Timing strategies could become more powerful in 2017, depending on what happens with tax reform


Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.

Timing strategies for businesses

Here are two timing strategies that can help businesses defer taxes:

1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

Potential impact of tax reform

These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.

Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.

But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.

Be prepared

Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.

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Bridging the divide with a mezzanine loan

In their efforts to grow and succeed, many companies eventually reach the edge of a precipice. Across the divide lies a big step forward — perhaps the acquisition of a competitor or the purchase of a new property — but, financially, there’s no way across. The money is just not there.

One way to bridge that divide is with a mezzanine loan. These instruments (also known as junior liens and second liens) can bridge financing shortfalls — so long as you meet certain qualifications and can accept possible risks.

Debt/equity hybrid

Mezzanine financing works by layering a junior loan on top of a senior (or primary) loan. It combines aspects of senior secured debt from a bank and equity obtained from direct investors. Sources of mezzanine financing can include private equity groups, mutual funds, insurance companies and buyout firms.

Unlike bank loans, mezzanine debt typically is unsecured by the borrower’s assets or has liens subordinate to other lenders. So the cost of obtaining financing is higher than that of a senior loan.

However, the cost generally is lower than what’s required to acquire funding purely from equity investment. Yet most mezzanine instruments do enable the lender to participate in the borrowing company’s success — or failure. Generally, the lower your interest rate, the more equity you must offer. Importantly, mezzanine debt may even convert to equity if the borrower doesn’t repay it on time.

Advantages and drawbacks

The primary advantage of mezzanine financing is that it can provide capital when you can’t obtain it elsewhere or can’t qualify for the amount you’re looking for. This is why it’s often referred to as a “bridge” to undertaking ambitious objectives such as a business acquisition or desirable piece of commercial property. But mezzanine loans aren’t necessarily an option of last resort. Many companies prefer the flexibility of these loans when it comes to negotiating terms.

Naturally, mezzanine loans have drawbacks to consider. In addition to having higher interest rates, mezzanine financing has a few other potential disadvantages. Loan covenants can be restrictive. And though some lenders are relatively hands-off, they may retain the right to a significant say in company operations — particularly if you don’t repay the loan in a timely manner.

Mezzanine financing can also make an M&A deal more complicated. It introduces an extra interested party to the negotiation table and can make an already tricky deal that much harder.

Best financing decisions

If your company qualifies for mezzanine financing, it might help you close a deal that you otherwise couldn’t. But there are other options to consider. We can help you make the best financing decisions.

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Don’t let “founder’s syndrome” impede your succession plan

Are you the founder of your company? If so, congratulations — you’ve created something truly amazing! And it’s more than understandable that you’d want to protect your legacy: the company you created.

But, as time goes on, it becomes increasingly important that you give serious thought to a succession plan. When this topic comes up, many business owners show signs of suffering from an all-too-common affliction.

The symptoms

In the nonprofit sphere, they call it “founder’s syndrome.” The term refers to a set of “symptoms” indicating that an organization’s founder maintains a disproportionate amount of power and influence over operations. Although founder’s syndrome is usually associated with not-for-profits, it can give business owners much to think about as well. Common symptoms include:

• Continually making important decision without input from others,
• Recruiting or promoting employees who will act primarily out of loyalty to the founder,
• Failing to mentor others in leadership matters, and
• Being unwilling to begin creating a succession plan.

It’s worth noting that a founder’s reluctance to loosen his or her grip isn’t necessarily because of a power-hungry need to control. Many founders simply fear that the organization — whether nonprofit or business — would falter without their intensive oversight.

Treatment plan

The good news is that founder’s syndrome is treatable. The first step is to address whether you yourself are either at risk for the affliction or already suffering from it. Doing so can be uncomfortable, but it’s critical. Here are some advisable actions:

Form a succession plan. This is a vital measure toward preserving the longevity of any company. If you’d prefer not involve anyone in your business just yet, consider a professional advisor or consultant.

Prepare for the transition, no matter how far away. Remember that a succession plan doesn’t necessarily spell out the end of your involvement in the company. It’s simply a transformation of role. Your vast knowledge and experience needs to be documented so the business can continue to benefit from it.

