What’s Your Business Investment Strategy?

Now that we’ve kicked off a new year have you given thought to developing or updating your business investment strategy to supplement your strategic plan?  Your business investment strategy is your plan for deciding how and what to invest in to meet your long-term goals.  It's a natural extension of the original company vision you outlined when you wrote your first business plan.  Knowing your long-term goals will help you decide where to invest your funds.  For example, if you're hoping to create a recognizable brand, your investment strategy will be heavily focused on ramping up your marketing department. 

There are a myriad of growth strategies you can invest in.  Do you want to develop a new product that complements your existing product in the same category?  Do you want to enter a new category in a new market?  Do you want to expand territorially?  Do you want to expand into a related business?  Do you want to diversify and invest in many types of businesses?  Do you want to pursue a merger or an acquisition?

Whatever direction you choose, it's critical that you support the initiative with the proper resources.  More often than not, that means human resources.

If you want to be innovative, you have to have the human capital to do this.  New ideas are not created by artificial intelligence; they're created by human intelligence.

It's tricky to set a strategy for when it's time to add new staff, however. The fact is, virtually all organizations are resource constrained. You don't have the finances to staff as much as you'd like, and a lot of time you don't have a choice to add staff until after you need them.  Still, I would rather have a backlog of customer orders rather than the opposite.

The flipside is even trickier.  Your investment strategy should also indicate how you will reduce resources when times are tough.  The key question to understand is how much will it cost you to replace an employee, especially if you have to replace that person in three months when customer demand returns.

Ultimately, you can't forecast when market conditions will change or how new technology will affect your existing market. (Look no further than the demise of Polaroid as a cautionary example.)

As such, you can really never quite finish your business investment strategy.  You have to tweak it as you go.  You've got to have some sort of process set up that regularly evaluates what you're doing, where you are, and what you need to do.  You can't just do this every year or every couple of years—you have to constantly be evaluating.

 

 

To forward this to a friend, Click Here  

Other CEBI Blog Articles... 

Kevin Minton
CEO
Chief Executive Boards International

http://www.chiefexecutiveboards.com/

KevinMinton@ChiefExecutiveBoards.com

Any Time is a Good Time to Harvest Some Cash

Your business may be a substantial piece of your personal net worth.   It may also be your most risky investment.  Most business owners fail to recognize that the money they have tied up in their businesses (fixed assets and working capital) is at considerable risk every day.  They believe so heavily in their own ability to mitigate risk that they leave all or almost all their chips in play at all times.   
     
What can happen?  Almost anything can take a small to mid-sized company (say, revenues of $50 million or less) out of business in less than a year.  Like what?   Like death or a disabling illness of the CEO.  Your business is just one stroke or one heartbeat from extinction, unless you have a fully-ready successor just waiting in the wings.  One sexual harassment suit.  One big product liability suit.  One major customer bankruptcy (or multiple small ones), leaving you holding the bag for hundreds of thousands or perhaps millions in uncollectable accounts receivable.  Be aware of the many things completely beyond your control that could wipe out a big piece of your equity in the business.  
    
We insure our businesses for fire -- an unlikely event that could happen and would be catastrophic.  Yet we're unwilling to recognize any of the far more likely events that could wipe our businesses out financially, and against which we may not be able to insure.  For this reason, we incorporate, to put a corporate veil between our personal assets and the company.  I was recently frightened to hear a member of Chief Executive Boards International say that he had $1 million in liquid assets inside his company.  That's an accident waiting to happen.  I don't think he's alone.  
    
What's the option?  Take some chips off of the table.  Take some money out of the company.   To do that, we'd have to borrow money for working capital, you say?   What's wrong with that?  If your credit is good, lenders will loan you money for working capital at ridiculously low rates right now.  So, borrow some working capital and take some cash out of the business and invest it elsewhere.  Almost any mid-to-long term investment will yield you more than you'll be paying in interest, and that money will be out of reach of creditors, judgments and other claims on your business assets.  
    
But "we're debt-free", you say?   Is that a good thing?  It's not typical of any major publicly-traded company.  Why is that?  Because shareholders would rather the company borrowed its working capital from lenders presently willing to take a return in the low single digits than to use shareholder funds for that purpose.  
  
"I don't know where to invest the money", you say?   Now would be a good time to start learning how to invest outside your business, because you'll probably live about 20-30 years after you sell and retire from your business and you'll need to know how to invest for both growth and income.  If you haven't taken time to become a knowledgeable investor so far, it's never too soon to start.  
  
Think about it -- would you rather have $100,000 in debt on the company's books and $100,000 in assets in your brokerage account (or gold or real estate or CDs or whatever) -- or neither?  Replace $100,000 with $250,000 or $1 million, depending on your situation.  Remember, you can ALWAYS loan money back into the company if the bank gets uncooperative in the future.  The point is that debt is a tool by which to leverage other people's money, and there's nothing wrong with it, as long as you have a plan by which to pay it back if you need to.   
  
I know I'm not on the same page as most business owners on this topic.  To post your point of view for the benefit of others, click "Comments" below.   

To forward this to a friend, Click Here

Other CEBI Blog Articles... 

