5 Ways for Small Business Owners to Separate Business and Personal Finances

I suspect most business owners that provide for their families would argue that nearly all business matters are personal! Unfortunately, too many times I have seen clients, intentionally or not, commingle their personal objectives with their business. This can quickly lead to decision making that has calamitous results for both your personal and business planning.

Here are five issues I hear frequently from small business owners:

“I spent too much money and now I don’t have enough to pay taxes!”
--Always categorize business profits before you spend them--

Profits should be allocated to serve the following purposes: business reinvestment, Federal and state tax liability and owner compensation. Work with your CPA to decide exactly what percentage of profits should be set aside for taxes.

“I am certain we will see 50% revenue growth next year!”
--Try to keep your forecasts conservative--

Sometimes small business owners will spend either business or personal funds too quickly because they are over-confident about future business revenues. This leaves a huge hole and the escape can be found only from sacrificing future revenues or future compensation.

“My business doesn’t make enough money so I am cutting expenses.”
--Instead, Focus on building revenue--

Sometimes small business owners become obsessed with managing basic expenses. Often, one of the first expenses reduced is marketing. My most successful clients are the ones who maximize the value they offer to their customers and invest in the most effective marketing strategies. Marketing is not an expense – it is an investment and as long as you are generating a strong return on that investment, your revenue growth will dwarf the insignificant operating expenses.

“My business needs to borrow some money to cover expenses.”
--Whenever possible, keep debt levels low--

Many businesses require some form of debt but too many times I have seen debt become an anchor restricting business growth. For example, debt may be necessary for large asset purchases (equipment, vehicles, etc.). If necessary, lines of credit are best used to finance revenue-generating investments. Just be sure to pay back the principal as soon as you reasonably can. Keep in mind: the greater the uncertainty of your future revenue, the less debt you should incur.

“I don’t want to pay myself now; my business needs the money.”
--Remember to compensate yourself reasonably-

Any viable business model allows for owner compensation. Even if your long-term plan is to sell the business for a substantial profit, as a talented individual putting forth time and effort, as a business owner you are entitled to compensation. Be sure to include this your business budget.

In my experience, the most successful small business owners seek to maximize profits, maintain sufficient cash reserves, invest their earnings and take from the business only the money they need. Follow these simple rules and both you and your business will reap the financial benefits.

Expanded HSA May Be Bright Spot in Healthcare Reform

It is challenging to find any degree of optimism in the healthcare debate. Mostly, what we hear are rhetorical grandstanding and bitter divisiveness.  Meanwhile, the uninsured continue to suffer and, for the fortunate ones who have coverage, their income is being siphoned by skyrocketing insurance premiums and prescription medication costs.    

Yet, there is reason for hope through the Health Savings Account. The HSA is an amazingly useful medical-expense savings and retirement tool.  Account holders can contribute thousands of dollars each year, receive a tax deduction for making the contributions, and withdraw the money for qualified medical expenses without paying penalties or income tax. Better yet, once you reach retirement age, you can draw the funds for any purpose, just as you would from an IRA, with no penalty.    

In 2017, individual HSA owners can contribute up to $3,400 per year, and families can contribute up to $6,750. The IRS also permits individuals who are 55 years old or older to make catch-up contributions that increase those limits by $1,000.   

Interestingly, some of the proposals under consideration in Washington, D.C., would nearly double the limit of allowable annual HSA contributions. Further, under the proposed legislation, HSA account owners may be able to use the funds for over-the-counter purchases (which is not currently permitted).   

The significant benefit of an HSA is that the funds you contribute remain yours even if you do not spend them.  Quite a few taxpayers are familiar with Flexible Spending Accounts (FSAs) that have a use-it or-lose it function; if you do not spend the money by the end of the year, it is gone. With HSAs, the money remains yours and it carries forward each year.    

Any distributions from an HSA account that are used for qualified medical expenses are not subject to federal income taxes. Additionally, if you are making COBRA payments due to a loss of a health insurance plan, you can use the HSA for that too.

