Business Valuation and Strategy

Posted on October 7th, by Janice in Business No Comments

In business and investing, strategy is key. Any action taken in your business and investing must be part of your overall strategy.

As a business owner and investor, I know first hand the hundreds of distractions that come up daily. This is why it is so important to have a strategy that clearly identifies where your focus should be.

Let’s say your goal is to sell your business in 10 years for $10 million. Everything you do between now and then should be tied to achieving that goal.

To reach your goal you must develop a strategy that will get your business or investing to the targeted value.
Here are the first 2 steps to develop that strategy:

Step 1 – Develop Your Strategy
The first step to developing your strategy is to understand how your business is valued.

I can’t count the number of times I’ve met with business owners who wanted to sell their business but had no idea what the value of their business was – other than a number they had in their head (and the actual value was usually 50% less than that number).

Every industry has its own valuation techniques. Of course, it matters whether you are planning to sell to employees, another business, a public company or whether you plan an IPO (“initial public offering”). But, there are fundamental rules in every industry.

Take the time now to find out what the rules for valuation are in your industry. General rules of thumb can be found through industry associations, business brokers or on the internet. For more precise information, you can hire a qualified business appraiser to do a business valuation of your business.

Once you know how your business is valued, you can focus on the specific factors that positively impact the value of your business. Reporting can help you do this on a regular basis – without having to spend a lot of time on it. Simply design a set of reports that tell you how each factor is progressing and the impact on the value of your business.

Step 2 – Develop Your Business to Run Without You
What you will find out in Step 1 is that the most valuable businesses are those that can run without the owner being there.

If you have to be there every day, how will a new owner take over? Many business owners are their business. They are the face, the name, the production, sales and marketing of their business. Businesses like this struggle to produce much income because there is very little leverage.

Leverage in a business comes from many sources. The most important source is the business systems. When a business has proper systems to run the business, the owner can spend his or her time managing the systems instead of managing the people. Managing systems is not only more efficient then managing people, it also takes less time and effort and produces greater profit.

Are you taking the right action in your business and investing?
Think about the actions you will take in your business and investing today. Do these actions get you closer to your goal? Or are they really distractions that are stealing your focus?

Your Tax Strategy: Where to Start?

Posted on September 15th, by Janice in Business Taxes No Comments

There are two big obstacles most people run into when forming a tax strategy.

Obstacle #1: What is a tax strategy?
Obstacle #2: Where do you start?

What is a Tax Strategy?
Let’s break this term down and start with strategy.

A strategy is a systematic plan of action intended to accomplish a specific goal or purpose. The specific goal or purpose is to permanently reduce your taxes.So, a tax strategy is a plan of action to permanently reduce your taxes.

Of course, most people are all for permanently reducing their taxes. What is typically missing in their quest to do that is the strategy piece. And it’s the strategy piece that produces the maximum results.The strategy piece helps focus our actions and thoughts every single day on permanently reducing taxes.It doesn’t have to take hours every day to get maximum results from your tax strategy. Instead, your strategy becomes a part of your daily routine.

Every transaction you do can have an impact on your taxes. Your tax strategy helps you think about your daily transactions in a way that gets you to your goal of permanently reducing your taxes.

Where Do You Start?
Think about planning a vacation. Let’s say you are going to Hawaii. When you go to book your ticket, you need to know where you are departing from, right? This is your starting point. It is impossible for you to get to Hawaii unless you know where you are starting.

The same applies to a tax strategy. You must know where you are starting. In your tax strategy, this means you must know your current financial position.

Your current financial position includes your current balance sheet.
Your current balance sheet tells you your current net worth. It’s calculated as follows:

Your Assets (what you own) – Your Liabilities (what you owe) = Your Net Worth
When you know your current net worth, you know the exact resources available to you to use in your tax strategy. Your specific assets and liabilities help create the best path for you in your tax strategy.