Terry Weaver

Advisor

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Key Man Insurance or Partner Insurance - Got it, so What?

Does your company have life insurance on its key players?  If so, don't dismiss the rest of this article – there are some minefields you may not have thought of.   If not, call an insurance agent today and then use some of these ideas in your conversation.     

In working with closely-held companies, including Chief Executive Boards International members, I find that even those who have "key man" insurance in place many times have not thought through the implications of just who owns the insurance and just who the beneficiary should be.  Many articles and many insurance agents assume the answers to both questions are "the company".   

Not necessarily.  There are actually two major reasons to insure a key player.  One is the traditional "key man" concept, where the insurance is meant to provide enough cash to hire, train and compensate a replacement.   In the case of closely-held companies, this may be an owner or it may also be a senior manager essential to the business, whether he owns shares or not.  In that case, the company as the beneficiary makes sense.    

The second and probably bigger reason for life insurance is to fund the provisions of a buy-sell agreement, providing the cash necessary to buy the shares left in a deceased co-owner's estate.   Call it "Partner Insurance", because the objective is completely different - it's to fund your estate and transfer ownership to your other shareholders.  This case is tricky and full of potential mine fields if not thought through initially and the beneficiaries updated regularly.    I've rarely seen one of these properly configured.  Why?  

Closely examine your company's buy-sell agreement.  You may find, as in many, that there's a provision whereby the company has right of first refusal to buy back a deceased partner's shares at a then-current valuation.  There are hundreds of variations on that theme, but generally those shares are bought back into the treasury, thereby "reverse diluting" the remaining shareholders.   The math becomes tricky. 

Let's say, for example, you're just starting to transition the ownership of your company and you have a 15% partner (someone who's been with you for years - your intended successor/owner) and two 5% partners (key players, with shares mostly for retention purposes), with your holdings at 75%.  At 100 shares outstanding, share ownership would be 15+5+5+75=100.  If the company is the beneficiary and there's enough money to completely buy back (retire) your shares, then the remaining partners' outstanding shares become 100% of the ownership of the company.  Proportionally divided, then, their shares (15, 5 and 5) end up being 60%, 20% and 20% of ownership.   You may be fine with that as far as the lead person is concerned, but what's happened is that the two minor shareholders have each suddenly "inherited" 15% of your company.  Was that your plan or your intent?    Probably not.  What's also happened is, in the case of a typical 67% super-majority requirement on major decisions (such as sale of the company), you've unwittingly handcuffed the majority owner, where either of the other two can block anything he wants to do.   Was that the plan?  You can see the problem.  By the way, the estate gets a step up in basis, meaning that the shares bought back from the company produce zero taxable income for the heirs - either ordinary or capital gains.   Good deal.   Unfortunately, the partners don't get the same deal.   Their basis is still their original investment - whatever they paid for their shares when they bought them. 

What's the alternative?  Depends on your intent.  For this case, let's assume what you really wanted was for your majority and long-time partner to inherit control of the company, keeping the minority shareholders at 5% each.   How would you do that?   Simple.  Make the majority shareholder the beneficiary of your "partner insurance" policy.  In other words, your partner receives (tax-free, it's life insurance) enough cash to buy your shares directly from your estate (which the buy-sell should allow).   This could be a win all around.  Your partner gets the insurance money, tax-free.  Your estate gets a step up in basis on your shares, and then sells them to your partner at that price for no taxable gain.  And your partner, since he paid real money for your shares also gets that amount added to the basis of his shares.   A win all around.  Despite the advantages of this approach, I've never seen a buy-sell initially set up this way.

Variations on this theme could include a small piece of the insurance proceeds for the minor partners, and if the death benefit exceeds the current valuation of the company, you could name your spouse or heirs for the rest.   Granted, this takes some management, updating the beneficiary percentages whenever you update the company valuation.  Among multiple partners, then, these policies need to name the surviving partners as beneficiaries to achieve the intended result in case of death of anyone (also known as a cross-purchase agreement). 

If you dismiss the "partner as beneficiary" option and the company remains the beneficiary, question two is, "What is the valuation of the shares the company is buying back from your estate?"  This is another minefield, particularly if the company is the beneficiary and the valuation process doesn't take insurance proceeds into account.  Let's say your company is worth $4 million and we have a $3 million insurance policy on yourself (to cover your heirs' 75% ownership), with the company as the beneficiary.   That's this week.   This weekend you get hit by a beer truck and expire.   Next week the insurance policy pays off and there's an additional $3 million of cash on the balance sheet.   What's the company worth then?  A capable attorney for your estate would argue it's worth $7 million.  Wow, then we're talking about buying back your 75% stake at a price of $5.25 million.   Where's the other $2 million going to come from?   This problem is a whole lot easier to solve.   Your buy-sell agreement should have a section on valuation.  In that section, simply state something like "for the purpose of valuing a deceased shareholder's shares, any proceeds of life insurance paid to the company will be excluded from the valuation."  One sentence that could save a $2 million dispute, in this sample case.   Note:  Insurance benefits paid to the company may be taxable, adding further complications.     

So, just like the rest of your buy-sell agreement, the insurance component needs to be carefully thought through and various possible scenarios played out.  In my experience, buying the life insurance is an afterthought and almost no thought is given to the beneficiary question - it usually defaults to being the company, with surprising unintended consequences.  