For retirees, you can use your HSA reserve to pay for Medicare. What’s more, once you reach 65, you can withdraw funds to pay nonmedical expenses and the distribution will be taxed the same as traditional IRA income.

HSA accounts are a terrific supplement to a retirement plan but they are not without their limitations. First, the funds cannot be used to pay either health insurance premiums or Medicare supplemental policy premiums, only qualified medical expenses.  Second, you are not able to use both an FSA and an HSA; you may only use one or the other.  Third, not all states offer the same tax benefits for HSA contributions.  

Expanding HSAs to enhance eligibility and participation is smart, low-hanging fruit.  This would be an easy way to encourage Americans to save more money – something that we desperately need.

Published on njspotlight.com 7/24/17

Testing Your Resolve

Now that the ball has dropped in Times Square it is time for another annual tradition – New Year’s resolutions.  So, along with improving your diet and exercising more, consider adding these:

“Will” you? – I have lost count of how many clients with whom I have met that have a spouse, children, and substantial assets but an outdated or even no will at all.  There are vast dangers in ignoring estate and probate law – failure to be proactive can have catastrophic results.  Skilled professionals can ask you the right questions and help you avoid these potential pitfalls.  If you have not updated your will in some time, you should speak with an attorney.

An end to debit cards – Financial institutions have created a convenient method for you to pay for your purchases.  Unfortunately, aside from that convenience, there is virtually no other reason you should ever use a debit card.  Firstly, you are granting a vendor access to your checking account at the point of sale – seldom a good idea.  Secondly, in the event of a dispute with the merchant, you will have far less recourse if the charge has already hit your account.  Finally, you are far better off using a credit card that can protect you as a consumer and offer you rewards for card usage.

Maximizing your retirement – Yes, I am referring to 401k and other employer-provided plans but you have many other options as well.  Although you may not be entitled to a deduction, you can contribute into your IRA each year.  In fact, you may qualify for a “back door” Roth IRA contribution which can be very valuable.  Further, maximizing contributions into HSA accounts can be very beneficial in the long run. 

A real plan for education – If you have at least one child, it is crucial to have a calculated plan for financing their education.  To begin planning, you should have a sense of what schools they might attend, the current tuition and fees for those schools, and the appropriate rate of inflation so that you can estimate the overall costs.  I encourage my clients to have a multi-pronged approach to education planning which can include 529 savings plans, taxable investment accounts and, if necessary, home equity and earned income savings.  Assess the costs, adopt a savings plan that works, and stick to it.

Investment allocation – It is a very good idea to review all of your investment accounts to be sure that the securities you hold align with your goals.  Your account allocation should reflect your objectives, risk tolerance, and future anticipated income.  If you are unable to say with confidence how your 401k account is being invested, then you definitely need to investigate and make adjustments.  This also applies to any other account including IRA’s, taxable accounts and 529 accounts for your children.

No matter how you may feel about your financial situation, you have a far greater chance of achieving your financial goals if you begin the planning process earlier.  Not everyone has the proper appreciation of exactly how much they will need for their children’s education or for their own retirement.  Unless you have already calculated these numbers with a great deal of thought, you will likely benefit from meeting with a financial planner.  But before you do, jot down your goals and start thinking about adding one or two items to your 2017 resolutions. 


Give With Your Heart ... But Use Your Head

It is that most wonderful time of the year when every day becomes a mad scramble to attend parties, meet family obligations, buy gifts, and in between, get work done.    The holiday season engenders feelings of nostalgia, hope and gratitude.  And, with that, we spend incredible sums of money, sometimes without thinking.  Generosity is a virtue so here are some basic tips on giving to those in need without giving it away wastefully:

·         If you are not already familiar with the organization to which you are donating, do some research to be sure it is legitimate.  IRS.gov select check:  https://www.irs.gov/charities-non-profits/exempt-organizations-select-check

·         Contributions to specific individuals, non-qualified organizations, political organizations and candidates are not deductible.  Be cautious with crowdfunding websites like Go Fund Me, YouCaring and Generosity.  Oftentimes, those contributions are not deductible.