Your Current Statement of Cash Flows
Your current statement of cash flows tells you your net cash flow. It’s calculated as follows:

Your Income – Your Expenses = Your Net Cash Flow
Identifying your sources of income is the starting point of identifying how to reduce the tax on that income.
Identifying your expenses is the starting point of maximizing your deductions.

Get Started
The starting point to reducing your taxes and forming a tax strategy is understanding your current financial position.If you haven’t created your tax strategy yet, start by updating your balance sheet and statement of cash flows.If you already have your tax strategy in place, review your current financial position regularly to identify new opportunities for your tax strategy.

Your Tax Strategy and Your Wealth Strategy
If you are like most, the single biggest expense draining your cash flow is your taxes.When you reduce your taxes, you immediately increase your cash flow. Increased cash flow can be used to create wealth. Your taxes are a powerful way to feed your wealth strategy!

Maximize Tax Savings with Good Bookkeeping

Posted on August 30th, by Janice in Business Taxes No Comments

Bookkeeping is one of the most powerful tools when it comes to maximizing tax savings. It’s where the activity gets captured and when done properly, it can capture additional tax savings.While bookkeeping is often viewed as a necessary evil, it has the ability to give your tax strategy a boost in many different ways. Here are just a couple of those ways:

#1: Bookkeeping Captures What is Often Missed
When I look at a new client’s tax return, I often find that deductions are missed or understated. The most common are:

• Home office
• Travel
• Vehicle
• Meals & entertainment

These deductions are missed or understated because there is no system in place to capture the information. Bookkeeping is this system.

Let’s use the home office as an example. Some of the expenses related to a home office include:

• Mortgage interest
• Property taxes
• Utilities, including water, gas, electric, sewer
• Pest control
• Security
• Association dues

While many people capture some of these expenses, it’s rare to see all of these expenses captured. Most people capture the big items – mortgage interest and property taxes – but usually miss the smaller items. These smaller ones can really impact the tax savings because these expenses create permanent tax savings.

The expenses listed above are all paid personally. Keeping a set of books for your personal finances can really pay off in the form of additional tax savings. Any time you pay a bill that relates to the occupancy of your home office, code it accordingly in your personal bookkeeping.

Doing bookkeeping for your personal finances can also help identify expenses you may not have thought to include as part of your home office or other tax deductions.

#2: Bookkeeping Captures the Timeline
A very powerful form of permanent tax savings comes from how you pay yourself from your business. Many times there is a delicate balance between distributions and salary and using the right amount of each is what creates permanent tax savings.

This makes distinguishing the two very important – especially given that these amounts will be scrutinized if audited.

Your bookkeeping documents two key factors related to distributions and salary:

• The amount
• The timing

Your bookkeeping is a fantastic tool to track how much you have paid yourself in distributions and how much you have paid yourself in salary. Even more important, is the timing of your distributions and salary.Think about when you pay your employees. Is it a set period or is it whenever you feel like it? Of course, it is a set period. The salary you pay yourself should also follow this pattern. Your bookkeeping captures this pay period pattern, helping to support your salary as part of the company’s normal payroll.

Now, think about how large corporations pay their shareholders. Typically, dividend distributions are quarterly or annually. Your distributions should follow a similar pattern. Your bookkeeping provides documentation of the actual timing of your distributions which is very important in your tax planning.

Good bookkeeping is a necessity if you want to maximize your tax savings. This includes bookkeeping for your business, as well as, bookkeeping for your personal finances.

5 Under-Utilized Tools to Protect Your Wealth

Posted on August 15th, by Janice in Wealth No Comments

A successful wealth strategy not only builds your wealth, it also protects your wealth. There are several wealth protection tools I see under-utilized in a wealth strategy. Here are a few of those tools:

Tool #1: A Tax Strategy
Building wealth is not about what you make, but what you keep. The average taxpayer spends 2.5 hours a day working to pay their taxes. Without a tax strategy, taxes can easily drain a person’s wealth and their ability to build wealth.