Finally, the purpose of this insurance is to cover a tragic situation.  As such, term life insurance with a top-rated company is the best vehicle.  Ignore pitches that suggest this is also somehow an “investment” and that cash value insurance is appropriate.  Invest the difference in your own company or distribute the money to shareholders.  

As always, check with your own legal, financial and tax advisors to be sure any of these ideas are right for your specific situation.  

If you have other approaches or scenarios relating to buy/sell agreements or key man/partner insurance, click "Comments" below and share them with others.   

To forward this to a friend, Click Here

Other CEBI Blog Articles... 

Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

5 Ways to Move up to $80,000 a year into Tax-Advantaged Investments

Most Americans and many business owners fail to take full advantage if the array of tax-advantaged investment choices available to them. Sure, people know about IRAs and 401(k)s, but few actually take full advantage of even those. Here's a checklist of tax-advantaged investment options available to most business owners. How many of these are you using?

1. 401(k) -- The 2013 maximum employee contribution is $17,500, with a "catch-up" provision of an additional $5,500 for those over 50 -- a total of $23,000 annually. Perhaps your contributions have been limited by "top heavy" provisions in your plan -- here's an article on some ideas to fix that.
   
   Additionally, your own contributions are eligible for a pretax company "match", which could be worth several thousand dollars more in tax-free (and payroll tax-free) investments. Consider also the Roth 401(k) option - instead of rolling up a future tax bill from tax deferral now, you can choose tax-free for life.
   
   Potential benefit - up to $26,000 in tax-advantaged savings ($50,000 for a working couple), including the company match.
      
2. Roth IRA -- Most business owners' higher income limits or eliminates their eligibility for a Roth IRA -- or does it?  If you (or your spouse) do not have a self-directed or rollover conventional (pretax) IRA, here's a strategy for converting up to $13,000 per year between you (if you're over 50) to a tax-free investment for not only your lifetime, but the lifetimes of your heirs, as well. It's now being referred to as the "Back Door Roth IRA": http://www.chiefexecutiveboards.com/briefings/briefing297.htm
   
   Potential benefit -- up to $13,000 per year, tax free for decades.
     
3. HSA Health Care Plans -- Many companies have chosen health care cost reduction strategies that include Health Savings Accounts (HSAs). This is just a "freebie" waiting for you to do the paperwork. By taking maximum advantage of these plans, you can avoid both State and Federal Income taxes on $6,450 of income for a family -- $7,450 if you're over 50. You can spend this tax free money on any health care expense, including deductibles, Dental, Orthodontia, Optometry, and a host of other costs not covered by your health insurance. And you can roll over that money for years, if you don't use it right away. HSA Bank and others offer long-term investment options just like an IRA.
       
   Potential benefit - $7,450 off the top of both Federal and State income.
    
4. 529 College Savings Plans -- Actually, they're educational savings plans - you can use the money for anyone's educational expenses, including yourself or your spouse. In most states, your contribution is deductible from your state tax return. That's an immediate ROI of the state tax rate (up to 7%) in year 1, and the investment growth and income is tax free, as long as it's eventually used for educational expenses.
   
   Some states limit that deduction. Ohio is particularly interesting - limiting the state tax deduction to $2,000 per year per beneficiary. Yes, that means you could set up accounts for all your kids, nieces, nephews and neighbor kids and take a $2,000 deduction for each. Later, you could re-name the beneficiaries of those accounts to anyone you want (you own the accounts). Peculiar, but that's the game Ohio set up.
    
   Potential Benefit -- Unlimited, depending on state tax deduction rules. Say, at least $10,000 per year in state tax deductions, practically.
       
5. Private Pension Plans -- The strategies above allow you to move a lot of money into tax-advantaged plans every year. Potentially:
    
   • $50,000 ($25,000 each) for yourself and your spouse to a 401(k), including the company match.
   • $13,000 ($6,500 each) into a Roth IRA.
   • $7,450 into an HSA.
   • At least $10,000 into some combination of 529 plans (unlimited state tax deduction in some states).
     .
   So, if $80,000 or so a year isn't enough, you can set up a Private Pension Plan within your company that greatly favors yourself. Now we're talking some meaningful expense, but if your income warrants it, Google "Private Pension Plan" and read up on the idea

One strategy you didn't see mentioned above?   Cash-Value Insurance or Annuities -- Ask anyone who's seen the back side of one of these products (tried to get the money back out), and they'll tell you these are very expensive, illiquid products constructed for the benefit of the company and the agent selling the products.   If you need life insurance, buy term insurance. 

Building wealth is not only figuring out how to earn a lot of money. It's about figuring out how to keep most of it out of the hands of tax collectors - legally. If you have some additional tax-advantaged investment strategies, click on "Comments" below and share them with others.


To forward this to a friend, Click Here

Other CEBI Blog Articles... 

Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

2 Huge Reasons to Build an Investment Portfolio outside Your Business

It made my day in a recent Chief Executive Boards International meeting when a younger member said, "I'd like to know a lot more about investing outside my business."   I could have hugged the guy.  He's on exactly the right track, and has decades to apply that knowledge to growing his own wealth. 

