EQUINOX Business Law Group - Seattle Bellevue

Year End Planning for Investment/Retirement

November 24, 2009

Our Guest Blogger this week is Kris Gray of Integrity Financial Group based in Bellevue, WA. IFC works with individuals and business owners to help them plan their investment and retirement strategies.

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With the holidays approaching and the New Year around the corner, now is an ideal time to consider making necessary changes to your company’s qualified retirement plan for 2010. As a boutique 401(k) advisory firm, we are quite familiar with the different strategies small business owners might implement at this time. There was some sweeping legislation and pension reform passed in 2006 that impacts qualified plans, and would necessitate a more in-depth review if that has not happened in the last couple of years. When you couple the current monetary and fiscal policy decisions with the volatility of the stock market in the last two years, only a fraction of the retirement plans that I come in contact with are maximizing the tax benefits that are available under the Internal Revenue Code, and have a sound investment strategies that includes hedges against a weakening dollar.

Here are a few thoughts from my desk to yours:

1. Make sure that your current retirement plan has investment options that include inflation hedges (like TIPS or Commodities) and a wide array of USD hedges (like global funds).

2. Take advantage of after-tax investments (as a tax hedge) such as Roth 401k, as it is fairly predictable that future taxes will likely be higher than they are now.

3. If you have a SIMPLE IRA consider adopting a 401k plan on January 1. You cannot change in the middle of the plan year, so if you don’t make the change now, it will be another year before you can. A SIMPLE IRA or a SEP IRA do not have a Roth component.

4. If you need access to your retirement account money for a short-term fix, set-up a 401k and roll your IRAs into the plan and take a loan from your account with no penalties or tax (just remember that you will need to pay the loan back in at least 5 years).

5. If you have an IRA, consider converting part of it next year to a Roth IRA, as the income limitations are removed for 2010…particularly if we see a downward slide in the markets between now and then.

The national debt just crossed $12,000,000,000,000, and our deficit spending is looking to nearly double that over the coming decade. The unfunded obligations of Social Security, Medicare, and Medicaid are staggering. There is more to comment on here, but I would say that today’s small business owner must use prudence in their tax, investment, and legal planning to ensure a legacy for their families and friends.

Integrity Financial Corporation helps business owners evaluate and make smart financial planning decisions on behalf of their business. Visit our website at www.ifclegacy.com.

Year End Tax Planning

November 19, 2009

Our colleauges at Berntson Porter & Company have collaborated to provide some end-of-year tax planning tips. Thank you to Jennifer Raybon, David Berthon, and Darcy Kookier for sharing their knowledge!

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In order to achieve financial goals, comprehensive tax and financial statement planning is not just a good idea, it is a cornerstone of fiscal success. This activity becomes even more critical as year-end rapidly approaches. Planning should not be limited to estimating tax liabilities. The relationship between taxes and the company’s financial position represented in its financial statements must be planned for and strategized congruently. Basic, but very important factors, to consider when planning are:

• Will I meet my financial covenants with the bank?
• How will my surety view my year-end financial statements?
• Are there additional tax deductions/incentives available?
• How do I meet all potential tax and financial statement goals?

When considering these factors, review the following items to identify how to optimize your position from both a tax and financial statement perspective.

Cash is King

Formulate strategies to maximize the cash balance at the close of the year. Consider requesting early payment from customers on large projects or orders. This will reduce the receivables balance and increase the liquidity of the company. Avoid taking excess stockholder distributions until after the close of the year.

Review Accounts Receivable

Review the accounts receivable aging schedule for uncollectible receivables. Accounts receivable in excess of 90 days are discounted heavily by financial statement users, and in some instances, removed from the collateral/covenant calculations altogether. Consider offering a nominal discount in order to accelerate the receipt of payments. Invoices which are determined to be uncollectible should be written off prior to year-end in order to be deducted for federal income tax purposes.

