed your expected revenues because of the loss of value in the dollar.

•Have an infrastructure. A business owner must­ have the infrastructure in place to facilitate trade between the U.S. and other nations. There are many different companies that specialize in facilitating trade by working with customs, financing, collections, and shipping. Trying to do all of it yourself is at best, very draining on your time and resources, and at worst exposes you to serious problems with your shipments and even legal complications.

•Learn the culture. Last, but not least, a successful business owner needs to learn the culture of the trading partner. Again, what is acceptable here may be highly offensive in say, Brazil. What customs are acceptable in Egypt may be frowned upon here. You need to take the time and do the research on your customer’s country so that an innocent remark may not spark a diplomatic crisis.

Personal experience

While most of my clients are U.S. based, I do have some tax clients that are not. One client supplies materials in support of the U.S. base in Kyrgyzstan. While the owner is American, preparing the tax return is a challenge as I have to understand international taxation and how best to report the foreign business activity—but I do enjoy the opportunity to grow professionally.

Another client is a school supporting a U.S. Air Force base in South Korea. Again, while the owners are American, doing the return requires me to understand some tax regulations governing relations between the U.S. and South Korea. I try to look at each such opportunity as a chance to improve my skills for the next clients.

To be honest, I have only met one of my clients thanks to the power of modern technology. Having an Internet presence and a strong SEO and social media plan allows people from all over the world to find your business easily and get them to consider your business as opposed to your competitors.

Earlier this year, I had the exciting opportunity to go to Cuba for two weeks to prepare tax returns for support personnel at the Guantanamo Bay Naval Air Station. While I worked with U.S. personnel mostly, I was exposed to some Cuban culture and it also allowed development of the government procurement side of my practice.

The right resources

Sounds a little daunting, and it is. However, fear not! There are a lot of resources here in River City that can help get your business prepared for international expansion.

Earlier this year, I earned a certificate in International trading from the UNF Small Business Development Center. It is about 20 hours over six weeks that explains all of the nuts and bolts of international trading. The knowledge, networking, and materials gained from the course have helped me a great deal. The cost is $299, but there are programs from Worksource that can help pay for it.

There is a wonderful resource here in Jacksonville named Jorge Arce. He is a local director for the U.S. Department of Commerce. The Commerce Department is committed to helping small businesses develop and execute a plan to export products and services

Finally, I would be remiss in not mentioning Larry Bernaski and Enterprise Florida. Enterprise Florida is the state agency that is charged with helping Florida businesses take advantage of their favorable geography and help grow an export business. Many of these services are either free or at a nominal cost, but the investment can be well worth it.

Survival box

In order for your business to survive today, you must think out of the box and consider all options in and out of the U.S. You must consider a business owner in the Ukraine for your product just as much as someone from Orange Park. Fortunately, there are a lot of resources at your fingertips to get your through the maze of regulations and cultures to get your goods to market. They have helped me, and now it’s your turn. Good luck!

Keith E. Johnson CPA, is owner of Keith E. Johnson CPA PA in Jacksonville, Fla., a full-service CPA firm providing accounting, auditing, consulting, and tax services to individuals, businesses, and non-profits. He can be contacted at 904-727-0077 or kejcpa@comcast.net.

By Brent Ross

Countless numbers of commercial property owners overpay federal taxes every year and are missing out on allowable depreciation expense deductions. Under existing IRS tax law, accelerated depreciation expense deductions are available to all federal taxpayers; however, without an engineering-based cost segregation analysis, the taxpayer is unable to take full advantage of the tax law and, therefore, surrenders significant cash flow to the IRS.

What is cost segregation?

A typical cost segregation study maximizes the tax benefit of real estate ownership by identifying, segregating and classifying a building’s components to asset categories with the shortest possible life creating significant tax deductions sooner for federal and state income tax purposes.