Ask for help. Your management team may need to step up its accountability as the succession plan becomes more fully formed. Managers must educate themselves about the organization in any areas where they’re lacking.

In addition to transferring leadership responsibilities, there’s the issue of transferring your ownership interests, which is also complex and requires careful planning.

Blood, sweat and tears

You’ve no doubt invested the proverbial blood, sweat and tears into launching your business and overseeing its growth. But planning for the next generation of leadership is, in its own way, just as important as the company itself. Let us help you develop a succession plan that will help ensure the long-term well-being of your business.

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How profitable are your customers?

“We love our customers!” Every business owner says it. But all customers aren’t created equal, and it’s in your strategic interest to know which customers are really strengthening your bottom line and by how much.

Sorting out the data

If your business systems track individual customer purchases, and your accounting system has good cost accounting or decision support capabilities, determining individual customer profitability will be simple. If you have cost data for individual products, but not at the customer level, you can manually “marry” product-specific purchase history with the cost data to determine individual customer value.

For example, if a customer purchased 10 units of Product 1 and five units of Product 2 last year, and Product 1 had a margin of $100 and Product 2 had a margin of $500, the total margin generated by the customer would be $3,500. Be sure to include data from enough years to even out normal fluctuations in purchases.

Don’t maintain cost data? No worries; you can sort the good from the bad by reviewing customer purchase volume and average sale price. Often, such data can be supplemented by general knowledge of the relative profitability of different products. Be sure that sales are net of any returns.

Incorporating indirect costs

High marketing, handling, service or billing costs for individual customers or segments of customers can have a significant effect on their profitability even if they purchase high-margin products. If you use activity-based costing, your company will already have this information allocated accurately.

If you don’t track individual customers, you can still generalize this analysis to customer segments or products. For instance, if a group of customers is served by the same distributor, you can estimate the resources used to support that channel and their associated costs. Or, you can have individual departments track employees’ time by customer or product for a specific period.

Knowing their value

There’s nothing wrong with loving your customers. But it’s even more important to know them and how much value they’re contributing to your profitability from operating period to operating period. Contact us for help breaking down the numbers.

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Find the right path forward with KPIs

From the baseball field to the boardroom, statistical analysis has changed various industries nationwide. With proper preparation and guidance, business owners can have at their fingertips a wealth of stats-based insight into how their companies are performing — far beyond the bottom line on an income statement.

The metrics in question are commonly referred to as key performance indicators (KPIs). These formula-based measurements reveal the trends underlying a company’s operations. And seeing those trends can help you find the right path forward and give you fair warning when you’re headed in the wrong direction.

Getting started

A good place to start is with some of the KPIs that apply to most businesses. For example, take current ratio (current assets / current liabilities). It can help you determine your capacity to meet your short-term liabilities with cash and other relatively liquid assets.

Another KPI to regularly calculate is working capital turnover ratio (revenue / average working capital). Many companies struggle with temperamental cash flows that can wax and wane based on buying trends or seasonal fluctuations. This ratio shows the amount of revenue supported by each dollar of net working capital used.

Debt is also an issue for many businesses. You can monitor your debt-to-equity (total debt / net worth) ratio to measure your degree of leverage. The higher the ratio, the greater the risk that creditors are assuming and the tougher it may be to obtain financing.

Choosing wisely

There are many other KPIs we could discuss. The exact ones you should look at depend on the size of your company and the nature of its work. Please contact our firm for help choosing the right KPIs and calculating them accurately.

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Could captive insurance reduce health care costs and save your business taxes?

If your business offers health insurance benefits to employees, there’s a good chance you’ve seen a climb in premium costs in recent years — perhaps a dramatic one. To meet the challenge of rising costs, some employers are opting for a creative alternative to traditional health insurance known as “captive insurance.” A captive insurance company generally is wholly owned and controlled by the employer. So it’s essentially like forming your own insurance company. And it provides tax advantages, too.

Benefits abound

Potential benefits of forming a captive insurance company include:

  • Stabilized or lower premiums,
  • More control over claims,
  • Lower administrative costs, and
  • Access to certain types of coverage that are unavailable or too expensive on the commercial health insurance market.