I'm greatly concerned about how few business owners (CEBI members included) have most of their net worth tied up in their businesses and almost no wealth accumulated in their own portfolios. 

There are 2 huge problems with that:    

• Risk -- Business owners as a group are unrealistic about the risks their companies face - particularly in the case of circumstances beyond their control.   Your company is only one stroke, one heartbeat, one employee harassment suit or one product liability lawsuit away from extinction. These are just a few of the events that have wiped out the value of closely-held companies.   In most companies, if the owner is suddenly and irrevocably out of the picture, the value of the company plummets, leaving the caregivers or heirs dependent entirely on assets accumulated outside the business.
  
  No sane investor would put all his money in a single publicly-traded company's stock.  It's just as risky to have all your assets tied up in your own company's stock.  
     
  As a CPA friend of mine is fond of saying, "You set up a Corporation for a reason - to protect your assets and your family from bad things that might happen in or to your business.  Why don't you use that protection, by getting some assets outside that corporate veil?"  
    
• Retirement -- By the time you're ready to leave your business, say, sometime in your 60's, you'll probably have another 25-30 years of life expectancy.  Robert Kiosaki's book, Cash Flow Quadrant makes a good point.  No matter how you've earned money during your work life -- whether as an Employee, a Self Employed person or a Business Owner, financial freedom is the domain of the Investor -- the quadrant where you don't have to work at all -- your money works for you.
     
  Now, think of how much time, study, practice and experience you've put into earning money through work. Realizing that by the time you're 60-70 years old you'll still need income for the next 20 or 30 years, what's your plan? It has to be income from successful investing, doesn't it? That's potentially 1/3 of your life. If it was worth all that time learning to earn it, isn't it worth some time learning to invest it?

So, it was really refreshing to hear a 30-something business owner talking about learning how to invest in other businesses, such as the stocks of major corporations, usually through mutual funds or exchange traded funds.  He has 30 years to learn how to do that, while he's continuing to learn how his business can provide more cash flow to fund that portfolio.   

My suggestion to him was an extraordinary resource I discovered a couple of years ago -- Money Magazine. This is one of the few real "how-to" laymen's guides to personal investing. Nothing flashy -- no hedge funds, derivatives, complicated or exotic strategies. Just simple, bread-and-butter saving and investing strategies that work and have worked (despite headlines to the contrary) for decades. Try it -- risk $15 on a year on this resource: http://www.amazon.com/Money-1-year-auto-renewal/dp/B002PXVZ40/ref=sr_1_1?ie=UTF8&qid=1296925222&sr=8-1

Perhaps your investment acumen is far above this "retail investor" guide. Consider giving your kids a subscription instead. You never know, they might read it and start saving and investing for their future retirement early -- the key to success in accumulating net worth.

And, finally, once you start accumulating substantial assets outside your company, find a fee-only investment advisor -- someone who doesn't sell any products or take any commissions -- who can help you make informed decisions about where and how to invest your portfolio.  
 
To forward this to a friend,  Click Here

Other CEBI Blog Articles...

Terry Weaver


CEO
Chief Executive Boards International

http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 

2013 Tax Rates - Another Kick of the Can

Chief Executive Boards International members have anxiously awaited resolution of the "Fiscal Cliff".  As some of us expected, Congress has kicked the can down the road another couple of months, slightly tinkering with a cumbersome and flawed tax code.   So, what is the result? 

I saw an email newsletter from Cincinnati-based CPAs Flynn and Company that's the most succinct article I've seen, particularly relative to small business.  Here's the article in its entirety:  

American Taxpayer Relief Act of 2012

On 1/2/13, President Obama signed the new legislation into effect which helped taxpayers by extending tax cuts that were set to expire, thereby preventing the fiscal cliff from occurring. The following is a summary of the important provisions of the new law.

INDIVIDUAL INCOME TAX PROVISIONS
Individual Income Tax Rates

• The American Taxpayer Relief Act of 2012 makes permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers, $425,000 for heads of households). Income above these levels will be taxed at a 39.6 % rate.

• The American Taxpayer Relief Act raises the top rate for capital gains and dividends to 20 percent, up from the Bush-era maximum 15 percent rate. That top rate will apply to the extent that a taxpayer's income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers; $450,000 for joint filers and $425,000 for heads of households).

• All other taxpayers will continue to enjoy a capital gains and dividends tax at a maximum rate of 15 percent. A zero percent rate will also continue to apply to capital gains and dividends to the extent income falls below the top of the 15 percent income tax bracket—projected for 2013 to be $72,500 for joint filers and $36,250 for singles). Qualified dividends for all taxpayers continue to be taxed at capital gains rates, rather than ordinary income tax rates as prior to 2003.

• Installment payments received after 2012 are subject to the tax rates for the year of the payment, not the year of the sale. Thus, the capital gains portion of payments made in 2013 and later is now taxed at the 20 percent rate for higher-income taxpayers.

