Your balance sheet and income statement can tell you a great deal about the health of your company - its past and perhaps even its future. Comparing operating results to prior periods is invaluable, as is comparison with other companies in your industry. This article will focus on operating results and industry data for you to consider.

Significant operating ratios

Current Ratio - this is essentially a measure of your company’s ability to pay bills as they come due. It is calculated by dividing your total current assets (cash, accounts receivable, inventories, short-term investments and prepaid expenses) by current liabilities (accounts payable, expense accruals, current portion of long-term debt). While there is no hard and fast rule as to what your current ratio should be, one of less than 1:1 is not desirable. The higher the ratio, the better off you are.

Quick Ratio - this is also a measure of your company’s ability to pay bills as they come due. It further refines the quick ratio by eliminating all but the most liquid of assets. In the calculation, prepaid assets and inventories are eliminated from current assets. In effect, it provides a measure of your company’s ability to pay bills immediately.

Days Sales in Receivables - this tells you how quickly you are collecting amounts due your company. This ratio divides the total receivables by average daily sales. Here is an example: you had receivables of $36,500 and annual sales were $365,000, so the calculation would be [36,500/ (365,000/365)] or 36.5. This number can fluctuate widely by industry.

Days Cost of Sales in Inventory - this tells you how well you are managing inventory. The calculation is similar to days sales in receivables, except the numerator is inventory and the denominator is average cost of sales. This ratio can also fluctuate widely from industry to industry. Inventory turnover is very closely related. For example, assume cost of sales is $3.65 million and inventory is $365,000. This means that days cost of sales in inventory is 36.5. Inventory turnover is $3.65 million/$365,000 or 10 times. You can reach the same ratio by dividing 365 days by the days cost of sales in inventory of 36.5.

Days Purchases in Accounts Payable - this tells how current your payables are. Calculated by dividing accounts payable by average daily purchases, this ratio, when compared to normal payment terms, will tell you whether you are paying your bills currently or not.

Debt to Equity - this helps you determine how well your company manages debt. The calculation is based on total debt, including normal trade payables, divided by your equity in the company. This ratio helps you determine how much of the company’s assets are financed internally and externally. This ratio can heavily influence company value.

Gross Profit on Sales - this tells you how much of each sales dollar is available to cover expenses other than the cost of acquiring or producing the item sold. This ratio is highly dependent on a company’s industry. The calculation basically subtracts cost of sales from sales. This number is then divided by sales.

Net Income to Sales - this tells you how well you manage your costs and expenses. Just like gross profit, this ratio can vary widely by industry.

Data sources

Your first and most important data source for operating statistics is your own financial statements. Prior months’ or years’ ratios compared to current results will help you understand if your operating philosophy is working. This comparison will allow you to see if the business is headed in the right direction or whether you need to change operations to achieve the results you want.

Secondly, many trade groups maintain operation data. Whenever possible, join appropriate groups and leverage their knowledge on how to run your business. Statistics maintained by professional or trade organizations are likely to be the most accurate. Be sure to obtain information about companies similar to yours in size and operations.

Outside data firms such as Robert Morris Associates and BizStats provide industry ratios - usually for a price. They provide high-quality information for a generally reasonable cost. You also might be able to get some information from your banker.

Effective review of your financial statements and comparison to your peers can be invaluable in managing your business.

In these difficult economic times, you might be asking yourself why anyone would start a business. With all the bad news, how could a new business possibly be successful? The truth is, with the right idea and a sound business plan, there is no reason you shouldn’t be successful. How do you know if your idea is the right one? How do you gauge whether your business has a good chance of success?The answer to these questions can be summed up in one word - research. To begin a new business successfully, you need to do a lot of research. You need to know the market for your product, the availability of materials and supplies you will need, their cost and, of course, what capital you have available to begin and sustain your business during the startup phase. While the task may be daunting, it’s not impossible and this article will explore a few things you can do to work toward building your new business.

Market Research

If you are seriously considering starting a business, you’ve probably done some preliminary research regarding the potential market for your product or service. Now it’s time to take things a step further and formalize your search.

