Tax Tips
Tip A:
Be careful when using deductions such as depreciation, section 179, inventory write downs, capital losses, etc. to reduce your income. For many lower income generating taxpayers it may be beneficial to be less aggressive with these deductions. This is especially true in the case of a growing business or when taking these deductions aggressively creates negative taxable income.
Negative taxable income equals wasted tax deductions that may come in handy if they were available in the future.
For growing businesses and other taxpayers with dramatically increasing income it may make sense to maximize the use of the 10% and 15% tax brackets now as the income tax rates are likely to be higher in the future.
Ways to limit your deductions include:
• Electing to depreciate equipment over a longer period of time than that defaulted by tax code.
• Not taking the maximum Sec 179 deduction available
•Triggering capital gains on appreciated assets to offset capital losses in the current year.
• Not writing down suspected obsolete inventory until a later year.
• If a cash basis taxpayer, timing the payment of bills can defer deductions to the following year.
• If an accrual based taxpayer, not recognizing potential bad debts until they are actually known can defer those losses to a future year.
• This list not all inclusive. There are many tax planning strategies you can use to legally maximize the advantages in the tax code.
Tip B:
Just because you can write it off against taxes does not mean it’s a wise spending decision. You should always base your purchasing or spending decisions on whether or not they make financial sense. It doesn’t make sense to buy a $40,000 vehicle you don’t need just to save $5,000 in taxes. You’ll lose that $5,000 and more in depreciation the minute you drive the vehicle off the lot. You’ll also be spending $40,000 additional cash flow or using $40,000 in working capital that you may need for other things in the future.
Tip C:
The true tax deadline is December 31st of any tax year. You should always contact your accountant in November or early December to see if you are going to have any tax problems so you still can make moves to avoid heavy taxation. Don’t spend all your money for Christmas presents. You may need some if it to buy equipment for the upcoming year, give your spouse a bonus or prepay income taxes or real estate taxes, loans, etc.
Tip D:
Just because the car salesman tells you to buy it because you can write it off your taxes don’t mean it’s true. You should always contact your accountant to verify anything you “heard” on the street.
Business Tips
Tip A:
Have a business plan! The business plan helps you define what you want your company to look like in the future. Would you try to build a house without a blue print? No! Then why would you try to build a company without a plan. Before buying a business or starting one, put your team of experts together and consult with them. That team should include a good accountant, a good attorney, a good banker, a good insurance agent, a good investment advisor and anyone else who has the technical skills to lend assistance to you.
Tip B:
Most businesses lose money the first three years of operation, right? Wrong! Most successful businesses make money their first year in operation and move ahead from there. The three years of losses fallacy comes from the common practice of triggering an IRS audit if your business loses money three years in a row and does not shut down. Anytime a business loses money the business owner needs to be concerned.
Tip C:
When cash flow gets tight, pay the vendors who cry the loudest first, right? Wrong! When cash flow get tight, assess your vendors, lenders and other creditors and prioritize them first by necessity for the business to continue operations and second by net effective interest rate. The government cries the least about getting paid…at first, but often carries and highest of interest rates once penalties are figured in and, unlike vendors and lenders, many forms of tax debt cannot be eliminated in bankruptcy. Pay your employees, pay the government, pay the vendors you rely on, pay the lenders and then pay the vendors who don’t carry priority until your cash flows improve either by increasing sales or attaining long term financing to cover short term capital needs.
Tip D:
Know what your business is capable of. Don’t try to be a jack of all trades. Learn what it is your business can do better than anyone else, market it, excel in it and exploit it. You’ll become more profitable through efficiency because you will not be constantly learning new things for one time jobs and training employees accordingly.
Tip E:
Know your limits as a boss. Don’t be afraid to fire people if it is needed. However, high employee turnover usually leads back up the chain of command for who is really the problem. If you are not a good trainer, the employees are never going to be able to learn from you. That’s not to say you need to become a good trainer, but then you should consider hiring someone who can do it for you. An employee who cannot find any work to do is usually just not trained to do the work that can be found. Most employers want to attribute it to laziness. That’s true in some cases, but in most cases, I’ve found the employees really wanted to work, but just lacked the necessary skills to have the confidence to pick up the job and go.
Tip F:
Turnover is expensive. This is true when it comes to everything - employees, customers, vendors, professional alliances, etc. It is easier to take a second to listen and think through your comment than it is to speak in haste or anger and lose an important ally. We all have stress in our lives and it is very easy to snap at someone when the pressure gets to be too much, but it is wiser to walk away from the situation saying nothing at all. Return to the situation when you’ve had time to cool and collect your thoughts.