3.8% Tax on Net Investment Income

• Starting in 2013, under the Patient Protection and Affordable Care Act (PPACA), higher income taxpayers must also start paying a 3.8 percent additional tax on Net Investment Income (NII) to the extent certain threshold amounts of income are exceeded ($200,000 for single filers, $250,000 for joint returns and surviving spouses, $125,000 for married taxpayers filing separately). Those threshold amounts stand, despite higher thresholds now set for the 20 percent capital gain rate that previously had been proposed by President Obama to start at the same levels. The NII surtax thresholds are not affected by the American Taxpayer Relief Act. Starting in 2013, therefore, taxpayers within the NII surtax range must pay the additional 3.8 percent on capital gain, whether long-term or short-term. The effective top rate for net capital gains for many "higher-income" taxpayers thus becomes 23.8 percent for long term gain and 43.4 percent for short-term capital gains starting in 2013.

Alternative Minimum Tax

• The American Taxpayer Relief Act "patches" the AMT for 2012 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individuals regular tax and AMT. Additionally, the American Taxpayer Relief Act provides for an annual inflation adjustment to the exemption amounts for years beginning after 2012.

New Limitations

• The American Taxpayer Relief Act officially revives the "Pease" limitation on itemized deductions, which was eliminated by EGTRRA as extended by the 2010 Tax Relief Act. However, higher "applicable threshold" levels apply under the new law:
  o  $300,000 for married couples and surviving spouses;
  o  $275,000 for heads of households;
  o  $250,000 for unmarried taxpayers; and
  o  $150,000 for married taxpayers filing separately.

The Pease limitation reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions by three percent of the amount by which the taxpayer's adjusted gross income exceeds an applicable threshold. However, the amount of itemized deductions is not reduced by more than 80 percent. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.

• The American Taxpayer Relief Act also officially revives the personal exemption phase-out rules, but at applicable income threshold levels slightly higher than in the past:
  o  $300,000 for married couples and surviving spouses;
  o  $275,000 for heads of households;
  o  $250,000 for unmarried taxpayers; and
  o  $150,000 for married taxpayers filing separately.

Under the phase-out, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer's adjusted gross income exceeds the applicable threshold level.

Child Credits

• The American Taxpayer Relief Act extends permanently the $1,000 child tax credit. Certain enhancements to the credit under Bush-era legislation and subsequent legislation are also made permanent.

• The American Taxpayer Relief Act extends permanently Bush-era enhancements to the child and dependent care credit. The current 35 percent credit rate is made permanent along with the $3,000 cap on expenses for one qualifying individual and the $6,000 cap on expenses for two or more qualifying individuals.

Education

• The American Taxpayer Relief Act extends through 2017 the American Opportunity Tax Credit (AOTC). The AOTC is an enhanced, but temporary, version of the permanent HOPE education tax credit.
• The AOTC rewards qualified taxpayers with a tax credit of 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a total maximum credit of $2,500 per eligible student. Additionally, the AOTC applies to the first four years of a student's post-secondary education.
• The American Taxpayer Relief Act makes permanent or extends a number of enhancements to tax incentives designed to promote education. Many of these enhancements were made in Bush-era legislation, extended by subsequent legislation and are scheduled to expire after 2012. Some enhancements, notably the American Opportunity Tax Credit, had been made in President Obama's first term.
• Deduction for Qualified Tuition and Related Expenses-The American Taxpayer Relief Act extends until December 31, 2013 the above-the-line deduction for qualified tuition and related expenses. The bill also extends the deduction retroactively for the 2012 tax year.
• Student Loan Interest Deduction- The American Taxpayer Relief Act also expands the modified adjusted gross income range for phase-out of the deduction permanently and repeals the restriction that makes voluntary payments of interest nondeductible permanently.
• Employer-Provided Education Assistance-The American Taxpayer Relief Act extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250.

More Individual Tax Extenders

• Teachers' Classroom Expense Deduction-The American Taxpayer Relief Act extends through 2013 the teacher's classroom expense deduction. The deduction, which expired after 2011, allows primary and secondary education professionals to deduct (above-the-line) qualified expenses up to $250 paid out-of-pocket during the year.
• Exclusion of Cancellation of Indebtedness on Principal Residence-Cancellation of indebtedness income is includible in income, unless a particular exclusion applies. This provision excludes from income cancellation of mortgage debt on a principal residence of up $2 million. The American Taxpayer Relief Act extends the provision for one year, through 2013.
• Mortgage Insurance Premiums-This provision treats mortgage insurance premiums as deductible interest that is qualified residence interest. The American Taxpayer Relief Act extends this provision through December 31, 2013. The provision originally expired after 2011.
• IRA Distributions to Charity-The American Tax Relief Act extends for two years, through December 31, 2013, the provision allowing tax-free distributions from individual retirement accounts to public charities, by individuals age 701/2 or older, up to a maximum of $100,000 per taxpayer per year. The Act provides special transition rules. One rule allows taxpayers to recharacterize distributions made in January 2013 as made on December 31, 2012. The other rule permits taxpayers to treat a distribution from the IRA to the taxpayer made in December 2012 as a charitable distribution, if transferred to charity before February 1, 2013.