To begin with, who will be buying your product or service? Will you be selling to the general public or will you be selling to businesses? Who are your competitors? How will you reach your target audience?

If you will be selling to businesses, you might want to contact some of the businesses you propose to serve and talk to them - this may be the best way to gauge the potential reception of your product. If your idea has been tried successfully in other cities similar to yours, ask those businesses what helped them succeed.

Determining the market for a retail business could be a bit more difficult. If you are working with a franchisor, you should be able to get advice from other franchisees.

You might also want to obtain information from the Bureau of the Census to determine how many businesses are in your area that could use your services and even the number of businesses you might be competing with. You can also find demographic information to see if your area has a population that will support your product or service.

Cash, And Plenty of It

One of the main reasons new businesses fail is that the owner doesn’t start with enough capital. One general rule is to sit down and forecast your need for cash and then double it. That’s because new business owners are excited about their products or services and think their target audience will be too, which is seldom the case.

You need to plan for two types of costs in starting your business. While you may think that the startup cost is the key expense to consider, your personal living expenses are far more important - you have to eat and have a roof over your head. If you don’t have enough money to meet your basic needs, the business won’t survive for long.

Create a budget of your personal living expenses. Include all the items you need to live including food, shelter, clothing, utilities and every other expense you incur on a monthly basis. Make sure your budget covers a year so that you will pick up those extra items that occur less frequently than monthly. It is very possible that your business will not provide enough income to meet your needs in the first six to twelve months and you need to have a plan to sustain you and your family.

After you know your personal living expenses, take a look at your resources. Do you have a spouse whose income will support you while the business gets off the ground? Are your savings sufficient to meet your living needs? Will you have to take a part-time job to keep the lights on until the new venture takes off? If you find that you can meet your personal needs, press on. If you are not at a point of having the resources to fund your needs, you may want to slow down on your business plans.

If you do have a plan to meet your personal living expenses, the next step is to look at the costs of establishing your business. Some typical costs will include advertising, inventories, employees, insurance, licenses, professional fees, rent and other expenses in addition to the cost of purchasing equipment and finishing out work or retail space. Many of these expenses will occur before you even open your doors. Therefore, plan on having enough cash on hand for from 90 days worth of expenses to as much as six months, depending on the business you intend to start.

Even after you open your doors, cash may not come in as fast as you assume. In your business planning process, be realistic about your sales. Unless you have firm commitments, err on the side of caution when forecasting sales. In many businesses, you will be required to sell to your customer on credit. Take into account the average time it will take you to collect receivables in your industry - the sale will not count for much until you convert it into cash.

Starting a business can be exciting, but it’s also a lot of work. Your keys to success will be starting on a firm foundation of knowledge about your industry and adequate startup capital. Many business owners have lost their companies because they forgot that cash really is king. If you are in the process of starting a business, give us a call. We can help with your planning process to minimize the likelihood of being undercapitalized.

Imagine This Scenario: Your company’s products have gained wide market acceptance - so much so, in fact, that backorders are piling up and customers are screaming. You decide it’s time to bite the bullet and build a state-of-the-art manufacturing facility at a cost of $5 million. It’s an opportune time to borrow because interest rates are at an all time low and the bank offers you a loan with a rate of prime plus one percent. You remember, however, what happened when you financed your home with an adjustable rate mortgage. It wasn’t a pretty sight.So, what do you do? Is there a way you can take advantage of today’s low interest rates while locking in a maximum long-term borrowing rate? How can you avoid the traps of a variable rate loan, yet take advantage of rates when they are low? One possibility to help you achieve your goals might be to use Interest Rate Caps, Collars and Swaps.

Interest Rate Cap

Interest rate Caps are perhaps the easiest to understand. Simply put, you pay the bank for an agreement that limits the maximum interest rate you will pay on your debt. This protects you in a rising rate environment, but does not prevent you from benefiting from lower rates in a falling rate environment.