This is determined though an analysis that reclassifies components of a building from 27.5, 31.5 and 39 year depreciable lives to five, seven and 15 year depreciable lives. The benefit comes from accelerating the depreciation tax deductions, which are more valuable today than 39 years from now.

Nonstructural items like carpet, accent lighting and signage, or exterior items such as paving, sidewalks and landscaping are examples of building components eligible for accelerated depreciation, and are items that can be “broken out” from structural costs and depreciated over a shorter period.

Many property owners can identify nonstructural items that qualify for accelerated depreciation, but the greatest savings come from identifying assets in three broad areas: electrical, mechanical and plumbing.

Let’s say a standard office has three electrical outlets. To effectively operate your computers, printers, projectors, etc. in your office, however, you require six electrical outlets; those “extra” three outlets may qualify as five-year property and accelerated depreciation. The same can be said for specific air conditioners when a certain temperature must be maintained for the safety of the product, such as in grocery/food stores or maintenance facilities so equipment won’t overheat.

Depreciation can increase your ROI

An often overlooked tax-saving opportunity is accelerated depreciation of cost associated with the construction, renovation or purchase of a new building or real estate. Taking advantage of certain techniques can boost your return on investment (ROI), and a cost segregation study can help you improve profitability and increase ROI by maximizing tax benefits on certain projects.

Property owners can substantially reduce taxable income and maximize current depreciation by accelerating deductions, thereby increasing after-tax cash flow. In addition to recently purchased or constructed properties, a cost segregation study can produce substantial tax benefits for properties that have already been depreciated for as many as 10 years or more by catching up on missed depreciation.

Most business owners who own a building understand that they recover their investment through depreciation. What they may not understand is how to look at an entire facility and allocate as much cost as possible to things with the shortest depreciable life thereby recovering the cost of their investment for tax purposes much sooner.

Business owners often overlook the opportunity to allocate costs to land improvements and things that qualify as furnishings that depreciate in five to 15 years as opposed to the building itself, which depreciates over 39 years for commercial property and 27.5 years for residential rental property.

A proven and allowable tax strategy

Cost segregation is by no means an aggressive or risky strategy. For decades, court rulings havesupported the practice of segregating costs for tax depreciation on commercial buildings. In 1997, the U.S. Tax Court ruled that segregating costs for tax purposes was allowable. Subsequently, cost segregation has become an accepted—if somewhat underutilized—tax planning strategy.

Using sources such as revenue rulings, court cases, IRS publications, senate and congressional finance committee reports and IRS regulations, cost segregation experts are able to help companies apply deductions that create tax savings starting in the first year.

Is a cost segregation study for you?

Office, manufacturing, retail, professional, residential rental—it doesn’t really matter which type of real estate you are building or acquiring. If the property can be depreciated, a cost segregation study would be a valuable strategy. The study can help you find hidden deductions and help you realize substantial tax savings. Even if your real estate project has been completed for several years, the IRS allows for a look back of the benefits from previous years through a change in accounting method.

A cost segregation study requires detective work. It might start with an invoice, but it goes into extensive analysis involving the examination of construction documents, blueprints and an inspection of property. This approach analyzes both actual cost records and cost estimates and may take up to a month to complete. Trained engineering and tax specialists will work closely with you and your contractor to identify more assets that qualify for shorter depreciable lives and accelerated depreciation, including all assets that are imbedded in your building’s construction or acquisition costs.

The business owner receives a detailed report including background, the methodology, asset classification summary and support, and the complete allocation of costs—everything they would ever need to know about the process and results.

Reinvest in your company

It’s important for the property owner to have a detailed report from a CPA so they understand exactly what they did. The engagement will pay for itself many times over through the first year’s tax savings. Earning these tax savings now, as opposed to many years from now is valuable. The property owner can take that money and invest it back into their business.

It’s important however, for property owners to work with engineers and tax advisors that are intimately familiar with cost segregation rules and requirements in order to make sure the study is in compliance with the constantly changing regulations regarding how assets may be classified. Any building put into service after 1987 qualifies. Even now, years later, the benefits can be realized.