BUSINESS TAX PROVISIONS

Code Section 179 Expensing and Bonus Depreciation

• Small Business Expensing-The American Taxpayer Relief Act extends through 2013 enhanced Code Section 179 small business expensing. The dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit. The rule allowing off-the shelf computer software is also extended.
• The American Taxpayer Relief Act extends 50 percent bonus depreciation through 2013. Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014.
• Bonus depreciation also relates to the vehicle depreciation dollar limits under Code Section 280F which imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile in service within a business, and for each succeeding year.  

Research Tax Credit

• The American Taxpayer Relief Act extends through 2013 the Code Section 41 research tax credit, which expired after 2011. The incentive rewards taxpayers that engage in qualified research activities with a tax credit.
• Commonly called the research or research and development credit, the incremental research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The credit applies to excess of qualified research expenditures for the tax year over the average annual qualified research expenditures measured over the four preceding years.

FEDERAL ESTATE AND GIFT TAX PROVISIONS

• The American Taxpayer Relief Act permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012.
• The maximum estate tax rate for estates of decedents dying after December 31, 2010 and before January 1, 2013 is 35 percent with a $5 million exclusion (indexed for inflation for 2012 at $5.12 million). Effective January 1, 2013, the maximum federal estate tax rate was scheduled to revert to 55 percent with an applicable exclusion amount of $1 million (not indexed for inflation), its levels before enactment of estate tax reform in 2001 and subsequent legislation.
• The American Taxpayer Relief Act makes permanent "portability" between spouses. Prior to the permanent extension, portability was only available to the estates of decedents dying after December 31, 2010 and before January 1, 2013.

Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent's unused exclusion (the deceased spousal unused exclusion amount (DSUE)) to the surviving spouse's own transfers during life and at death.

• The American Taxpayer Relief Act provides a 40 percent tax rate and a unified estate and gift tax exemption of $5 million (inflation adjusted) for gifts made after 2012.
• The 2010 Tax Relief Act provided that for gifts made after December 31, 2010, the gift tax was reunified with the estate tax, with a tax rate through 2012 of 35 percent and an applicable lifetime unified exclusion amount of $5 million (adjusted annually for inflation).



Thanks to Flynn and Co. for this well-written and timely guest article. 

To forward this to a friend, Click Here

Other CEBI Blog Articles... 

Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

10 Bad Money Habits to Break in 2013 - Behaviors Worth Changing for the New Year

I'm astonished at how little time and study business owners give to their personal financial lives.   Many have little or no net worth outside their businesses and many of those who do haven't a credible strategy for managing that personal wealth.  This incongruity is surprising, considering that when most people stop working full time, perhaps in their 60's they'll have about 25 years of life expectancy during which their only means of support will be the wealth they've accumulated and invested over 40 years of earning. 

A good friend and writer Shanda Jeffries published something in her newsletter that I thought was huge, as it captures in 10 categories the mistakes I most often see among my business coaching clients and CEBI members.   Here's her article in its entirety:  

Do bad money habits constrain your financial progress? Many people fall into the same financial behavior patterns year after year. If you sometimes succumb to these financial tendencies, the New Year is as good an occasion as any to alter your behavior.

1. Lending money to family and friends - You may know someone who has lent a few thousand to a sister or brother, a few hundred to an old buddy, and so on. Generosity is a virtue, but personal loans can easily transform into personal financial losses for the lender. If you must loan money to a friend or family member, mention that you will charge interest and set a repayment plan with deadlines. Better yet, don’t do it at all. If your friends or relatives can’t learn to budget, why should you bail them out?


2. Spending more than you make - Living beyond your means, living on margin, whatever you wish to call it, it is a path toward significant debt. Wealth is seldom made by buying possessions. Today’s flashy material items may become the garage sale junk of 2025. Yet, the trend continues: a 2012 Federal Reserve Survey of Consumer Finances calculated that just 52% of American households earn more money than they spend.(1)


3. Saving little or nothing - Good savers build emergency funds, have money to invest and compound, and leave the stress of living paycheck-to-paycheck behind. If you can’t put extra money away, there is another way to get some: a second job. Even working 15-20 hours more per week could make a big difference. The problem is far too common: a CreditDonkey.com survey of 1,105 households last fall found that 41% of respondents had less than $500 in savings. In another disturbing detail, 54% of the respondents had no savings strategy.


4. Living without a budget - You may make enough money that you don’t feel you need to budget. In truth, few of us are really that wealthy. In calculating a budget, you may find opportunities for savings and detect wasteful spending.


5. Frivolous spending - Advertisers can make us feel as if we have sudden needs; needs we must respond to, needs that can only be met via the purchase of a product. See their ploys for what they are. Think twice before spending impulsively.


6. Not using cash often enough - No one can deny that the world runs on credit, but that doesn’t mean your household should. Pay with cash as often as your budget allows.


7. Gambling - Remember when people had to go to Atlantic City or Nevada to play blackjack or slots? Today, behemoth casinos are as common as major airports; most metro areas seem to have one or be within an hour’s drive of one. If you don’t like smoke and crowds, you can always play the lottery. There are many glamorous ways to lose money while having “fun”. The bottom line: losing money is not fun. All it takes is willpower to stop gambling. If an addiction has overruled your willpower, seek help.