A tax strategy that legally reduces your taxes protects your wealth by keeping more of it in your pocket. And, a properly designed tax strategy will protect your tax savings by having you well-prepared for an audit.

Tool #2: Estate Planning
It’s a shame to see someone build incredible wealth during their lifetime only to see it diminish when they die due to poor estate planning. The hits to a person’s wealth can come from many different directions: estate taxes, probate fees, attorney fees and assets not being passed how they were intended (just to name a few).

The good news here is that basic estate planning can add a great level of protection to one’s wealth.

Tool #3: Reporting
If you hate reporting, then odds are you are not getting the right reports.

Reporting should report the activity YOU want. There are no specific rules that must be followed – it is based on facts, figures or data you want to help you make decisions to grow your business and your wealth.

The right reports tell you when you need to take action in your wealth strategy. Taking action at the right time protects your wealth. For example, if your reporting indicates that the cash flow from your business is on a downward trend, you can protect your business (and wealth) by addressing the issue immediately. Waiting too long, or not acting at all because you don’t have the reporting to tell you there’s an issue, could be detrimental to your business.

Tool #4: The Right Team Members
Every team member should be pushing your wealth strategy forward and not keeping it from moving forward. Are your team members deal-makers or deal-breakers? Do your team members start their responses with “Here’s how you can do that?” or “You can’t do that?”

The right team members protect your wealth by enabling you to leverage their expertise into your wealth strategy to move your wealth building forward while avoiding costly mistakes and distractions.

Tool #5: Agreements
When you hire an attorney, you usually sign a letter agreeing to certain terms. Or, if you have a partnership, you probably have a partnership agreement with your partner.

These agreements protect your wealth if your relationship goes south. The most important time to have your agreements in place is before things go bad; if you wait until things go bad, your wealth is not protected.

Think about the people you interact with in your business or investing. What types of agreements do you have with them? Are expectations clear on both sides?

I find most people are investing and running their businesses without the proper agreements in place.

Protect Your Wealth
Many people are anxious to start building their wealth right away – so much so that they rush out and jump right into an investment. I love this enthusiasm. I like to redirect that enthusiasm into creating the wealth strategy first. A properly built foundation can save years and years when it comes to building wealth.

If you want to learn more about how to take advantage of these tax strategies; sign up on our web site or email us for an appointment to get started today.

A Better Way to Reduce Taxes

Posted on August 6th, by Janice in Taxes No Comments

“I know there has to be a better way.”

This was a line in a form submitted to me a couple years ago and it still sticks with me.

The person was inquiring about how my team and I may be able to help this person reduce their taxes. This person shared that they were paying a lot in taxes and that their current tax advisor gave them the following advice:

1. Increase their withholding (so they pay in more taxes throughout the year)

2. Make less money (so they have less money in their pocket at the end of the day)

This is the worst advice I’ve heard and sadly it wasn’t the first time I had heard it – I still hear it at least once a month.

There are so many things wrong with this advice:

When your advisor’s solution is to make less money, you need a new advisor.

Your tax advisor should be leading the way with new ideas to reduce your taxes and put more cash in your pocket.

No country has a 100% tax, so making more money still means you are making more – even after taxes.

There is always a way to reduce your taxes, regardless of your situation.

As I like to put it, if you want to change your tax, change your facts. Your advisor’s role is to tell you what facts need to change and why. Your role is to make those changes happen.If you are willing to change your facts, there is always a way to legally reduce your taxes.

Change your taxpayers, change your tax

There are legal ways to add taxpayers to your tax strategy. With additional taxpayers come additional tax brackets – many of which have a nice set of low tax brackets that you can legally use. These additional taxpayers could be an entity, your children or other family members.

Of course, you don’t just want to give your income away solely to reduce your taxes. But, there are many situations when it can work with your tax goals, wealth goals and personal goals.

Change your wealth strategy, change your tax

Changing where your income comes from will change your tax. Certain types of income come with tax benefits whereas other types of income come with the highest tax rates. These are just two examples – both of which can provide huge tax savings and, like I said, these are just two examples.