For example, assume you take out a prime + 1% loan that is payable over five years and you think interest rates will go up during that period. Let’s say your initial rate is 9% rate. You also buy an interest rate Cap that limits your maximum interest rate to 11%. If the prime rises to 14%, in the absence of that Cap you would pay 15% interest on the loan. Since you bought the Cap, however, your rate will only be 11%. Suppose the prime rate drops to 4%. You benefit from the drop because the rate you pay will be 5%.

The price you pay for an interest rate Cap is determined by negotiation when the Cap is issued.

Interest rate collar

Just like you can buy an interest rate Cap to protect against rising interest rates, you can also purchase a “Floor” that limits the rate you pay on the downside. Unlike a Cap, you are the seller of a Floor and the bank from which you purchased the Cap is the buyer. By protecting against interest rate risk on the high side (CAP) and foregoing some benefit from a decrease in rates (Floor), you create a Collar by surrounding your risk with upper and lower rate limits.

Interest Rate Collars limit the cost of protection from interest rate increases, sometimes to nothing. Generally, a Collar can be sold back to the bank, but you could incur a loss.

Interest Rate Swaps

Interest rate swaps are contracts entered into by two parties where each party agrees to make interest payments to the other based on a notional or fictitious amount of principle. For example, if you want to enter into a swap where you pay a fixed rate of interest, say 5%, on $1 million to limit your exposure on a floating rate loan, in year 1 you would pay $50,000 in interest to the other party. The other party pays you interest based on the rates in effect during that same year.

The swap we just discussed is called a Fixed-for-Floating Rate Swap (same currency). Typically, the floating rate is pegged to widely quoted rate index; the most used being the London Interbank Offered Rate (Libor). This type of swap is generally used to convert a fixed rate asset or liability to a floating rate asset or liability and vice versa. Let’s look at how you limit the interest on your $5 million building. One strategy would be to enter into a Fixed-for-Floating Rate Swap (same currency). Beware, though, because there is a cost to entering into interest rate swaps - and a real possibility of losing even more in the long run.

You can also enter into a Fixed-for-Floating Rate Swap (different currency). In this case, you enter into the swap, but payments will be in different currencies. For example, you may pay a fixed 5% on a notional 10 million USD in exchange for a floating rate of Libor + .25% based on 7 million in British Pounds. Unless you are involved in international trade, you would rarely utilize this type of swap.

Another swap type is a Floating-for-Floating Rate Swap. In this type of swap, two different indexes like Libor and Tibor (3-Month Euro Yen Interest Rate) are used. To further complicate things, you can also create such swaps in different currencies.

Conclusion

This article is not meant to be an exhaustive discussion of ways to minimize your interest costs. Rather, it is meant to introduce the notion that you can limit your exposure to increased interest rates in the right circumstances. While there are many advantages to limiting your cost of borrowing, there are some very significant downsides to Caps, Swaps, Collars and the like. The bottom line is that you can lose a great deal of money if you don’t make the right decision going into the contract. Before you enter into any type of hedging instrument, give us a call. We can help you look objectively at the economics of the transaction and assist you in determining if the investment is right for you.

Starting a new business can be a harrowing experience, whether it’s a full time or part time venture. Tax planning must be part of your basic strategy. Many of the decisions you make when starting a business will affect your after tax profit, and therefore your personal tax liability as well, for many years to come. So it is a word to the money wise, to choose carefully when setting up your company. We’ve outlined below some of the choices you can make along with a few suggestions on which path to take.A regular C corporation is rarely the best choice for a start-up business. A pass-through entity such as a limited liability company (LLC), partnership, or S corporation is usually better. Here’s why. With an LLC or and S Corp.:

• Business income is taxed directly on the personal income tax returns of the business’s owners. Therefore, the owners avoid the double taxation created by a regular corporation, with the exception of salary. The business income of a regular corporation is taxed first at the corporate level and then taxed again on the owner’s level when funds are distributed.

• Losses, as may be expected during a start-up phase, are generally deductible on the owners’ personal returns.

• Taxes paid on the business’s income may be reduced by giving shares of the corporation to low-tax bracket family members.