8. Inadequate financial literacy - Is the financial world boring? To many people, it is. The Wall Street Journal is not exactly Rolling Stone, and The Economist is hardly light reading. You don’t have to start there, however: great, readable and even entertaining websites filled with useful financial information abound. Reading an article per day on these websites could help you greatly increase your financial understanding if you feel it is lacking.


9. Not contributing to IRAs or workplace retirement plans - Even with all the complaints about 401(k)s and the low annual limits on traditional and Roth IRA contributions, these retirement savings vehicles offer you remarkable wealth-building opportunities. The earlier you contribute to them, the better; the more you contribute to them, the more compounding of those invested assets you may potentially realize.


10. DIY retirement planning - Those who plan for retirement without the help of professionals leave themselves open to abrupt, emotional investing mistakes and tax and estate planning oversights. Another common tendency is to vastly underestimate the amount of money needed for the future. Few people have the time to amass the knowledge and skill set possessed by a financial services professional with years of experience. Instead of flirting with trial and error, see a professional for insight.

Shanda Jeffries may be reached at 864-968-2319 or sjeffries@flynnwealth.com.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations:

1 – business.time.com/2012/10/23/is-the-u-s-waging-a-war-on-savers/ [10/23/12]
2 - www.creditdonkey.com/no-emergency-savings.html [10/9/12]

Thanks to Shanda for this well-written and timely guest article. 

To forward this to a friend, Click Here

Other CEBI Blog Articles... 

Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

If You Can't Say "Yes", You Don't Have Enough

Can you really afford to sell your business? Can you afford to give it to your kids? Are you financially OK if your business vanishes?

In a recent Chief Executive Boards International meeting, a member was asked, "If your business went away tomorrow, would you have enough assets outside the business to last the rest of your life?" The member hesitated, stammered, and then another member made a profound statement, "If you can't say yes to that question right away, you don't have enough."

So, do you have enough? Do you know what "enough" is? If not, you have some serious homework to do, right away. So, how do you figure that out? Here are the steps:

1. What are you spending now? Most people don't know. If you're in that group, here's a suggestion. Install some personal finance software -- click here for some choices.   I prefer Quicken because it directly interfaces to my bank. 
   This isn't about budgeting -- its just about tracking what you're spending now. I've been doing this since 1996, and we know exactly what our annual burn rate is, by expense category. It's been surprisingly stable, year after year. Hugely helpful to be confident in calculation of your "number".   Just take each check and each credit card bill and break it down into a couple of dozen expense categories (doesn't have to be GAAP). 
        
2. Get all your assets and liabilities on a single balance sheet. Your personal finance software selection will give you a platform to do that.
    
3. Apply the 4% rule to your liquid assets (not including home equity, household assets, etc.). You can find countless articles saying that somehow this is no longer valid. In fact, it's as good as it gets when forecasting uncertainty. Over a 20 or 30 year time horizon, you can afford to burn 4% of your net worth per year at the start, while giving yourself a "raise" each year to keep up with inflation. That has about a 90% chance of keeping you from running out of money before you run out of heartbeats.  The assumed investment mix in this is 60% stocks, 40% bonds, although a 40%/60% mix gets you essentially the same result. 
    
4. If you have a real plan for cashing out of your business and an objective valuation to estimate those proceeds, you can apply the 4% rule to that amount, also.   Adjust for the possibility that it's your estate selling the business and discount accordingly for your absence. 
      
5. Add in any other cash streams. Do you have rental income?  What can you earn from part-time work or consulting? You'll be amazed at how $50k or $100k/year in consulting income improves this picture. That's only 2 to 4 billable days a month. Do you have any pensions, royalties or other annuity-style income? Of course Social Security is included. You get an annual forecast from the SS Administration of what that cash stream may be worth.
    
6. Do the math. Add the 4% withdrawal of your liquid assets and business sale proceeds to other cash streams and subtract your current burn rate of household expenses. Click here for a worksheet, borrowed from Lee Eisenberg's book, The Number.  Where are you?

If that answer is positive with a reasonable cushion - say, 25% to 50%, then you can confidently and immediately say "Yes" when someone asks "Do you have enough money to last you the rest of your life?" If you can't answer that with "Yes" right away, then you need a better plan. Either reduce the burn rate or figure out how you're going to earn, save and accumulate the assets necessary to give you the cushion you need. Part of that solution might be to just figure out how to accelerate the extraction of cash from your business.

Shortcut:  I just saw an article in Money Magazine, saying that for the average person with an ordinary asset base (stocks & bonds) a net worth of 10x-12x current income  (or current income necessary to support current lifestyle) would also be a good sufficiency test.   I ran that range on my own situation and it came out about dead even with the more technically correct 6-step approach above.   Try it for yourself. 

Escapingly simple, but surprisingly few business owners have this one nailed. Considering that when you and your spouse are 65, you have a better than 50% chance of either of you living to be 90, isn't it a good idea to figure out how you're going to be able to afford that next 25 years with minimal earned income?
        
To forward this to a friend, Click Here

Other CEBI Blog Articles... 

Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Take Some Chips off the Table

Yes, I've written about this before.  If you're a C Corporation, you have about 4 weeks to act at the lowest tax rates on dividends we're likely to see in our lifetimes.  If you're an S-Corp or an LLC, this is simply about self-preservation.
 