Tip G:
The customer is always right…some of the time. Good customer service is not about always giving into 100% of a customer’s complaint, but it is about handling a customer dispute courteously and professionally. Assess the complaint’s validity. If it is not valid, you’ll have to prove it conclusively. If you cannot conclusively prove it, then move for compromise. If the customer is right, give them whatever is rightfully theirs. Usually that’s their money back or replacement product. If you know they are scamming you, don’t be afraid to refuse a refund or replacement. Scamming is fraud.
Retirement Tips
Tip A:
It’s never too later or too early to start setting aside for retirement. The only difference will be the amount you’ll have available when you retire. Investing equal amounts every month, week or pay cycle is probably one of the most efficient ways to build retirement assets. This should be already start when you are 18 and continue even if you think you will not be able to afford it. The out of sight, out of mind philosophy works very well in building of retirement assets. If it comes out every week you learn to live without the excess income and will probably succeed at putting the money away for retirement.
Tip B:
Do not get caught up in the TV commercials telling you what to do with your retirement assets and how to invest. Contact an investment advisor and your accountant. Then the three of you should work through your strategy and goals so you can maximize your returns and minimize your taxes.
Tip C:
Are annuities bad? Annuities got a negative image due to atrocities committed by some greedy individuals in the past. That doesn’t mean they are evil and should not be considered as part of your retirement vehicle. They, like all things, have their place in a portfolio. They may not work for some people and work very well for others. It depends upon the situation.
Tip D:
You should have a mixture of Roth and Tradition retirement assets in your portfolio when you retire. Having all Roth assets defeats the purpose of the Roth tax avoidance in retirement. Having all traditional assets could mean you will pay more tax in retirement than would have been necessary. So which is the worst of the two situations? Having all Roth assets and no traditional retirement assets is worse by far because a retired taxpayer would be wasting thousands of dollars worth of free tax deductions every year they draw out their retirement funds. Essentially, it would mean they paid tax on money that would have come to them tax free in retirement. Always consult your accountant before converting traditional retirement assets into Roth assets and before adding lump sum amounts to your traditional or Roth retirement plan.
Tip E:
If you are giving large sums of money to charity and you are retired, consider making direct gifts from your retirement plan instead. A retirement distribution paid directly from the retirement plan to a charitable organization is tax free to you under current tax law. This is much more beneficial than taking money from your checkbook and trying to deduct the charitable contribution as an itemized deduction which most times will not generate as much tax benefit as a direct gift from the retirement plan.
Estate Planning Tips
Tip A:
Most taxpayers will never pay estate tax under current tax law. It would be worse if the estate tax is repealed than it is right now with the multimillion dollar exclusion. The thing most taxpayers have to worry about is losing their estate to the medical industry or the State because of care they received late in life. The largest atrocity today is the elderly are seeing their estates consumed by either the casinos or medical bills rather than being able to pass their hard earned assets onto their heirs. Estate planning should be started as soon as you have net asset value regardless of how young you are. Once the value of your assets exceeds the debts you have, you have an estate worth protecting.
Tip B:
We know we are going to die, just not when. Do you know what will happen to your minor children if you and your spouse or other biological parent is killed in a freak accident? You should have a will and any other necessary legal documents drawn up as soon as your first child is conceived to ensure your wishes will be carried out should the unthinkable happen.
Tip C:
Trusts are only for the wealthy, right? Wrong! Trusts are for everyone. Like any other estate planning vehicle out there, they have their place. They are not for everyone, but it isn’t determined by your wealth. It’s determined by your overall need. Yes, wealthy people probably should have trusts regardless, but people with very little wealth are the ones at risk of having nothing to pass along to their children should they need major medical assistance later in life. Irrevocable trusts, if structured properly, can be a good way to protect assets now so they cannot be eaten up by the medical industry later. Another time where trusts are good is in the situation of an irresponsible child or in-law you don’t trust. You can use the trust as a way to dictate beyond the grave how your child will receive and can use their retirement assets. You can also use the trust as a means to keep your child’s inheritance from being carved up for the in-law’s benefit should a divorce occur in your child’s future. You can designate pretty much anyone as a beneficiary of a trust just like you can from your will. It does not have to be a relative.
Tip D:
Passing your assets to your living spouse when you die rather than to other beneficiaries in many cases can be a very poor use of your estate planning. There are ways to pass your assets onto your beneficiaries through the use of a trust rather than through your living spouse that both protects your assets from your spouses future financial problems, should any occur, and protects your spouse from your beneficiaries should any unfortunate issues arise. |