There is a better way!
The best person to reduce your taxes is you. You are in control of all your facts and that is the key to reducing your taxes.

To do this, you’ll need education and a strategy. A good tax advisor can provide these. With these in place, there is a better way.

If you want to learn more about how to take advantage of these tax strategies; sign up on our web site or email us for an appointment to get started today.

Your Mid-Year Tax Strategy Checklist

Posted on July 30th, by Janice in Uncategorized 11 Comments

We are just over halfway through 2014 and that means it is time for a mid-year tax strategy check up.

Mid-year is a critical time when it comes to tax planning. Enough of the year has gone by that you have a good idea of how the year has been and there is still time to make changes. Below is a checklist I like to share every year. It covers the actions you can do mid-year to make sure your tax strategy is on track.

Check Up Point #1
Do you need to add an entity or change how an entity is taxed in your tax strategy?

Entities are one of the greatest tools to reduce taxes. Knowing the right time to add an entity and knowing the right entity to add can save as much as $10,000 per year in taxes. However, the entity needs to be in place in order for the tax savings to occur.

When I create a tax strategy with a client, it’s not uncommon for an entity to be created knowing that once it reaches a certain level of income, an election will be made to change how the entity is taxed. Missing this election or not making it at the ideal time can be a very costly tax mistake.

Now is the time to look at adding an entity or changing how one of your existing entities is taxed. Waiting any longer could minimize the tax savings for this year.

Check Up Point #2
Are your entities paying you the optimal amounts to minimize your taxes in your tax strategy?

Optimizing how you take money out of your entity is another effective way to reduce your taxes. The amount that is taken and how it is taken can have a huge impact on your taxes. It can also get the unwanted attention of the government.

Now is a good time of year to check in on how your entities are paying you because if changes need to be made, there is still time left in the year to make those changes without having to do one big adjustment at the end of the year.

Check Up Point #3
Is your documentation in place?

Documentation is a great way to successfully get through an audit. It is also a great way to increase your tax deductions because proper documentation leaves less room for deductions to get missed. Documentation includes keeping proper receipts, keeping mileage logs for your business vehicle and keeping hour logs if you claim real estate professional status.

Documentation is best when it is kept current. An auditor can usually tell when someone has gone back and created their documentation after-the-fact. Don’t get behind with your documentation – now is the time to get caught up.

Check Up Point #4
Have you been reimbursed for expenses you’ve paid personally?

Commingling business and personal funds is never a good idea. It can jeopardize the legal and tax status of your business.

To avoid commingling of funds, it’s best to pay business expenses with business funds and personal expenses with personal funds.

There is one exception to this and that is business expenses paid by you personally. It is a common business practice for a business to have a policy in place to reimburse employees or owners for certain expenses. Common examples include lunch with a client or travel for business purposes.

If you have paid for any business expenses personally and have not been reimbursed, it’s time to submit that expense report and get paid. These expenses are easy to forget about and that means the tax deduction could get missed.

And, if your business doesn’t have a policy in place to reimburse you for these expenses, it’s time to get that in place too.

Check Up Point #5
Is your bookkeeping up-to-date?

Have you noticed that each of the above is impacted by your bookkeeping? Bookkeeping is one of the most powerful tools in a tax strategy. Without up-to-date bookkeeping, it is impossible to determine if anything in your tax strategy needs to be adjusted in order to maximize tax savings.

How are you doing on these five points? By paying attention to each item on the checklist now, you will be better prepared at the end of the year.

4 Essential Tips For Planning for Retirement

Posted on July 15th, by Janice in Uncategorized No Comments

You’ve heard it before. It’s never too early to think about retirement. If you’re a younger worker and think retirement is too far off to think about, think again. We have some basic tips you should begin considering now to plan for your future.

1. Plan for the Essentials
Since social security won’t be sufficient to pay for life’s necessities – look for other options (investing) to help cover essential costs. Today’s retirees will tell you their two greatest financial concerns are covering health care costs and running out of money before running out of breath.