Limited Liability Company
In most cases, an LLC is your best choice. It provides legal protection against personal liability for the business’s debts just as a corporation does, together with the flexibility of a partnership. A problem could arise if the LLC were funded by investors who are not material participants in the business. It is unclear whether LLC’s funded by investors who are not material participants would be subject to self-employment tax since Congress previously prohibited the IRS from issuing regulations to clarify the issue. It is possible that an LLC’s passive investor could incur an employment tax bill that would be avoided with another kind of entity.

Partnership
A partnership offers flexibility in allocating income and expenses among the partners. But at least one partner must serve as a general partner who is personally liable for the business debts.

S Corporation
This entity provides corporate protection against personal liability for all owners. However, it is subject to restriction on types of permissible shareholders, the maximum number of shareholders, and classes of stock that may be issued and others.

Sole Proprietorship
A sole proprietorship is usually a good fit for a small one-owner business. Its income is simply reported on the owner’s personal tax return. But it provides no legal protection against liability, so the owner should consider another form of organization if the business grows.

C Corporation
A C corporation can provide the most sophisticated tax favored benefit plans, but this is rarely a primary concern for the start-up stage of business. And, as the revenues and assets grow in value, it becomes harder to avoid the double taxation inherent in the structure of a C corporation.

Pass-through entity
It is much easier to convert from a pass-through entity to a C corporation than the other way around. So, starting a business as a pass-through entity will give you more planning options.

Personal Ownership
Valuable assets such as real estate may be best held by business owners personally, or through a separate pass-through entity, and be leased back to the business, especially if it is a corporation. This gives the owners another way of receiving funds from the business that aren’t subject to employment taxes. It also preserves their ability to finance or dispose of the assets for their own purposes. Each state has their own laws governing pass-through entities, so we recommend getting professional counsel.

In order to maximize business deductions, get the business operating as soon as possible. Start-up costs are not deductible as business expenses. They are capital costs. However, a business can elect on its first tax return to deduct start-up costs over a period of at least sixty months. Start-up costs are those incurred before a business begins operating. They typically include the cost of researching the business opportunity and of legally organizing the business. They may also include costs of travel, market surveys, training and advertising to build a market. Clearly separate your own expenses from the business’s. There is no clear test for when a business begins to operate. To be safe get the business running quickly.

If your new business is a pass-through entity and you are active in managing it, you can deduct your share of its losses on your personal tax return to the extent you have an interest in the business. If losses continue, and the business is a sole proprietorship, the IRS may conclude that you do not have a profit motive for running the business and disallow your deductions. Even if your business never has a profit, you can demonstrate a profit motive by running it in a business-like manner.

We hope that these suggestions are helpful, at least to point out to let you know that there are a number of ways you can go when setting up a business and that each path has it’s advantages and disadvantages, according to your needs.

If you have ever started a business with someone else, you might appreciate the old adage that “A partnership is like a marriage.” With the amount of time you spend working with your partner(s), the negotiating that’s necessary for a satisfying business relationship, and the dependence on one another for the common good, a business partnership is indeed similar to a marriage.Even with all the similarities between the two, there is one very important difference - marriages are born of love and business partnerships are a union of financial needs. Because business partnerships owe their lives to more material motives, partners could be more inclined to seek their own good above the interests of the business. To minimize conflicts, all business partnerships should be based on written agreements.

Partnership agreements set down the basic terms of how the business operates. At first glance, that may seem simple, but there are so many situations you and a partner may find yourselves in, you need a comprehensive agreement on the rules that will govern your relationship. This article will review a few of the basics to be covered when drafting an agreement.

A partnership agreement normally names the individuals who are involved in the business - and the business name. This can be as simple as combining the names of the parties involved or selecting another (fictitious) name entirely. Caution: be careful in choosing a name - if your business is a professional services entity, or is regulated by some other licensing board, you may be limited in what name you can use.

A partnership agreement should spell out the initial responsibilities of the partners for capitalizing the union. Often, the parties wish to have equal contributions of cash (or cash and property). Sometimes, however, one partner or group of partners puts in cash and/or property while another partner or partners primarily contribute expertise. Regardless of the initial contributions to capital, it is important that the agreement sets forth each partner’s obligations.