I've had multiple conversations with business owners lately who are having a record year and are sitting on piles of cash inside their businesses - one has over $1 million in cash inside his $8 million company.   That just sends chills down my spine. 
 
Why?  Because that money is just like chips on the poker table -- it's at risk every day.  What risk, you ask?  One stroke.  One beer truck.  One employee harassment suit.  One product liability suit.   That's how far most closely-held businesses are from extinction.  Would you want your surviving spouse to watch that pile of cash melt away while your estate is in the process of getting settled?  Wouldn't it be a whole lot better if that money was in your brokerage account?  
 
A good friend of mine and a CPA, Roger Clinkscales, explains it this way:   "Why did you set up your corporation (LLC, C-Corp, S-Corp) in the first place?  To put a firewall between your company and your personal assets, right?  So, why don't you use it?  Why don't you take the cash that's inside your company and distribute it to yourself, thereby taking it out of reach of creditors and judgments against your business?"   
 
Roger's right.  The next thing that comes up in this conversation is, "But I need that cash cushion for unexpected working capital needs."  Do you?  Why not "outsource" that problem?   Where?  To a bank, in the form of a line of credit.  Those guys are in the business of providing short term cash, and right now they're doing it at incredibly low interest rates. 
  
With a line of credit for a few hundred thousand dollars you have the flexibility you need to take that cash out of the business and then borrow for a few days here and there if you need some short term inventory or if a customer stretches you out a few weeks on payment.    
 
Think about it -- would you rather have $100,000 borrowed on your line of credit and $100,00 in your brokerage account, or neither?        


To forward this to a friend, Click Here

Other CEBI Blog Articles... 

Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Who Earns the Most on an Annuity?

Would you want to make a $90,000 investment when you knew the person selling it was going to take $20,000 out of your investment, so that you end up with only $70,000 in the account? Happens all the time, when a person selling an investment product like an annuity brands himself an investment advisor. His best interests and yours are diametrically opposed, but he's befriended you and proposed an annuity as your best investment option.

Investment advisors come in a lot of different stripes. There are fee only (my preference), then fee based (fees plus commissions), then commission based, and finally product based "advisors". The product based investment advisor sells things -- mostly insurance-type products, and gets paid a commission for doing so. Those include insurance policies and annuities, and other investment vehicles, like IRAs that have insurance policies or annuities inside them. That's where you want to be watching your wallet -- the commission-based advisor (agent/salesman) has an inherent conflict with your interest. His interest is selling a high-commission product, regardless of your interest.

If you're talking with a product-based investment advisor, it won't take very many meetings for him to decide your best wealth-building vehicle is either cash value life insurance or, more likely, an annuity of some type. Annuities and annuity salesmen have had a resurgence in this choppy equities market, which has spooked most retail investors and left them looking for something perceived as "safer".

What's safe about an annuity is this: The lion's share of the annuity's benefit goes to the insurance company writing it. They stand to earn the most through hidden fees, costs, etc. that may cause your actual investment yield to be substantially lower than you're led to believe. Of course, they keep the money if you die before the annuity pays out.

Second in line is the annuity salesman. How much do these guys make for selling one of these? Hold onto your hats.

Sometime back, CEBI got listed in a directory somewhere as an investment advisor -- no idea how that happened or how to get it fixed. A curious side benefit of that is I'm on occasion getting mailings intended for "insiders" in that business. Here's a recent one (quoted word-for-word from the mailing):

"A Financial Planner offered an annuity through Woodbridge with an 8% yield on cash flow from Metropolitan Life Insurance Company. That Annuity was comprised of 240 monthly payments of $2,500 starting 10/10/2030, going through 9/10/2050 for a purchase price of $71,000. The Financial Planner offered this to his investor to yield 7%, a difference in yield of 1% to the investor. The investor's purchase price was $91,000, netting the Financial Planner a profit of $20,000!"

Read that again. This is a promo to financial planners, and the case study is that a salesman bought an annuity product for a $71,000 one-time deposit, then quoted it to the customer at $91,000, pocketing the $20,000 difference. Of course the customer has to live 18 years to collect a dime and 38 years to collect the full benefit, which then ceases (he has no upside, but if he dies NY Life keeps the rest). This type of offering is known technically as a Structured Settlement, where an intermediary bought someone's annuity (taking a nice discount from the seller) and then resold it.

Cash value life insurance is similarly profitable, to both the company and the salesman, who usually gets the first year or two of premiums as a commission.

The primary pitches I've seen on annuities are safety (a questionable claim on many) and tax benefit. Considering the many other tax-advantaged investment choices you have, a $20,000 front-end haircut is a lot to pay for tax benefits.   These are very complex, high cost, illiquid products, and few consumers understand how limited their options are. 

Ask some serious questions about how your investment advisor is getting paid -- especially if he thinks your best investment vehicle is either an annuity or cash value life insurance. CEBI member Brian Fricke has offered a couple of resources for your use:

Tough questions to ask your advisor

Financial Planner Questionnaire

 Other CEBI Blog Articles... 

To forward this to a friend, Click Here

Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Financial Planner Questionnaire