Posts Tagged ‘Small Business’

The Tax Club Investigates: Effective Business Planning

Thursday, March 11th, 2010

Every small business owner has dreams of making their company a huge success. Unfortunately, creating a successful business cannot be accomplished overnight or with little effort. The preparation that goes into a business before it actually gets started can make a difference. Before a business owner can sell products and services, they must define their goals. The goals of the business must then be assigned a realistic timeline which will allow the business to prosper and succeed at a steady rate. These can be outlined in a well drawn business plan. A concrete business plan provides the foundation for an efficient and organized company. It will house the company’s executive summary, marketing strategy, and operational and financial plan.

                The executive summary is the perfect start to a business plan. The summary allows the business owner to develop a general company description and initial snap shot of the business. Even though the executive summary is created in the initial stages of the business, it needs to be powerful.  The ingredients should capture the attention of lenders and business partners and give business owners more confidence in what their business offers. Products and services need to be described in detail and appear unique compared to other businesses. The ready to market product or service will eventually gain attention from consumers, partners, and professional organizations.

                Once the executive summary is created, a proper marketing strategy needs to be developed. If a marketing strategy is not thought out or organized, a business can fail in a short period of time. The marketing strategy needs to define the competition and identify the areas of the market that the business will be embracing. Outlining competitors and understanding market niches allows business owners to sustain themselves in the market and provide products and services that consumers can appreciate. Other areas of the marketing strategy will contain market research and support material. The information in this area will act as a library for ideas and fundamental reasoning for market engagement.

                Enable to take full advantage of the market one must understand how their business operates. The operational plan will vary from business to business depending on the type of entity that is created and the types of products or services offered. Generally, the plan will identify product and service development and how it will be maintained and serviced over the initial years of the business. Eventually this plan will invite small business owners to spot glaring weaknesses and make changes when necessary.  The operational plan will also outline how the business will function. Information on ownership, investors, and directors are usually kept in Minutes and By Laws or Operating Agreements. The plan goes beyond this information by displaying an organizational chart and providing information for founders, key advisors, and hired salaries.

                The last key attribute of a well structured business plan is the financial analysis. Since the business has not officially started, business owners should make projections. Income and cash flow statements should be created on a quarterly or monthly basis for three to five years while balance sheets should be created on an annual basis for three to five years.  These statements will allow a business owner to see if the business is exceeding or falling short of expectations over time. Information of this nature allows owners to make marquee decisions on the direction of their establishment. Showing assumptions, developing a break even analysis, and estimating financial ratios and statistics can become the bottom line in realizing how effective one needs their business to be over time.

                The business plan outlines the structure of the company and the direction it will be heading. Even though a business plan is created during the initial stages of a business, it can be changed over time.  Understanding the products and services, market, structure, and financial obligations of the business will make you a savvy business owner. Creating an efficient business plan will not always lead to success but it will reduce the chance of failure by optimizing ideas, measuring performance, and increasing profits.

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Roth or Traditional IRA’s In Today’s Economy

Wednesday, September 23rd, 2009

When the Roth IRA was first introduced, it was expected that only the highest income individuals would contribute to it since their income tax bracket were not expected to decline during retirement.  Unlike a Traditional IRA, there was no current tax savings, but the earnings are tax-exempt, not tax-deferred, as with a Traditional IRA.

But now, with fewer tax brackets, many people find themselves already near the maximum rate and a Roth IRA may become a better deal than a Traditional IRA.  Even if you are currently in a low bracket, or have children in a low tax bracket, contributing to a Roth IRA is a good way to build up their retirement savings on a tax-exempt basis.

It is important to note that Roth IRA contributions are limited for higher incomes. If your income falls in a “phase-out” range you are allowed only a prorated Roth IRA contribution. If your income exceeds the phase-out range, you do not qualify for any Roth IRA contribution. The table below summarizes the income “phase-out” ranges for Roth IRAs.

 

Tax filing status

2009 Income Phase-Out Range

Married filing jointly or Head of household

$166,000 to $176,000

Single

$105,000 to $120,000

Married filing separately

$0 to $10,000

 

There are many calculators on the Internet that model the comparison between contributions to a Traditional and Roth IRAs.

Converting a Roth IRA

If you have a Traditional IRA already, you may want to consider converting that to a Roth IRA.  Why would you do that, since the conversion will be taxable? 

1)      If you are like many people, your IRA may have lost money in the last few years. Converting now may save you taxes in the long term if your account recovers..

2)      Withdrawals of your Roth IRA contributions are penalty and tax-free.  Withdrawal of earnings is also tax free, as long as you meet the rules for minimum holding periods.

3)      There are no required minimum distributions.  Distributions from a Traditional IRA must begin at age 70 ½ and will be taxable.  This will result in increasing the income counted in determining what portion of your Social Security may be taxable.

4)      Your heirs don’t owe income taxes on withdrawals.

5)      For planning your taxes on a yearly basis, having the ability to take tax-free distributions gives you the most flexibility to keep your taxes low.  

The big hurdle in converting to a Roth is your ability to pay the income tax on the conversion.  For the conversion to make financial sense, you will need the ability to pay any tax out of non-IRA assets.  If you have to dip into the IRA to pay the tax, you are reducing the tax-exempt aspect of the conversion.  In that case, you may want to consider converting a smaller amount.

Conversions are not for everyone because in 2009, if your adjusted gross income exceeds $100,000 ( married or single), you can not do a conversion.  But that is changing in 2010 when the income cap is being eliminated.  And, if you do the conversion in 2010, you can report the income in 2010 or you can spread the amount converted equally across your 2011 and 2012 tax return.

There are still a number of hoops you will need to jump through because you can not cherry pick which assets you want to convert.  You have to add all of your IRAs together and allocate any non-deductible contributions to come up with a percent for the total.

Suffice to say that if this is a possibility for you, consult your advisor before taking any steps. 

 

IRA Distributions

With a Traditional IRA, you may begin to receive distributions when you reach age 59 ½, without a penalty, or you can continue to defer distributions until age 70 ½ when you must begin a Required Minimum Distribution (RMD) program.  The amount of the RMD is based on an IRS Life Expectancy table.  Here are distribution percents for selected ages.

 

Age Distribution Percent
70 3.7%
80 5.3%
90 8.8%

 

The RMD for a year must be done by December 31 of that year, based on the account value as of December 31 of the prior year.  There is an exception for the year you reach age 70 ½.  In that year, the withdrawal date is extended to April 1 of the next year.  If you choose to use the April 1 date, you would also need to take a December 31 distribution for that same year, meaning that you would take two distributions in that year.  Depending on your tax situation, there may be some planning opportunities for you.

For 2009 only, the  RMD rules have been suspended. 

If an account owner:

1)      fails to withdraw a RMD,

2)      fails to withdraw the full amount of the RMD, or

3)      fails to withdraw the RMD by the applicable deadline,

the amount not withdrawn is taxed at 50%. The penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.

Please Note: You should contact your tax accountant to discuss your specific financial situation before making any decisions regarding Roth IRA/IRAs.

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