3 Tips for Getting an Accurate Business Valuation
If you're conscientious about financial reporting, you may already have a sense of your company's worth, but in some instances you might need a formal business valuation, such as:
There isn't a single formula for valuing a business, but there are generally-accepted measures that will give you a valid assessment of your company's worth. Here are some tips that will help you get a more accurate business valuation.
Should You Invest in Life Insurance?
The purpose of life insurance is to provide a source of income, in case of death, for your children, dependents, or other beneficiaries. (Life insurance can also serve certain estate planning purposes, which we won't go into here.)
Buying life insurance is contingent upon whether anyone is depending on your income after your death. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance.
Because life insurance protects your family in the event of a death, it is important to determine the correct amount. Most people do not have the right amount of insurance.
There are two basic types of life insurance: term and permanent. Term insurance is insurance that covers a specified period. If you die within this time frame, your beneficiary receives the insurance benefit. Term policy premiums usually increase with age.
Permanent insurance, such as universal life, variable life, and whole life, contains a cash value account or an investment element to the insurance.
Rules of Thumb
The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping, etc.). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance for the wage earner.
If there are no dependents and your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.
If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.
Give us a call. We'll happy to help you determine the correct amount of life insurance you need.
Employee Relocation in a Down Market
Many companies have questions about what to do with an employee's home when he or she is moved to a new job location, especially with the real estate market in a downturn throughout much of the country.
Typically, the employer wants to protect the employee against financial loss on a "forced" sale of the home. Here are the most common ways to do that, and their consequences to the employee:
The employer reimburses the employee's financial loss. Here the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee's costs of the sale.
If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). However, tax loss on the sale of one's residence is not deductible.
The employer's reimbursement of the employee's financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may "gross-up" the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket - more where Social Security taxes or state taxes are also grossed-up.
Employer buys the home. Few employers directly buy and sell employees' homes. But many do this indirectly, effectively becoming the homes' owners, through use of relocation firms acting as the employers' agents. An IRS ruling shows how to do this with no tax on the employee:
Option 1. The relocation firm as employer's agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which will cover sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee's gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).
Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm's fee and the gain is tax exempt under the above limits.
The Employer's Side
Reimbursing the employee's loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.
Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers, whose tax treatment wasn't covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.
Are you an employee who is being relocated this fall? Are you wondering about the sale of your home and the tax implications for you? We can answer your questions. Just give us a call.
A SIMPLE Retirement Plan for the Self-Employed
Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.
These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend time and high administration fees associated with more complex retirement plans.
SIMPLE plans really shine for self-employed business owners. Here's why...
Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.
SIMPLEs calculate contributions in two steps:
SIMPLE plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.
If living expenses are covered by your day job (or your spouse's job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.
A Truly Simple Plan
A SIMPLE plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules - in investment options, spousal rights, creditors' rights - don't have a lot new to learn.
Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.
What's Not So Good About SIMPLEs
Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE retirement plan.
Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will in practice have fewer investment options than if you were your own trustee, as you would be in a 401k.
It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.
If the SIMPLE plan is set up for a sideline business and you're already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE and the 401(k) combined (in 2011) can't be more than $16,500 or $21,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.
So someone under age 50 who puts $8,000 in her 401(k) can't put more than $8,500 in her SIMPLE in 2011. The same limit applies if you have a SIMPLE while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).
How to Get Started with a SIMPLE Plan
You can set up a SIMPLE account on your own, but most people turn to financial institutions.
SIMPLES are offered by the same financial institutions that offer IRAs and 401k master plans.
You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" - the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1.
Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.
Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.
401k, SEPs, and SIMPLES Compared
Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE plans.
5 Tips for Taxpayers Who Owe Money to the IRS
The vast majority of Americans get a tax refund from the IRS each spring. But what if you're not one of them? What if you owe money to the IRS?
Here are five tips for individuals who still need to pay their taxes.
If you owe the IRS money, give our office a call. We can help you set up installment agreements and other payment options.
What Income Is Nontaxable?
Generally, you are taxed on income that is available to you regardless of whether it is actually in your possession, but there are some situations when certain types of income are partially taxed or not taxed at all.
Here are some examples of items that are NOT included in your income:
Here are examples of items that may or may not be included in your income:
Please contact us if you'd like more information about what income is nontaxable.