The money you save from a cost segregation study can help your company in many ways. It could for example be used as additional working capital for operations, or be used toward new investments and ventures or used to pay down debt and reduce interest costs.

Brent Ross, CPA, is president of Brent Ross & Associates, CPAs, LLC. He has worked in the area of federal and state taxation since 1972. Having worked as a practicing CPA since the early 1970s, he has extensive experience dealing with issues related to investment tax credits (ITC) and property qualifying for ITC and component depreciation. This body of experience is the backbone of knowledge necessary to complete quality cost segregation analysis and reports to owners. He can be reached at 904-448-6408, bross@brjaxcpa.com, or through http://brjaxcpa.com/default.aspx.

Who qualifies?

Although any non-residential commercial property may qualify for tax deferral and increased cash flow, here is a sampling of the types of properties with a high probability of benefiting from a cost segregation study:

Corporate office buildings

Warehouses and distribution centers

Hospitals

Medical/dental offices

Nursing homes

Apartment buildings

Restaurants

Hotels and motels

Strip malls and retail stores

Car dealerships

Golf courses and country clubs

Grocery stores

Airport hangers

reviewing your 2010 receipts much longer. When it comes to filing taxes for self-employed individuals, you should take advantage of as many allowed deduction as possible. Maximizing these deductions will not only save you money, but will reduce the overall potential for tax liability.

A good rule of thumb is to eliminate any personal purchases, or anything that was used for personal use, from your receipts or logs. The Internal Revenue Service (IRS) code only allows for “ordinary and necessary” expenses in your business. This means if it was not used for specific use by your business, it is not an allowed deduction.

1. Vehicle expenses. As a self-employed individual, you can either deduct vehicle expenses by standard mileage or actual expenses. If you have not been keeping a mileage log, standard mileage may not be the option for you, as the log will be the only proof for this expense.

You can deduct interest paid on a car loan if the car is used for business purposes. If the car is only used for business 60% of the time, you can only deduct 60% of the interest paid that year.

2. Bookkeeping and accounting. Tax Preparation fees can be deducted from your Schedule C. Basically, you can only deduct the fee for preparing your self-employed portion of the return as a business expense. The rest of the tax preparation expense can be deducted from your Schedule A on your personal return. All bookkeeping and/or accounting expenses can be deducted as it pertains to maintaining your business records.

3. Travel, meals, and entertainment. When you’re preparing to deduct expense related to travel, meals, and entertainment, ensure they were for business use only.

Travel expenses are deductible when you are required to be away from your tax home (your primary residence) and are in need of rest or sleep while you are conducting business. This also applies for any meals necessary while you are traveling. More good news: Tips are also allowed as a deduction during travel.

Entertainment expenses are deductible only when you are entertaining a customer, client, or employee. The expense must be common or accepted in your field of business, and be considered helpful for your business. Beware: You can only deduct approximately 50% of your unreimbursed business expenses.

4. Office supplies. Most people make numerous trips to office supply stores for their everyday needs—sometimes more frequently than they would like (with big bills to prove it!).

Paper, ink, postage, computers, printers, and related office supplies are all necessary for you to keep your business running professionally and efficiently and thus are tax deductible. Always keep your receipts, and if you are purchasing business and personal supplies, it’s advisable to get your business purchases on a separate receipt. This can be a small gold mine in deductions, as most people do not realize how this can add up over the course of one tax year.

5. Business use of home. Be cautious when you are claiming portions of your home for business use. This is easily one of the most frequent places that tax payers can make mistakes.

The business portion of your home must be one of the three following:

•Your principal place of business;

•A place where you meet or deal with your patients, clients, and/or customers; or

•A separate structure not attached to your home.

The business portion of your home doesn’t have to be used exclusively for business. Examples include using the space to store products or using the space as a daycare facility.