Another very important provision is the allocation of profits and losses. Some partnerships choose to allocate profits equally amongst the partners, but more often than not, these allocations are more complicated. In order to prompt individuals to work for the good of the business, it is sometimes necessary to base the division of income on the factors that drive the profitability of the company (example: you may wish to reward the partner responsible for business relationships more than the partner responsible for administrative duties). Whether you choose to make the allocation of business profits simple or complicated, the best way to protect your relationship and company is to have a clear understanding of how proceeds will be allocated at the outset.

How is each partner going to pay his or her own living expenses throughout the year? Will it require periodic withdrawals of partnership funds - or is the partnership other than the main source of income for a partner? Is the agreement designed to pay profits only at year-end? While allocation of profits among partners is extremely important, it is also essential to specify how each party will realize those profits in cash. Be sure to spell this out at the inception of your relationship rather than wait for a conflict to make the decision for you.

What are the duties of each partner? Just as in marriage, each person enters a partnership with his or her own set of expectations. One partner may be very effective at marketing and another may be a financial whiz. Having a clear understanding of duties could limit conflict over the roles of each owner.

How will you make partnership decisions? Some partners prefer to vote on everything, while others only wish to vote on “significant” issues. For this reason, it is important to identify and state those issues on which a vote is required and those where the individual partner has discretion. If you choose to vote only on significant issues, you need to spell out what constitutes a “significant” issue. This area should also address the authority of the individual partners to act on behalf of the partnership. Can a partner act unilaterally to commit the partnership to contracts or agreements - or does it take more than one to do so?

Admission of a new partner is another key item in drafting an agreement. Hopefully, the business you are starting will grow to the point where you might want to add a new partner, but what will be required for the person to advance to that rank? Will it take a certain level of business? Will the level of business be based on the prospect’s customer servicing - or will it simply result from an overall increase in the company’s business volume? How many of the existing partners must vote in favor of admitting a new member? The life of your business after you retire could depend on the answer to these questions.

As important as admitting a new partner is, the provision of a mechanism for partners to withdraw or retire from the business is equally so. Putting a withdrawal and/or partner buyout strategy in the body of the agreement will make life much easier, when the time comes, by spelling out the major terms for each partner’s withdrawal from the company.

Partnerships are a lot like marriages - they put two people in a close relationship that will govern their lives during the term of their union. If you are looking into starting a new business, or have a business without an agreement covering the terms of your partnership, now is the time to create a document that spells out the rights and responsibilities of each partner.

President Obama’s budget for 2011 will bring yet more scrutiny of businesses that use independent contractors to minimize labor costs. This year the IRS will audit 2,000 companies for compliance. If the 2011 budget is approved, the Internal Revenue Service will get the green light to add 100 more enforcement officers over a three-year time period. According to White House projections, Federal coffers will gain $7 billion over a 10-year span as IRS auditors crack down on companies that have misclassified employees as independent contractors and collect employment taxes and penalties from the businesses involved.The IRS selects companies by statistical sampling, and small businesses are just as likely to be audited as large corporations. The contractor crackdown follows several other policies designed to collect an estimated total of $350 billion, which the President believes is the shortfall created by noncompliance with tax laws. If you think the classification of your employees could be wrong, contact your tax professional as soon as possible. Don’t take any chances. The tax code is vague, the IRS’ assessments are hard to predict and penalties accrue daily.

Workers in the United States are usually employees or self-employed workers - otherwise called contract workers. The contractor tax issue is not new; neither are the problems that occur as companies try to classify their workers correctly. Problems arise because there is no clear, universal definition of what constitutes a contract worker. The IRS’ own reclassification frequently is made years after a worker has been hired. The determination is made based on how much control the individual has over the scope of the job and the worker’s exposure to costs and risk. For example, if a worker is required to come to the employer’s place of business to work and be present for specific hours on specific days, he or she would most likely be classified as a payroll employee. High-tech consultants, home healthcare workers and construction workers are among those who are misclassified the most. If the IRS decides that a contract worker should have been classified as an employee, it could impose significant back taxes, interest and other penalties. These can be substantial and are owed to the IRS even if the contract workers paid their taxes in full.