Planning for Fixed Asset Purchases

Taxpayers may elect to expense up to $250,000 of qualifying fixed asset purchases in the 2009 tax year. This amount begins to phase out if fixed asset purchases exceed $800,000 and can only be expensed to the extent a taxpayer has income from an active trade or business. In addition, taxpayers are eligible to take 50% bonus depreciation on qualifying new assets. This incentive applies to 2009 fixed asset purchases only (except for certain long-lived assets). Since both the increased Section 179 expensing and bonus depreciation are tax adjustments only, these two incentives can generate significant tax deductions without hurting a GAAP basis balance sheet.

Special Considerations for Companies with Inventory

Financial statement users, especially banks, consider proper inventory valuation important. Banks use inventory value in borrowing base calculations in order to determine lines of credit when lending to distributors and manufacturers. Inventory should be valued at the lower of cost or market. Evaluate what your inventory can sell for on the open market, and if the market value is less than what is reported on your books, write it down to net realizable value. When this inventory is written off, it is also a deduction for tax.

Internal Revenue Code (IRC) Section 263A requires certain overhead costs be capitalized as part of inventory for tax purposes. This applies to all manufacturers and to resellers with average gross receipts in excess of $10 million for the previous three years. If 263A has not been required in the past but you are approaching the threshold, estimate what sales are going to be through year-end and determine if there are ways to defer revenue until next year. If you have been subject to Section 263A in the past, evaluate opportunities to lower year-end inventory levels to reduce its impact.

For companies with domestic production activities, IRC Section 199 provides for an additional deduction. Domestic manufacturers are allowed a deduction for 6% of either taxable income or net income from qualified production activities in 2009. In 2010, the deduction increases to 9%. Evaluating what constitutes domestic activities can maximize tax savings as the rate increases.

If your company has excess inventory, consider donating it to a qualified charity. Only C-Corporations that contribute inventory to a qualified 501(c)(3) organization are eligible for the deduction. The deduction can be up to twice the basis of the donated property and companies have two and a half months after year-end to make the contribution.

Finally, if your company has multistate operations, evaluating where the company’s inventory is held could result in tax savings. Most state apportion income based on a 3-factor formula that includes inventory. Take a look at year-end inventory levels by location and determine if it’s possible to move inventory to a state with little or no income tax.

Special Considerations for Contractors

If your company is in the construction business, financial statement users do not like to see a decline in gross profit margin from contracts in progress in prior years that are now completed contracts in the current year. If this becomes a trend, it could indicate poor estimating and job cost report forecasting or that a contractor is not recognizing revenue correctly for financial statement reporting purposes.

Furthermore, the percentage of completion and estimated gross profit percentage should accurately reflect a project’s position at year-end. Costs to complete should be carefully analyzed and forecasted. Job closeouts are important and delays in this process typically reduce profitability. Examine projects greater than 95% complete and focus on closing them out prior to year-end.

Additionally, underbillings are a potential red flag to third-party financial statement users, especially if the project is nearing completion. Underbillings may imply unresolved change orders or inefficiencies in the billing process. From a federal income tax perspective, a contractor will recognize taxable income on these underbillings that could be avoided.

If residential projects are on the contracts in progress schedule, they represent tax deferral opportunities for contractors without affecting the balance sheet. Contractors can defer 100% of the profit on home construction jobs, mainly single family homes and townhouses, and 30% of the profit on residential construction jobs, including apartments, condominiums and even military barracks, until the projects are complete.

Don’t Forget the Covenants

For most, year-end planning is about reducing taxes. Keep your company’s financial statement covenant requirements in perspective, especially during these troubled economic times. It is needless to say that banks have a heightened sensitivity to financial performance which is measured by these covenants. Don’t put yourself in a bad position with your bank in the effort to save a few dollars in taxes. Take the time to review covenants as well as lending agreements to make sure the requirements and needs of your bank or bonding company are understood. Depending on the level of service – audit, review, or compilation – there could be different requirements as well as differences in timing or costs.