Many people use portions of their home for business purposes, if not run their business out of their home. You need to know what size the space is in order to have a complete deduction, which can save you money in the long run.

Just the beginning

This is merely scratching at the surface of what items and expenses can be deducted when you file your Schedule C. Review your receipts and records for the 2010 tax year. If you have expenses not listed above, check out IRS Publication 334, available at www.irs.gov, to see if your deduction is an allowed expense.

Preparation of a self-employed tax return is not simple, and can cost you big when prepared incorrectly. If you do not feel comfortable preparing your return on your own or have a large amount of expenses, it is in your best interest to seek a licensed and qualified tax preparer or CPA.

This is a guest post by Richard Close, on behalf of the Tax Defense Network (888-248-9058 or www.taxdefensenetwork.com). As a former IRS Revenue Officer, Richard “stole” $10 Million for the IRS. Now he works to help American taxpayers. Richard writes IRS news and updates daily on his website, The IRS Hitman (www.irs-hitman.blogspot.com). You can find answers to common tax questions in his knowledge vault.

By Keith Johnson

As business owners and individuals, you’ve all had that sinking feeling at one time or another when your tax return is prepared and you get hit with the shocking news. Because of improper planning, unforeseen circumstances, or some other emergency, you find you owe Uncle Sam more than you can afford to pay right then.

This scenario is most likely to occur because of two reasons. First, the IRS requires businesses that have a payroll to file and pay payroll taxes on a Form 941. It is easy for a small business owner to find themselves overwhelmed by the amount of federal payroll taxes they held from their employees as well as the required company match for Social Security and Medicare. The Form 941 is due every quarter and can make any small business owner lose sleep figuring out how to stay current, especially in these hard economic times.

Second, and related to the first, a sole proprietor who may not even have employees may find themselves owing a significant amount of self-employment tax. Self-employment tax is actually the government’s way of ensuring that sole-proprietors pay their fair share of Social Security and Medicare. The tax runs around 15% of net profit, is counted toward your Social Security benefits, and is in addition to the income tax generated by the net profit reported on Schedule C and line 12 of the 1040. Again, this tax adds up quickly and has left many small business owners in despair.

Wishful thinking

If something like that happens to you, you will feel like ignoring it and hope it goes away, or when an IRS letter comes, you’ll want to leave it in the mailbox and hope the mailman takes it back; however, the IRS is similar to a spoiled child in the fact it doesn’t like it when it’s ignored. But instead of pouting or throwing a temper tantrum, the IRS can resort to filing liens and levies, as well as take you to court.

But remember, the IRS actually is staffed by human beings just like you. The IRS will not only work with you to resolve your tax issues, but bend over backward as long as you work with them in good faith. It is a little known fact that the goal of the IRS is taxpayer compliance, not criminal prosecution.

Make no mistake, if you owe the tax, you owe the tax and the IRS can’t help that. But they can make payments much easier if you let them.

What to do if…

You just got a letter from the IRS stating you owe $5,000 in taxes and have $500 in penalties and interest on top of that. The first thing you need to do is not panic. Call your tax advisor immediately and tell him or her what is going on.

Perhaps a mistake was made by either your payroll preparer or you, but only a thorough review of your payroll or financial records will confirm that. Many business owners will get such a letter to find there was a timing or processing error, such as a payment not posted to the account correctly.

•It may be legitimate. If a review of your business records by your tax advisor reveals that the tax may be legit, what’s next? Your advisor should prepare a Form 2848, IRS Power of Attorney for you to sign. It allows the advisor to represent you to the IRS on your behalf.

It allows the advisor to discuss your tax situation over the phone, collect records for your account, and be present at any meetings with IRS agents. It doesn’t allow the advisor to access bank accounts or make business decisions for you. Go ahead and sign as your advisor will not be able to do much without it.