Moving Soon? Let the IRS Know
If you changed your home or business address, notify the IRS to ensure that you receive any refunds or correspondence. Although the IRS uses the postal service's change of address files to update taxpayer addresses, notifying the IRS directly is still a good idea.
There are several ways to do this.
It's a good idea to notify your employer of your new address so that you can get your W-2 forms on time.
If you change your address after filing your return, don't forget to notify the post office at your old address so your mail can be forwarded.
You should also notify the IRS if you make estimated tax payments and you change your address during the year. You should mail a completed Form 8822, Change of Address, or write the IRS center where you file your return. You can continue to use your old pre-printed payment vouchers until the IRS sends you new ones. However, do not correct the address on the old voucher.
In 2011, if you give any one person gifts such as cash or property valued at more than $13,000, you must report the total gifts to the Internal Revenue Service. You may have to pay tax on the gifts, but the person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.
Gifts include both cash and property, including the use of property, without expecting to receive something of equal value in return. For example, if you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.
There is a lifetime maximum of $5 million and there are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit of $13,000 in 2011:
If you are married, both you and your spouse can give separate gifts of up to the annual limit of $13,000 each or a total of $26,000 in 2011 to the same person without making it a taxable gift.
If you're confused about gift taxes or need more information,we can help clear up the confusion. Contact our office today.
Tips for Recently Married or Divorced Taxpayers
Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration (SSA). A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.
If you have any questions related to your requirements to the IRS after getting married or divorced, or need help changing your name with the SSA, give us a call. We're happy to help.
Tracking Bills in QuickBooks, Worth the Effort
Next to payroll, paying bills is probably your least favorite task in QuickBooks. You don't have to use this feature -- you can keep stacking bills on your desk, scrawling the due dates on a paper calendar, and writing checks.
If you're still operating this way, though, you're missing out on the numerous tools that QuickBooks offers to track your accounts payable, including the ability to:
Receiving the goodsWhen an expense bill comes in (from a utility company, for example), click the Enter Bills icon on the home page, or Vendors | Enter Bills. A window like the one displayed above opens. Select the vendor and fill in the blanks. Make sure that the Expenses tab below is selected and the appropriate account number and amount fields are completed. If it's a bill for an item that already has a related Item Receipt (the shipment preceded the bill), QuickBooks instructs you to use Vendor | Enter Bill for Received Items. Follow the prompts. Note: Dealing with incoming inventory is complex. Consult with us if you plan to use this feature. If the bill came simultaneously with items, click Vendors | Receive Items and Enter Bill. When you select the vendor from the list, this box opens (if you have sent a purchase order):
Figure 2: QuickBooks is telling you that you have open orders with this vendor.
Click Yes. The Open Purchase Orders box opens, containing a list of open POs. Select the one(s) you want and click OK. The bill form opens, containing the details of that purchase order. Change quantities if they don't match the shipment, and edit other fields as necessary. Save the bill.
Settling your debtsIt's good to set reminders for bills. Go to Edit | Preferences and click Reminders. Make sure that the Show Reminders List...box is checked, then click Company Preferences. Find the Bills to Pay row and enter the advance notice you'd like. Indicate whether you want to see a list or a summary, then click OK. When bills are due, click the Pay Bills icon or select Vendors | Pay Bills. A window opens displaying all outstanding bills. You can pare this down by selecting a date in the Due on or before field and filtering by vendors. The screen will look something like this:
Figure 3: You can easily select the bills you want to pay.
Enter a check mark next to the bills you're paying, and change the amount in the Amt. To Pay field at the end of the row if necessary. At the bottom of the screen, you can set the payment date and type, use any discounts or credits, and make sure the correct payment account is selected. When you're done, click Pay Selected Bills. Tip: You can have credits and discounts automatically applied by going to Edit | Preferences | Bills.
After You've Paid UpThere are a number of places where your bills appear in QuickBooks, including:
Figure 4: QuickBooks displays the Paid status of bills.
QuickBooks also lets you void and delete bills, and copy and memorize them. Check with us before voiding and deleting, as this can make some complicated changes in your accounts.
You can just pay bills by using Banking | Write Checks or Enter Credit Card Charges. But the payoff for tracking bills is instant access to your accounts payable status, better relations with vendors, and a more insightful accounting of your company's cash flow.
Tax Due Dates for September 2011
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