2. Control Spending

If you’re living beyond your means before retiring, you are likely to continue in retirement until you don’t have enough to cover your needs. Pay attention to your budget now so that you can be in good shape at retirement.

3. Don’t Procrastinate

Prograstination is one of the biggest enemies of financial success. Get started saving today and do it on a consistent basis. Use payroll deductions and programmed bank withdrawals. Invest whether the market is up or down. Either way, you will be more likely to come out ahead in the long run.

4. Plan for Healthcare Expenses

The Employee Benefit Research Institute estimates that the average couple can expect to spend $261,000 of their own money to achieve a 90% certainty of meeting their health care needs. In addition to Medicare, having a supplemental policy and long-term care might be a good idea. Insurance may seem expensive, but not having it could be more expensive.

If you haven’t started thinking about retirement, now is the time to begin. A little planning and attention now will help you provide a secure future for yourself and your loved ones.

The Most Important Step You Can Take to Create Wealth

Posted on July 1st, by Janice in Wealth No Comments

When we try to do things all by ourselves, we are ignoring the fact that we all have only 24 hours in the day. By building a wealth team, we are leveraging those hours into hundreds or even thousands of hours each day.

A typical wealth team can include many different people. It often includes: Advisors, Employees, Vendors, Customers/Clients, and Partners. Most people understand who is involved in a wealth team, but few truly understand how to utilize each team member to their full potential.

Get Maximum Leverage from Your Team Members
Your wealth team is a valuable resource in your wealth strategy and one that I often see used incorrectly.

My profession is a great example of this. I talk with prospective clients every day and most have the following relationship with their tax advisor:Their tax advisor prepares their tax return. Outside of their tax return preparation process, they contact their tax advisor when they have a question and their tax advisor answers their question.

One of the ways I want my clients to leverage me as a resource is to share my knowledge with them so they don’t have to do it themselves. This includes providing them with answers to questions they don’t even know to ask.

Here’s an example.

At least once a week I am asked the question, “What type of entity should I form for my business/investing?” With a few follow up questions, most tax advisors will answer this question and the client will be happy with the answer.Then what usually happens is the client starts to learn more specifics as they progress in their business or investing. These may be details they should have been doing or should not have been doing, but they are all facts they wished they would have known sooner.

This is why I don’t just answer the specific question at hand; I anticipate what the client doesn’t know to ask. I have tremendous experience in the long-term implications of a tax strategy, which includes forming an entity, and I want to share my knowledge and experience with my clients so my clients can avoid common mistakes (that sometimes can set their business or investing back by years).Even though the client has come to me with one specific question, I typically find myself asking the client many more questions that cover bookkeeping, tracking expenses, business or investing operations, additional goals they have, estate planning and exit strategy (to name a few).Eventually most people learn these details, but usually it is not until they are at a point where they wish they had known about them sooner.

Remember: Every team member should be pushing your wealth strategy forward and not keeping it from moving forward.

Does Your Tax Strategy Assume You Want to Retire Poor?

Posted on June 15th, by Janice in Business Taxes No Comments

#1 Most Tax Planning Assumes You Want to Retire Poor
When I speak at a seminar, I ask how many people plan on retiring poor.It may not surprise you that no one raises their hand. It surprises me because the tax planning they have done works best if they retire poor.

This is because most tax planning focuses on tax deferral. Tax deferral means you are opting not to pay tax now and will pay the tax in the future.The most common example of tax deferral is the advice to maximize the contributions to your retirement plan.

Most retirement plans work like this:

– The money you contribute is deductible.
– The money you receive as a distribution when you retire is taxable.
– The tax is deferred until a later date.

What’s the problem with this? The deduction is at your current tax rate while the distribution is taxed at your future tax rate.If you plan on retiring rich, you will be in a higher tax rate when you retire. This means you are deferring your tax into a higher tax rate.