The punitive nature of penalties has caused many employers to convert contract positions into payroll employees - even though contractor labor might provide savings of up to 30 percent on labor costs. Companies do not pay Social Security, Medicare, sick leave, etc. for contract employees.

The technology sector, where the use of independent, self-employed contractors is especially common, has seen a wholesale shift from contractors to employees. Unlike other sectors where contract workers often would prefer the health and other benefits of payroll employment, technology contractors were willing to forgo employer-provided benefits for the chance to grow their own business and make money. These opportunities began to dry up a decade ago when industry leaders were found guilty of misclassification and hit with big fines. Microsoft paid $6 million in employment back taxes and penalties in 2000 when an IRS team discovered 12,300 cases of misclassification.

If contract workers are a part of your workforce, don’t gamble on avoiding an IRS review. Get help now to make sure you stay on the right side of the tax laws.

We spent a great deal of time discussing how to start and grow a business, but what happens when you want to slow down or retire? Unless you have developed a workable exit strategy, you could be in for a rude shock when it’s time to leave.

Another term for developing an exit strategy is succession planning. It is the process whereby one generation of business ownership/management determines when and how to pass the baton to a new generation. It is important to note that generation in this context does not refer to age, but rather to a new ownership group.

In order to develop a viable succession plan, current management/ownership must first identify what life cycle the business is in. Is the company young and just getting off the ground? Is the business in a growth phase or has it reached its maturity? Knowing the company’s current position will help identify its needs if current management suddenly becomes incapacitated.

Once you have a clear understanding of where your company stands, you must then develop a vision of where it is headed. This is critical if you want the company to support the buyout of your interest by future owners. With a firm vision in mind, you can begin to position a new management/ownership group to take over when you retire.

There are a number of exit strategies you might consider:

Close the Doors
This is where you simply sell the business assets and go home.

The Buy-Sell Agreement
You and your partner(s) agree on a fair price to pay when one party wants to leave the business.

The Family Sale
With this approach, you simply pass on the ownership/management of the business to family members through a sale of your interest in the company.

The Third-Party Sale
Another company or unrelated individual purchases your ownership interest.

Employee Ownership
With this strategy, you sell the company to one or more key employees, perhaps even to the entire employee group.

The Drop Dead Strategy
Believe it or not, there are business owners who expect to work in their business forever and do not take time to develop a plan to ensure business continuity. This is not a viable or desirable exit strategy.

Except for the Drop Dead Strategy, there is a common thread running through all of these exit plans: you need to have the right people in place to carry out the transition. This means you need to recruit your successors early in the life cycle of the business. Then you must create a development plan to help them reach their full potential and design a compensation plan to retain them. It’s unlikely you’ll keep everyone you recruited to form the backbone of the company once you leave, and that’s why it’s crucial to begin your talent search early.

There are other key ingredients that are necessary in order for you to exit your company when you are ready. These ingredients include a business model that works; an industry for which there is a product demand; and a buildup of customer satisfaction/loyalty. Furthermore, successful implementation depends on having seasoned managers who will help guide and build the business along with you.

So, do you have a good exit strategy? Take a look around you and ask yourself, “If I left today, would the business continue?” If you can answer “yes” to this question, congratulations! You have positioned your company to move into the future. If you are uncertain or your answer is “no,” give us a call and let’s talk about your next steps.

Don’t assume that your business is too small to merit the attention of a hacker. These crooks don’t care how big or small your company is. When it comes to stealing financial information – especially customers’ credit card numbers – the incentive remains the same. Business owners are vulnerable in two arenas – their Web sites and their networks. Here are some tips to protect your company from cyber crooks.

E-Commerce
Hackers often use automated programs to capitalize on a flaw in common software that is used by thousands of computer users. Using this indiscriminate method, hackers want to reach and infect as many webpages as possible, planting something malicious that will get picked up by visitors to the site. Websites run by smaller companies with less security savvy are often considered easy targets for this type of criminal activity.