You can customize your coverage package and charge premiums that more accurately reflect your business’s true loss exposure.

Another big benefit is that you can participate in the captive’s underwriting profits and investment income. When you pay commercial health insurance premiums, a big chunk of your payment goes toward the insurer’s underwriting profit. But when you form a captive, you retain this profit through the captive.

Also, your business can enjoy investment and cash flow benefits by investing premiums yourself instead of paying them to a commercial insurer.

Tax impact

A captive insurance company may also save you tax dollars. For example, premiums paid to a captive are tax-deductible and the captive can deduct most of its loss reserves. To qualify for federal income tax purposes, a captive must meet several criteria. These include properly priced premiums based on actuarial and underwriting considerations and a sufficient level of risk distribution as determined by the IRS.

Recent U.S. Tax Court rulings have determined that risk distribution exists if there’s a large enough pool of unrelated risks — or, in other words, if risk is spread over a sufficient number of employees. This is true regardless of how many entities are involved.

Additional tax benefits may be available if your captive qualifies as a “microcaptive” (a captive with $2.2 million or less in premiums that meets certain additional tests): You may elect to exclude premiums from income and pay taxes only on net investment income. Be aware, however, that you’ll lose certain deductions with this election.

Also keep in mind that there are some potential drawbacks to forming a captive insurance company. Contact us to learn more about the tax treatment and other pros and cons of captive insurance. We can help you determine whether this alternative may be right for your business.

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Back-to-school marketing ideas for savvy business owners

August is back-to-school time across the country. Whether the school buses are already rumbling down your block, or will be soon, the start of the school year brings marketing opportunities for savvy business owners. Here are some examples of ways companies can promote themselves.

A virtual “brag book”

A creative agency posts on social media a vibrant photographic slideshow of employees and their children on the first day of school. It gives the parents an opportunity to show off their kids — and creates a buzz on the agency’s Facebook page.

The brag book’s innovative design also demonstrates the agency’s creative skills in a fun, personal way. And it helps attract talent by showcasing the company’s fun, family-friendly atmosphere.

Promos for parents

In August, many parents are in the midst of desperately trying to complete checklists of required school supply purchases. To help them cope, a home remodeling / landscape business offers free school supplies with every estimate completed during the month.

Customers receive colorful bags containing relatively inexpensive items such as pencils, pens, pads of paper and glue sticks all stamped with the company’s logo. And even though every estimate won’t result in a new job, completing more estimates helps create an uptick in fall projects.

Freebies for students

During the first week of school, a suburban burger joint offers students a free milkshake with the purchase of a burger. Kids love milkshakes and, because the freebie is associated with a purchase, the business preserves its profitability.

Meanwhile, the promotion brings entire families into the restaurant — widening the customer base and adding revenue. The campaign creates goodwill in the community by nurturing students’ enthusiasm for the beginning of the school year, too.

Determine what’s right for you

Obviously, these examples are industry-specific. But we hope you find them informative and inspirational. Our firm can help you leverage smart marketing moves to strengthen profitability and add long-term value to your business.

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Material participation key to deducting LLC and LLP losses

If your business is a limited liability company (LLC) or a limited liability partnership (LLP), you know that these structures offer liability protection and flexibility as well as tax advantages. But they once also had a significant tax disadvantage: The IRS used to treat all LLC and LLP owners as limited partners for purposes of the passive activity loss (PAL) rules, which can result in negative tax consequences. Fortunately, these days LLC and LLP owners can be treated as general partners, which means they can meet any one of seven “material participation” tests to avoid passive treatment.

The PAL rules

The PAL rules prohibit taxpayers from offsetting losses from passive business activities (such as limited partnerships or rental properties) against nonpassive income (such as wages, interest, dividends and capital gains). Disallowed losses may be carried forward to future years and deducted from passive income or recovered when the passive business interest is sold.

There are two types of passive activities: 1) trade or business activities in which you don’t materially participate during the year, and 2) rental activities, even if you do materially participate (unless you qualify as a “real estate professional” for federal tax purposes).

