Sunday, July 27, 2008

Selling Your Small Business

If you are like many business owners out there, you dream of one day selling your business, cashing that one last big check, and riding off into the sunset.

However, gearing up a business to sell is something that should be established and worked at from day one.

Many small business owners approach their business in a way that allows them to avoid paying taxes (not reporting all of your income, inflating your expenses, etc.). Aside from the legal and ethical implications here, you are setting yourself up for great disappointment when it comes time to sell your business.

Here are just some of the things you risk by taking the “I’ll do what I can to avoid taxes now and worry about the sale of my business later” approach:

1) Many years of continued profitability increase the likelihood of a quick sale and ensures that someone will be willing to pay top dollar for your business. Underreporting income and overstating expenses makes your business look less profitable
2) A good buyer will have his accountant run due diligence and look into the history of your business. A history of problems with the IRS means that your business will be less desirable due to the fact that with it may come additional future IRS scrutiny
3) A buyer who sees your tax avoidance as a sign of other possible unethical business practices, they may be less willing to negotiate with you or they may walk away from the deal all together


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Monday, July 21, 2008

Don't Claim the Home Office Deduction

Looking for a quick tax deduction this year?

If so, most tax preparers and unscrupulous accountants may steer you towards the Home Office Deduction. DIY tax preparation software such as TurboTax or TaxCut will also lead you down this road.

However, if you are fortunate enough to have hired a knowledgeable CPA who is ethical and looking to establish a long-term accountant/client relationship with you, you will not be claiming that Home Office Deduction anytime soon.

Claiming this deduction will save you a few hundred dollars on your current tax return. Sounds great, right? Even if claiming this deduction will expose yourself to significantly higher audit risk, you are willing to do it in exchange for those couple hundred dollars.

However, what you haven’t been told up until now is the long-term impact of claiming the home office deduction…how it can cost you up to $15,000 in additional taxes when you eventually sell your house!

Considering that the average homeowner who claims the home office deduction saves approximately $450 in taxes each year, they would have to live in their house for over 33 years to ensure that they have saved enough taxes each year to cover the potential $15,000 tax bill.

How does claiming the home office deduction lead to a high tax bill in the year you sell your house? Well, the IRS allows a $500,000 capital gain exclusion to married couples who file a joint tax return. What this means is that, given certain requirements are met, you can sell your house for a profit of up to $500,000 without having to pay a penny in capital gains taxes. However, if you allocate 20% of your house to your “home office” for purposes of claiming the home office deduction, you run the risk of losing 20% of your capital gain exclusion. Losing 20% of this $500,000 exclusion means that $100,000 of your gain would be taxed at the capital gains rate (currently 15%) and you would be faced with a $15,000 tax bill.

One caveat – renters. If you rent your home instead of owning it, you can claim the home office deduction without having to worry about this long-term negative financial impact. Keep in mind, that your tax returns will still remain subject to additional IRS scrutiny as the home office deduction is an often-challenged deduction.


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Monday, July 14, 2008

Don’t be a Small Fish in Your Accountant's Pond

Ever feel like you are one of the smallest fish in your accountant’s pond?

If so, it may be time for a change.

Being the small fish means that you are last in line to hear about changes in the tax code that could benefit you and your company…it means you receive answers to your questions weeks after you ask them…it means virtually no tax planning is done throughout the year to benefit you come tax time.

The main reason why accountants treat their smaller clients like “small fish” is simply due to the fact that they are not good business people themselves. Tip #1…if your accountant does not run his own business well, why do you have him on board as a trusted advisor for your business?

Let me explain to you why my firm, Merl & Hanley, LLP has made a conscious decision to view our smaller clients as our best clients:

1) Accounting is a service-driven business that revolves around one main thing…time. There are only so many hours in a day…a week…a year. Accountants gauge the success of their practice by their hourly rate. Taking on larger clients that provide us with 10, 15, 20+ hours of billable hours each month typically means having to offer these clients some type of “volume discount.” So, if we are able to earn $150 per hour working on the smaller (1-2 hour per month) client, we can only earn $125-140 per hour working on the larger (20+ hour per month) client. Since hourly rate is the driving force of our business, the smaller client is actually our better client since we are able to earn more per hour working on the smaller client’s file. That is why our smaller clients come first!

2) Accounting, like all other service-driven businesses succeeds due to referrals and satisfied clients are the number one source of referrals. By choosing to service 200 smaller clients for the same amount of fees that we could earn by servicing 50 larger clients, we expand our field of referral sources by 300%. Growing our business through referrals means spending less time on marketing, which means more time to service our existing clients.


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Tuesday, July 8, 2008

IRS Raises Standard Mileage Rates

With gas prices soaring, the IRS has announced an increase in the standard mileage rates that taxpayers can use to deduct the cost of driving for business, medical services, or moving.

Effective for driving from July 1 through December 31, 2008, the standard mileage rate for business driving has been increased to 58.5¢ per mile. The rate for business miles driven from January 1 through June 30, 2008, remains at the previous rate of 50.5¢ a mile.

The IRS also increased the deductible rate for medical and moving mileage for the last six months of 2008 to 27¢ a mile. For the first six months of 2008, the rate remains at 19¢ a mile.

Note that the IRS made no change in the mileage rate for driving in conjunction with charitable activities. That rate is set by law and remains at 14¢ a mile.

The standard mileage rates provide taxpayers with an IRS-approved recordkeeping shortcut for deducting expenses for business, medical, and moving driving. The rates are adjusted annually based on operating costs for vehicles. When costs rise dramatically during the year, the IRS considers a midyear change.


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Fixed Fee Billing

When interviewing an accountant, whether this is your first time hiring one or whether you are making a change from your current accountant, one factor to strongly consider is how you will be billed. Will the accountant bill you on a per-hour basis or will you enjoy the benefits of fixed-fee billing.

Although hourly billing seems to have been the industry standard for over 50 years, as the client, it’s time that you stand up for your rights and demand a change to fixed fee billing.

Fixed fee billing is a method employed by many newer accounting firms. It involves them gathering enough information about you and your business to estimate what amount of work will be involved in servicing your company. Using this estimate, the accountant determines a set monthly, quarterly, semi-annual, annual, or per-project fee.

Major Benefits of Fixed Fee Billing:

1) You always know what the fee will be before you agree to the work

2) Rather than hesitating to call or e-mail your accountant with a question out of fear that his meter will be running, you enjoy the freedom of being able to pickup the phone or shoot him an e-mail whenever the need arises

3) No time wasted questioning or disputing bills for which your accountant and his staff spent more time on a project than you think they should have

4) Not being subject to “timesheet padding.” When your accountant’s staff is working on your file and they take a cigarette break, grab a cup of coffee, get interrupted by a phone call, have a computer problem, or chat with a co-worker, you can just about guarantee that this time will be billed to you. While all employees deserve a break, you should not be paying them for their rest.

5) Not being subject to billing program intervals. Most billing programs that accounting firms use to track billable hours run off minimum intervals such as ten minutes, twelve minutes, or fifteen minutes. This means that when you spend three minutes on the phone with your accountant, you are going to be billed for at least ten minutes. Doesn’t seem like much, but add up all the rounding for an entire year and you are looking at five-ten additional billed hours each year.

Small businesses can save an average of $500-$1,500 per year in fees simply by hiring an accounting firm that utilizes fixed-fee billing.


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