Your tax advisor can then contact the IRS and get in touch with the agents who can best explain your situation and review your options. Before the IRS can help you, you must be up-to-date with your tax filings. The IRS will advise if there are any missing returns. Get them filed immediately. Payment arrangements can be figured out later.

Once your tax advisor has all of the information they need to catch you up-to-date, you may find that you don’t owe anything. This happens more than you may think. There may be penalties and interest for late filing, and if that’s the case, request your advisor to write a letter to the IRS requesting abatement of penalties. If this is your first offense, the IRS will usually grant it. Interest is harder to remove unless it is the result of an IRS error.

•It is valid. Let’s say the tax you owe is legitimate, and you’re in over your head. The IRS will allow you to enter into an installment agreement. You need to file a Form 9465 for this. If the amount is less than $10,000 and you have not had another installment agreement in the last five years, the IRS cannot refuse your request.

Basically, your setting up a loan payment arrangement similar to a car or mortgage. The IRS will ask you for a monthly payment amount which can pay off your tax in four or five years, but it does cost $105 to set up.

Also, if the tax is expected to be paid within 120 days, do not use this option. The IRS collection process is such that taxes owed will not go into active collection status for 120 days. This also appears on the Form 9465. Use this like a same-as-cash alternative.

•It is a financial hardship. Suppose you’re really in trouble. There are other alternatives to asserting financial hardship such as Offer-in-Compromise, which is rarely granted but worth looking at. There is also a Currently Not Collectible (CNC) status, which puts collection activity on hold for up to 10 years.

At this point, you need to organize your financial records as the IRS will require you to complete a 433-A or 433-B collection statement. This lengthy form requires supporting documentation for your assets, liabilities, income, and expenses. This is a pain to put together, but will help the IRS in determining a reasonable payment.

If you can show the IRS that repayment will cause severe financial hardship, they are more likely to work with you. You can also request the services of a Taxpayer Advocate by filing an aptly named Form 911. An advocate will help grease the wheels to resolve your tax problems.

Know your options

Getting in trouble with the IRS is easy to do and happens to many more than you may think. Don’t feel you’re a failure or a bad business owner. Lots of things can happen to put you in hot water. There are also many options the IRS has given you to resolve any problems. Get the help you need immediately. Don’t wait for it to go away.

Keith E. Johnson CPA, is owner of Keith E. Johnson CPA PA in Jacksonville, Fla., a full-service CPA firm providing accounting, auditing, consulting, and tax services to individuals, businesses, and non-profits. He can be contacted at 904-727-0077 or kejcpa@comcast.net.

ON THE WEB For more information on 2011 taxes, visit http://advantagebizmag.com/archives/6113.

By Lori Putnam

Those us who have paid attention over the last 25 years have witnessed the emergence of technology at what can best be described as warp speed. If you really think about it, the technology of today was probably obsolete before you evenpurchased it!

In the world of financial services, the technology boom has created the ability for bank customers to obtain immediate and accurate banking information, real-time and online. As e-banking technology began to emerge and improve, the initial fear that online banking would replace branch banking was quickly replaced with a desire to offer as much information to our customers through online portals as possible.

When you can sit at the computer at midnight in your pajamas and learn about the products and services your bank offers, it’s a better educational experience than sitting at your banker’s desk, trying to decipher “bank-speak” and knowing there are four people behind you waiting to be seen. This doesn’t mean you never need to go into a branch, but many things that used to be done in branches can now be done electronically, which can save you time and money.

Extended services

Most people log onto their bank’s website to balance their checkbook ledgers. They’ll look at their current or recent activity, maybe look at the detail of some checks they forgot to enter into their ledgers, transfer money to or from savings, and originate electronic bill payments through their bank’s online bill payment site. But e-banking is much more robust than just paying and receiving.