Example: If you are currently in a 25% tax bracket, and are in a 40% tax bracket when you retire, you are deferring your taxes into a higher tax bracket.This type of tax planning works best if you plan on being in a lower tax rate when you retire.

Example: If you are currently in a 25% tax bracket, and are in a 15% tax bracket when you retire, deferring your taxes works much better.If you plan on retiring rich, deferring your taxes will ultimately increase your taxes. Instead of deferring your taxes, create a tax strategy that focuses on permanent tax savings.

You may be wondering why tax deferral is such popular advice then? Because it’s easier than creating permanent tax savings. Creating permanent tax savings requires a much better understanding of the tax law.

#2 Your Taxes Keep You from Your Dreams
Taxes steal our time. In an average lifetime, no matter where you are in the world, taxes are stealing an average of 20 years of your life. That’s a prison sentence!

The average person spends 30% to 50% of their income on taxes.What if you were able to reduce your taxes (legally, of course) by 10%? Or 20%? Or even 30% or 40%?

You would keep more money in your pocket. You could then use this money to build your wealth.The result is more time – whether it’s an early retirement or not having to work as much.

#3 Following the Tax Law Can Improve Your Business and Investing
There are thousands of incentives in the tax law, in all countries, to encourage businesses and investors.Governments need businesses and investors to succeed. Governments want people to be employed. Governments want people to have housing. Businesses and investors help the government do this.

Governments are highly motivated to help businesses and investors succeed, so the tax law is written to help businesses and investors do just that. When looked at this way, the tax law is really an instruction book for businesses and investors.

The closer you follow the tax law, the more successful your business and investing becomes and the more money you’ll make in your business and investing.

Janice S. Vanderbilt, Vanderbilt CPA Group

Treat Your Small Business Like a Real Business – Hold Annual Meetings

Posted on June 1st, by Janice in Business Taxes No Comments

By Janice Vanderbilt

People get into big tax trouble with their business because they don’t treat it like a “real” business.

Annual meetings are an important example of this.A public company holds an annual meeting with its shareholders (owners). During these meetings, many things are discussed, including:

Informing the owners of previous and future activities
Reviewing and approving financial statements and budgets
Declaring dividends
Approving vendors

A public company keeps a written record of each meeting – these are the meeting minutes.

The topics of a typical annual meeting directly relate to a tax strategy which makes the meeting minutes an extraordinary tool to protect your tax savings. This is why it is so important to treat your business like a big public company when it comes to annual meetings and minutes.

How meeting minutes can protect your tax strategy
Meeting minutes are an ideal place to document the activity in your tax strategy, such as:

Your salary
Your bonus
Your distributions (dividends)
Loans to/from your company from/to you or your other companies
Investments purchased
Investments sold
Travel expenses
Vehicle expenses
Use of your home office

Just to name a few!

Who should have meeting minutes?
When you think of meeting minutes as being a tool to protect your tax savings, then every company should have meeting minutes. It doesn’t matter if the company is an LLC, partnership, corporation or even a sole proprietorship.It’s always a good business practice to have an annual meeting. It’s a great time to review the past year and focus on the upcoming year. This falls right in line with the company approving your salary, bonus and/or distributions. Have a discussion about why the amounts are appropriate and document that in your meeting minutes.

An annual meeting is the ideal time to document activities the company has done and intends to do. For example, if one of those activities is to purchase real estate, the discussion can address if the real estate will be held long-term and rented, or fixed up and sold, or perhaps the company has something else in mind.

Two terms that commonly come up during a tax audit are “intent” and “facts and circumstances.” A tax auditor wants to know what a taxpayer’s intent was and what the facts and circumstances were for a particular transaction. Meeting minutes are one of the most effective ways to document these items.

What if your company is just you?
You may be wondering how you conduct your meetings if your company is just you. While you may be the only owner, you may have employees who should participate or you can invite members of your team of advisors to participate.

If you haven’t been holding annual meetings in your small business, now is the time to make the change. Annual meetings will help you manage your business and will help you stay out of tax troubles.