·         You’ll need some sort of written proof (cancelled check, credit card statement, etc.).  If you donate $250 or more, you must receive a written acknowledgment from the charity.  If you donate cash, your best bet is to simply ask for a receipt.

·         If you receive a benefit from your contribution such as merchandise, tickets or membership rewards then you can only deduct the amount of your contribution less the fair market value of these benefits.

·         Donating property can be tricky.  The most common property, such as clothing and household items, should be usable condition.  Vehicle donations are subject to additional rules.  Appraisals may be needed for valuable property exceeding $5,000.

·         We are sorry to report that you cannot deduct the value of your time!  You can, however, deduct costs incurred such as certain travel expenses, uniforms and supplies.

·         Gifts must be made by December 31, 2016 to be included in your 2016 tax return.

·         Oh, and of course:  make sure you will actually itemize deductions on your tax returns!

There is certainly the possibility that future tax reform could significantly impact the deductibility of charitable contributions.  One version of President-Elect Trump’s tax plan involves ceilings on itemized deductions which includes donations to charity.  Similar plans being proffered by Congress, however, preserve charitable giving so there is reason to be optimistic.   For now, you can feel confident in giving generously and prudently!


Social Insecurity – How You Should Plan Ahead

So far, we have seen two debates that have covered a wide array of political and economic issues.  Unfortunately, there is one substantive topic neither candidate was eager to discuss – Social Security. 

As the nation’s largest domestic spending program, and considering the amount of tax collected by our government, one would hope that Social Security would remain solvent and achieve its intended purpose.  Unfortunately, this is not the current trend.  According to the Social Security Administration, the trust funds serving retiree and disability benefits will be depleted by 2034.  Of course, that is assuming the trust funds actually exist.

To restore Social Security, lawmakers would have to choose among the following options:

  • Reduce benefits – certainly the least favored option amongst current and pending retirees, perhaps the most active voting block.

  • Increase taxes – strictly opposed by both Corporate and Main Street America, this would likely entail an increase in payroll taxes assessed to both employers and employees.  The Bipartisan Policy Center recommends an increase from 6.2% to 6.7% as well as increasing the cap on earnings subject to social security taxes.

  • Increase the retirement age – this is not exactly music to the ears of American workers. The AARP suggests immediately increasing the age from 66 to 68.

The most recent notable effort to reform the program was put forth by President George W. Bush in 2005.  After his re-election, President Bush spent a great deal of time and political capital only to be completely disregarded by an anxious congress.  Sensing that the Washington will only act in the event of an immediate financial crisis, American taxpayers are left to their own devices to calculate what, if any, Social Security benefits they might receive during their retirement. 

Here are some strategies you should consider:

  • Assume you will receive no Social Security benefits whatsoever – in assisting my clients with constructing their retirement plans, we generally exclude both inheritance and social security.  With both a reasonable annual income and retirement expectations, an impressive nest egg can be constructed within 20-25 years of advanced planning

  • Alternatively be conservative with your calculation of Social Security benefits:

  1. The SSA offers a quick calculation of benefits – for general planning purposes, considering significantly discounting the benefit. https://www.ssa.gov/oact/quickcalc/

  2. Presently, the tax treatment of social security benefits depends upon your total income.  For safety, assume all future benefits will be fully taxable.

  • Diversify your retirement income sources:

  1. Maximize retirement plan contributions – at the very minimum, you should contribute up to the amount of your employer match.  Ideally, you should contribute the maximum amount each year. 

  2. Utilize both Traditional and Roth IRA’s – even if you have an employer-provided retirement plan, you can still make IRA contributions.  Ask your financial advisor about the opportunities to convert Traditional IRA’s to Roth IRA’s.  Having both will help to generate withdrawal options and strategies during your retirement.