Need to stop payment on a check? Chances are you can initiate a stop payment from your bank’s website. Got a kid in college who needs money? You can initiate a payment to them through your bank’s online bill payment system. In fact, most banks’ online bill payment products can not only accommodate payments to credit cards and utilities, they can now accommodate payments originated electronically to individuals, and business owners wishing to make electronic payments can attach invoices and even apply discounts to electronic bill payments.

E-banking also extends to the lending arena, with a variety of information available through not only your bank’s website, but the links they most likely provide. These links can include calculators for loan payments so you can determine how much a payment will be and how long it will take to repay, as well as detailed information on the variety of loan products available to you, whether you are a business or an individual.

Many financial institutions offer online loan and credit card applications, and even current rate information for their most standard loan products. The e-banking application is virtually the same as what you would complete in a branch office; in fact, many banks no longer use paper applications, but instead originate in-branch loan and credit card applications through their internal electronic systems.

What about investing and retirement? Your bank’s website most likely offers a retirement planner so you can determine how much to invest and at the current rate of savings, how much you will have when you retire, and even asset allocation information so you know how to build a more balanced investment portfolio.

Want to keep up with the current news on your bank? Check out the website. News and information about your bank is readily available for your reading pleasure.  Many banks also offer the option to begin the new account opening process through their electronic sites, and some offer “switch kits,” which can help ease the pain of establishing yourself at a new financial institution by making the process a little more manageable.

New services

With the movement toward “paperless” transactions, many banks offer a terrific service, generically referred to as Remote Deposit. Remote Deposit allows business customers the ability to make non-cash deposits through a secure website using a desktop scanner.

Users simply scan their checks to be deposited, correct any errors that may occur during scanning, and then submit the deposit for practically immediate credit to their bank accounts. The images of the items are stored electronically and can be viewed anytime. While most banks do have processing cut-offs for credit for remotely deposited items, the system itself is available 24 hours a day, 7 days a week; deposits can be originated and transmitted to the bank and images of deposited items can be reviewed anytime, day or night.

Along these same lines, electronic bank statements, or e-statements, are gaining popularity as “go green” becomes the rallying cry of reducing paper waste. Statements are delivered through a secure system and retrieved at your convenience. All e-statements include transaction details, and most e-statements include the images of the items transacted on your account.

Wire transfer remains one of the most popular methods of moving funds swiftly between banks, and with the ability to originate wire transfers through electronic banking, customers can save a trip to the bank and even gain a reduction in the cost of wiring funds. Payments initiated or received through the Automated Clearinghouse (ACH) are the preferred method of handling payroll and expense reimbursements. Most banks even offer a “self-service” ACH product, which allows the end user to process ACH payments without the use of an intermediary, such as a payroll company.

Another e-banking service gaining popularity is Positive Pay. Check fraud is one of the most common reports of fraud among businesses. Positive Pay offers one of the most effective methods of deterring check fraud by allowing users to compare the checks they have issued against those being presented for payment on any given day.

Items that do not match the checkbook register raise a red flag and the user must decide if these exceptions represent fraudulent activity. This gives the business owner control over the items being presented for payment against their account, which in turn helps control costs by minimizing the risk of check fraud.

Your e-banking site also offers a wealth of information regarding FDIC insurance, the bank’s officers and directors, identity theft and fraud protection, and more. Many bank sites offer a tool that allows you to pull all financial information into one site for money management purposes. There’s even a good chance that if you visit your bank today, there are e-banking kiosks available for your use, right at the branch site! And we never even discussed the variety of electronic functions that are available now through ATMs and mobile banking. That’s best saved for another article.

It’s probably safe to say that advances in technology have not quite given us the time or cost savings that jet-packing to work or traveling by transporter might have offered us. But taking advantage of the many products and services offered by your financial institution’s e-banking site can certainly make it easy and convenient for you to manage your daily financial needs.

Lori Putnam is vice president, commercial deposit manager, and cash management officer for FirstAtlantic Bank. She can be contacted at 904-446-2567 or lputnam@bankfirstatlantic.com.