As if dealing with fixing the infected site is not enough, business owners could end up blacklisted by major search engines (Google, Microsoft, etc.), which means customers who find your name through a search will receive messages warning them that your site is not safe. How much business is lost when a website loses customers’ confidence? Fixing the problem is only the first step. Corrupted pages must be identified and reinstalled with clean pages, and security gaps have to be closed. Then you can ask Google for a rescan to get your site declared clean and removed from the blacklist. Time-consuming recovery procedures can kill a new business. Prevention must be in place. Obviously, no prevention plan can be 100 percent guaranteed, but make sure you follow up on these tips:

Ensure your web hosting company is taking care of your security.
Most commonly used software is frequently the conduit used by crooks to infect your site. For example if you use a blogging program, make up strong passwords and keep them closely held. Educate staff regularly on the importance of keeping passwords a secret.

Not Always Technology
It is not always weaknesses in technology that allow hackers to get into your network. Increasingly, employees are the weakest link. Employees whose loyalty to your business is unquestioned are often the chink in the armor. Here’s how this breach occurs:

Crooks identify people likely to have access to administrative system programs. It is not too hard to do this using social (Facebook) and job networking sites (LinkedIn). When the hacker has the target employee’s email or instant messaging information, the cyber crook has a number of methods available to hijack the target’s computer and gain access to the network with a virus or a bot.

It is worrisome – given the millions of people who use social networking sites – to note that hackers are increasingly using social networking as a key element in their attacks on secure networks. Staying current on cyber crime continues to be an increasingly difficult job.

If you need assistance in protecting the risks in your organization, contact Tene at the CPA firm of McConnell & Jones — 713.968.1600 or smallbusinesssolutions@mjlm.com

The House of Representatives passed two bills that reform the health care system and have an impact on most employers and taxpayers. First, the House passed the Patient Protection and Affordable Care Act (“the Act”), which was signed into law by President Obama on March 23, 2010. Second, Congress has approved the Health Care and Education Reconciliation Act of 2010 (“the Reconciliation Act”), which amends the aforementioned health care act. We expect that the President will sign the Reconciliation Act in the near future.

As you are aware, this legislation is intended to result in an extensive overhaul of the health care system. This alert provides a brief overview of its effects on you from both a business and tax perspective. (Additional guidance will be issued as the legislation is further analyzed.)

What does health care reform mean for your business?
Beginning in 2014:
If you have 50 or more full-time employees, the Act does not require you to offer health insurance, but without it, you will incur large fees. Here are the rules and some caveats:
• If you have 50 or more employees, do not offer health insurance, and at least one of your full-time employees gets a subsidy from the federal government to purchase health insurance on his own, under the Reconciliation Act you will be charged a fee of $2,000 for every full-time employee. You can subtract your first 30 employees from this assessment; so if you have 50 employees, you would be charged based on 20 employees.
• Even if you offer coverage, you may incur additional costs for workers who opt out of your coverage and choose to buy their own. If you have an employee whose share of the health insurance premium is more than 8 percent of his/her income (but less than 9.8 percent), he has the option of buying insurance on his own through newly created insurance exchanges. Even though he opted out of your plan, you would have to subsidize the plan he purchases from the exchange with an amount equal to what your company would have paid for him if he had remained in your plan.

If your company has more than 200 employees and provides health insurance, you must automatically enroll them in your plan.

If you have fewer than 50 full-time employees, your business is exempt from penalties if you do not provide health insurance.

What taxes are increasing to pay for this?

The Medicare portion of the FICA tax is being increased from 1.45 percent to 2.35 percent for an individual earning more than $200,000 a year and married couples earning more than $250,000 a year.
• Planning Consideration: Many companies have deferred compensation plans. The regulations for these plans offer some latitude as to when the value of an employee’s deferred compensation is recognized for FICA purposes. If you have such a plan, you should analyze whether it makes sense to accelerate the recognition of income before the effective date of this increase.