Labels: business planning, tax planning

Year End Estate Planning

November 10, 2009

Our guest blog post this week is by Kanoa Ostrem, a Seattle-based estate planning attorney. Mr. Ostrem's practice focuses on counseling and assisting individuals and families with their estate planning needs in a cost-effective and efficient manner. For more information, visit his website at www.ostremlaw.com.
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The end of the year presents just one critical estate planning deadline. December 31st is the last day to utilize your $13,000 "annual exclusion" gifts in favor of your loved ones. Each year you may make $13,000 gifts to as many individuals as you wish without gift tax consequence. Importantly, you are not even required to report the gifts as long as they do not exceed $13,000 in any given year for any beneficiary. If you give more than $13,000 to any beneficiary in a year, then you are required to file a gift tax return. You would then be utilizing a portion of your $1,000,000 gift tax exemption or even triggering a 45% gift tax!
If you don't use the $13,000 annual exclusion in a year, it is essentially wasted since you don't get to carry it over into the next year.

A good strategy is to set up a "Family Gifting Trust" and then to write a check to the trust for each trust beneficiary. For example, if you have 3 children and 7 grandchildren, you may gift $130,000 to the trust and use the annual $13,000 exclusion for all 10 beneficiaries. If you are married, your spouse may make the same gift, thus resulting in a total of $260,000 worth of gifts. The Trustee may accumulate these funds and need not make current (or equal) distributions to the the trust beneficiaries. Importantly, you may gift shares in real estate or a family entity such as a Limited Liability Company or Family Limited Partnership to minimize the impact on your cash reserves. Over time, this is a very simple yet powerful way to move a family investment to the next generations.

Planning: A Legal Check Up for Your Business

November 02, 2009

Planning is always a critical part of starting a business. As the business grows, though, many find that the daily operational demands and “firefighting” take over. Even when time is set aside for planning, the time is often encroached upon by other work that seems more pressing. Business owners realize the importance of the plan yet so easily find ourselves sidetracked. Is this because the planning for business growth is difficult or because there are no right answers, so it’s easier to avoid the questions altogether? In some cases, the matters that need to be addressed are front and center in the business, staring us right in the face. Yet often, we ignore them, hoping we won’t have to invest the time and money to put things in order. Choosing not to face these questions, though, won’t cause them to go away. Instead, we must take a deep breath and baby steps into addressing the key areas that keep our businesses from growing into the vision of its potential.

For our business clients, we find the ideal time to plan is at the time of their annual meeting, often in connection with the business’ annual license renewal or at year end. We reach out to our clients each year with key questions in our “Annual Check Up,” helping them to think through critical changes in their businesses. The Check Up covers the following important business planning matters for the upcoming year:

1. What are the goals of the business?

2. What changes has the business seen in the past 12 months and what changes are anticipated in the next 12 months?

3. Does the business require a change in business structure due to changes in ownership, risk tolerance or tax assessments?

4. Has the business held the required annual meetings of members/shareholders and board members?

5. Do the business owners have a Shareholders’ Agreement or Operating Agreement that governs any changes in business ownership (i.e. death, disability, voluntary departure)?

6. Has the company’s valuation changed so that the buy/sell provisions must be funded by insurance or some other fund?

7. Does the company require additional funding through loans, capital from owners, or third-party investors?

8. Has the company evaluated its business relationships and created written contracts for key relationships?

9. Are employees and contractors under contracts that protect the company’s intellectual property?

10. Does the company have an employment manual for employees?

11. Has the company moved into any new products and services that may create additional liability or require additional intellectual property protection?

12. If the company does business online or participates in social media, is the company protected from online activities?

13. Has the business changed where it operates its business?

14. Has the business acquired or sold significant business assets?

15. Does the business conduct regular searches of its tradename(s) and trademark(s) to identify infringement?

16. Has the business met with each member of its core business advisory team in the past 6 months?

These questions will enable you to consider some of the key areas of potential exposure in your business and provide an opportunity to button down important areas that will facilitate growth and value. Each question points you to a critical function of the business. In answering these questions, you can gauge where your business might require an overhaul or simply some fine tuning to move forward.
For business owners seeking to accelerate their growth next year, now’s the time to dive in and prepare your business for success!