  3. Build a health care reserve – HSA plans allow for families and individuals to build a cash reserve for medical expenses.  Having a reserve of this kind can serve you very well during your retirement years, by which time, health care expenses could be astronomical.  Additionally, these plans may also offer significant tax planning benefits.

When I was a child, there was a nearby intersection notorious for requiring great care and caution when traversing.  I asked my father if the town should install a traffic light and he said “They will…after a major accident.”  Unfortunately, he was correct.  Let’s hope that Washington can restore Social Security before a crisis occurs.




Vacation Homes - To buy or not to buy

If you are anything like me, you begin to truly relax around the third day of your vacation. Soon after that, you visualize what life would be like working from a beach house six months out of the year.  Then you start to analyze:  How can I be sure I can afford the purchase? Is it a good investment?  Are there tax consequences?    

Here are some thoughts to get you started:

1. Know your plan

Be realistic in your expectations of rental income.  Roughly 25 percent of vacation homes are rented to other people for at least part of the year and much of that rental activity is seasonal.  Use a conservative estimate as to how often you will really visit. If you don't rent out your unit, you want to make sure you will visit enough to make the purchase worthwhile. Pick a place you love and want to return to often as you won't want your home to sit unoccupied.

Calculate your return on investment. If owning a vacation home is part of your overall investment strategy, make sure it's a good move. Estimate returns and weigh them against other uses of the same money.

2. Know your costs

To purchase a vacation home, you should be able to comfortably put down at least 20 percent of the purchase price.  In the current market, if you are qualified, you should be able to find a second-home mortgage comparable to first-home rates.  However, the lender will want to ensure that your overall income can support both mortgages.

You will also have to pay utilities, HOA or condo fees, property taxes, insurance, utilities, house cleaning, trash removal, landscaping and home furnishings.  Particularly if you live a distance away from this home, remember to install a security monitoring system.

3. Know the rules

Not all homes can be used as rental property. Homeowner or condo associations may set rules for rentals, as may cities. Some resorts may require you to use their programs, which set standards for interior furnishings and amenities, but the property handles the logistics for a percentage of the rent. If you plan to rent out your property, it's especially important to research all these rules before you buy.

If you plan to visit infrequently, give strong consideration to hiring a local property manager that will maintain your home. It will cost extra, but so will the damage from those frozen pipes or leaky roof, especially if it goes unnoticed for a long period of time.

4. Know the tax consequences

Rental income is taxable on federal and most state returns, though with careful planning, your expenses should offset this income.  If your deductible rental expenses are more than your gross rental income, you will report a loss.  This loss, unfortunately, is not generally deductible unless you qualify as a real estate professional.  If you are not a real estate professional, there can be other benefits to the loss.

Vacation homes are subject to what's called the 14-day or 10 percent rule. You can rent your home for up to 14 days a year and pocket the rental income without having to declare it on your tax return. If you rent out the house for more than 14 days a year, you are considered a landlord by the IRS and you must report the income but will also qualify to deduct certain rental-related expenses.

5. Know the end game

Purchasing any form of real estate is among the most illiquid investments.  It is a major commitment, your principal is difficult to access and there is no guarantee of profit.  If you do manage to sell for a profit, you will almost certainly be subject to capital gains tax. The actual amount of that tax will vary depending upon your adjusted gross income as well as your home state tax rules.   There are other more complicated rules pertaining to depreciation recapture which will you need to pay.  If you sell the home for a loss, it may or may not be deductible depending upon the rental activity.

Here is one way to potentially postpone those gains:  you can convert your vacation home to your primary home.  The catch is that you must have owned and lived in the home as your primary residence for two of the five years prior to sale.  There are other specific requirements as well so, if you choose this route, definitely reach out to your accountant.

With any major purchase, you must be confident that it something you can comfortably afford.  Consider a vacation home more of a luxury than an investment; this will help to manage your expectations.  If you become serious about moving forward, put together a spreadsheet of all the costs and be completely sure you can afford this commitment.  And, as always, find yourself a good attorney and CPA who can provide you with critical guidance.