Under the Reconciliation Act, a new 3.8 percent tax applies to unearned income, again for individuals with more than $200,000 in modified AGI and married filing joint taxpayers with more than $250,000 in modified AGI. Unearned income includes items such as interest, dividends, royalties, rents, and capital gains. However, it also includes business income arising from passive activities.
• Planning Consideration: Depending on the structure of your closely held business investment, you may be able to materially participate in the activity without incurring self-employment taxes on the related business income. This may involve regrouping your activities if they are conducted through multiple partnership or LLC interests, or operating through an S corporation.

Manufacturers of medical devices will incur a 2.9 percent excise tax on the sale of their products.

The preceding changes will be effective in 2013.
Tax on “Cadillac” plans. Health insurance plans that cost more than $10,200 annually for individual coverage or $27,500 for family coverage will be subject to a 40 percent tax based on the cost of the plan. This provision becomes effective in 2018.

Are there any tax benefits available for companies providing coverage?
Small Business Tax Credits will be available. Generally a small employer is one with fewer than 25 employees and average annual wages of less than $50,000 per employee. In years 2010 through 2013, such employers may qualify for a tax credit of up to 35 percent of their contribution toward an employee’s health insurance premium. In 2014 and beyond, eligible small employers that purchase coverage through a state exchange may qualify for a credit for two years for up to 50 percent of the premium/contribution. Any portion of the premium funded by an employee’s salary reduction contribution is not included in the amount eligible for the credit.

Visit www.mcconnelljones.com to keep current with health care reform as these changes are implemented and guidance is issued.

This year’s tax filing deadlines will be here before we know it. Here’s an update on new deductions and some unresolved issues that might affect your tax bill.

The Federal Estate Tax Conundrum
The 2001 Federal Estate Tax was scheduled to expire in 2010. Surprisingly, Congress has done nothing to extend or revise the provisions yet. This leaves us with the current generous estate tax exemption of $3.5 million in place for people who die this year. There remains a big question mark, however, concerning tax penalties for those who die after the law expires. Changes will be forthcoming, but at the moment no one knows what they’ll look like. Pessimists fear a return to punitive estate taxes, and others hope that any future provisions won’t eliminate the current exemption rate. If you have a tax-saving estate plan in place, visit your tax professional to see how this situation might affect you and if there are any reasons to change your estate plan strategy now.

Tax Breaks for Education Costs
First of all, the rules concerning tax breaks for education expenses have not become any less confusing. Self-employed taxpayers are allowed to take qualified education expenses that are related to their current business. Take care in determining what constitutes a qualified expense. An undergraduate degree is not covered because the IRS considers this to be preparing you for a new career rather than improving your existing skill set. Based on recent tax court decisions, MBA qualifications do count if the additional academic credentials will help you in your current job. Bear in mind that you might be eligible for a variety of types of tax breaks and it is possible that you will qualify for more than one tax perk for the same expense. To figure out how best to handle your situation, consult your professional tax adviser.

Automobile Expenses
If you use the standard mileage deduction to claim automobile expenses, you probably know that the rate (since Jan. 1, 2010) has declined to 50 cents per business mile driven — down from the 55 cent rate in use for 2009. The IRS believes that gasoline and other costs are less than they were last year. You might consider using the alternative actual expenses method rather than the standard mileage method. Most business owners get a better break by using actual expenses. The down-side is that you must have records to show what you have paid to operate your car — costs that might include gas and oil, repairs, standard maintenance, license fees, etc. You are required to deduct a percentage from your claim based on your personal use of the vehicle. If you prefer the simpler standard mileage method, don’t forget you are still required to keep a record of how much mileage involved business.

Business Entertainment
Only 50 percent of entertainment expenses — the cost of entertaining clients or customers for business reasons — is deductible according to current IRS regulations. Sports events, restaurant meals and even concerts or plays can be considered legitimate business entertainment. In the event of an audit, you will need records showing who was entertained, the business topics addressed and the guests’ business relationship with you. Employee events — annual picnics or holiday parties — remain 100 percent deductible, and you are not required to support the deduction with an explanation of possible business benefits.

As always, the following observations are general guidelines only and are no substitute for individual counsel from your tax professional.  Email your questions to Tene at smallbusinesssolutions@mjlm.com or visit www.mcconnelljones.com