The 7 tests

Material participation in this context means participation on a “regular, continuous and substantial” basis. Unless you’re a limited partner, you’re deemed to materially participate in a business activity if you meet just one of seven tests:

1. You participate in the activity at least 500 hours during the year.
2. Your participation constitutes substantially all of the participation for the year by anyone, including nonowners.
3. You participate more than 100 hours and as much or more than any other person.
4. The activity is a “significant participation activity” — that is, you participate more than 100 hours — but you participate less than one or more other people yet your participation in all of your significant participation activities for the year totals more than 500 hours.
5. You materially participated in the activity for any five of the preceding 10 tax years.
6. The activity is a personal service activity in which you materially participated in any three previous tax years.
7. Regardless of the number of hours, based on all the facts and circumstances, you participate in the activity on a regular, continuous and substantial basis.

The rules are more restrictive for limited partners, who can establish material participation only by satisfying tests 1, 5 or 6.

In many cases, meeting one of the material participation tests will require diligently tracking every hour spent on your activities associated with that business. Questions about the material participation tests? Contact us.

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4 tough questions to ask before expanding to a new location

Is business going so well that you’re thinking about adding another location? If this is the case, congratulations! But before you start planning the ribbon-cutting ceremony, take a step back and ask yourself some tough questions about whether a new location will grow your company — or stretch it too thin. Here are four to get you started:

1. What’s driving your interest in another location? It’s important to articulate specifically how the new location will help your business move toward its long-term goals. Expanding simply because the time seems right isn’t a compelling enough reason to take on the risk.

2. How solidly is your current location performing? Your time and attention will be diverted while you get the second location up and running. Yet you’ll need to maintain the revenue your first location is generating — especially until the second one is earning enough to support itself. So your original operation needs to be able to operate well with minimal management guidance.

3. How strong is the location you’re considering? Just as you presumably did with your first location, ensure the surrounding market is strong enough to support your company. The setting should complement your business, not pose potentially insurmountable challenges.

Also consider proximity to competitors. In some cases, such as a cluster of restaurants in a small downtown, proximity can help. The area becomes known as a destination for those seeking a night out. But too many competitors could leave you fighting with multiple other businesses for the same small group of customers.

4. Can you expand in other ways that are less costly and risky? You might be able to boost sales by adding inventory or extending hours at your current location. Another option is to revamp your website or mobile app to encourage more online sales.

Investments such as these would likely require a fraction of the dollars needed to open another physical location. Then again, a successful new site could mean a substantial inflow of revenue and additional market visibility. Let us help you crunch the numbers that will lead you to the right decision.

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Listening to your customers by tracking lost sales

“Sorry, we don’t carry that item.” Or perhaps, “No, that’s not part of our service package.” How many times a year do your salespeople utter these words or ones like them? The specific number is critical because, if you don’t know it, you could be losing out on profit potential.

Although you have to focus on your strengths and not get too far afield, your customers may be crying out for a new product or service. And among the best ways to hear them is to track lost sales data and decipher the message.

3 steps to success

A successful lost sales tracking effort generally involves three steps:

1. Get the data. Ask your sales associates to log every customer request and to question customers further to get at the heart of what they need. Train sales associates to record information such as the date of request, item requested and the reason the item was unavailable.

2. Crunch the numbers. Calculate how much you could sell if you had the new items in stock or offered the additional service. Naturally, you’ll need to bear in mind that meeting customer demand might involve spending money on equipment or personnel to expand your product or service line. Key data points to examine include:

• Estimated potential purchases,
• Potential sales losses, and
• Estimated gross profit losses.

Develop a report that lays out this and other information, so you can see it in black and white.

3. Talk about it. Run a lost sales report monthly and discuss the results with your management team. Seek to establish consensus on where your best strategic opportunities lie. Sometimes you’ll want to be patient and let trends develop before acting. Other times, you might want to strike early to seize an underdeveloped market.

A better grip

Lost sales are lost opportunities. By getting a better grip on your customers’ needs, you can build a stronger bottom line. Please contact us for help creating and maintaining a lost sales tracking system that best suits your company’s distinctive needs.

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