Frequently Asked Questions
Learn how to lower your taxes with these legitimate tax saving strategies.
Business Owners
Small Business: Frequently Asked Questions
How can I ensure that my small business will survive the transition into the next generation?
Less than one-third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.
The following is a list of options to consider:
Close the doors.
Sell to an outsider or employee.
Retain ownership but hire outside management.
Retain family ownership and management control.
There are four basic reasons why family firms fail to transfer the business successfully:
Lack of viability of the business.
Lack of planning.
Little desire on the owner's part to transfer the firm.
Reluctance of offspring to join the firm.
The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.
What's involved in succession planning for family businesses?
Transferring the family business requires the family to make a determined effort to do the following:
Create a business strategic plan.
Create a family strategic plan.
Prepare an Estate Plan.
Prepare a Succession Plan, including arranging for successor training and setting a retirement date.
These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.
Q: What is a business strategic plan?
A: A business strategic plan defines goals, objectives, and targets for a company and outlines its resources will be allocated in order to achieve them. When a strategic business plan is in place, it allows each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company's future. A strategic plan is long-term in nature and focuses on where you want the business to be at some future date.
Q: What is a family strategic plan?
A: The family strategic plan establishes policies for the family's role in the business and is needed to maintain a healthy, viable business. For example, it should include the creed or mission statement that spells out your family's values and basic policies for the business, and it may include an entry and exit policy that outlines the criteria for working in the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.
Q: What is an estate plan?
A: An estate plan is a written document that outlines the disposal of one's estate and includes such things as a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the business because, without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.
Q: What is a succession plan?
A: A succession plan identifies key individuals who will be groomed to take over the business when the time comes. It also outlines how succession will occur and how to know when the successor is ready. Having a succession plan in place goes a long way toward easing the founding or current generation's concerns about transferring the firm.
How do I know whether I have what it takes to run my own business?
Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.
When determining what business is "right for you," consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you're willing to make to running a business.
Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?
What should I include in a business plan?
The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:
Introduction
Marketing
Financial Management
Operations
Concluding Statement
Q: What should be included in the introduction to my business plan?
A: The introductory section of your business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.
Q: What should be included in the marketing section of my business plan?
A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.
Q: What should be included in the financial management section of my business plan?
A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide "what if" statements that address alternative approaches to any problem that may develop.
Q: What should be included in the operations section of my business plan?
A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.
Q: What should be included in the concluding statement of my business plan?
A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also, be specific as to how you plan to achieve your goals.
Is a home-based business right for me?
To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what's involved, and a lot of hard work.
You have to be willing to plan ahead and then make improvements and adjustments along the road. Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.
What legal requirements might affect a home-based business?
A home-based business is subject to many of the same laws and regulations affecting other businesses. Be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business. For instance, be aware of your city's zoning regulations. Also, certain products may not be produced in the home.
Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
In terms of registration and accounting requirements, you may need a work certificate or a license from the state, a sales tax number, a separate business telephone, and a separate business bank account.
Finally, if your business has employees, you are responsible for withholding income and social security taxes, and for complying with minimum wage and employee health and safety laws.
How can I avoid running into cash flow problems in my small business?
Failure to properly plan cash flow is one of the leading causes of small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.
A business's monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.
The Operating Cycle
The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable - credit sales. Accounts receivable are usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, which increases your cash. Now your cash has completed its flow through the operating cycle and is ready to begin again
Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear.
A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.
What steps can I take to improve my business cash flow?
To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:
Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.
Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.
Should I keep a cash reserve in my small business?
You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill.
Home Owners
Buying a Home: Frequently Asked Questions
How much should I spend on my next home?
The first step is to think about how much you can afford to pay out each month for a mortgage payment. Keep in mind that a mortgage payment typically includes property taxes and mortgage insurance as well as the mortgage payment itself. The general rule of thumb is that no more than 30 percent of your gross monthly income should be spent on housing expenses.
If you plan to borrow money from a lender then you might want to consider getting pre-qualified. Pre-qualification is helpful to the buyer for planning purposes because it gives you an estimate of the maximum mortgage amount you can afford based on your current financial situation. Unlike a pre-approval, pre-qualification is not a commitment on the part of the lender, but it does give you an idea of the mortgage amount you probably qualify for. Knowing this information in advance can help you figure out a price range for your new home.
When you're figuring out a price range, don't forget to take into account any amount you apply as part of a down payment. You will want to save as possible for a down payment. The reasons for this are two-fold: first, lenders will not require you to pay for private mortgage insurance if you can come up with a 20 percent down payment; second, the sooner you pay off your mortgage, the better off you are financially.
Once you've figured out a price range let your real estate agent know what it is, but don't be afraid to look at homes that are 15 percent to 20 percent over your price range. In many cases, you will be able to negotiate the price down.
How can I find a good real estate agent when buying a home?
As a home buyer you pay a commission to the agent, so you want to make sure you are getting your money's worth. What you need is an agent who is competent and experienced, and whose way of working is compatible with your own. If you're working with a real estate agent that you feel is not doing his or her best to find you the home you want, then don't hesitate to find a new one.
When looking for a real estate agent ask yourself the following:
Is the Agent Full-Time? Is the Agent Experienced?
Look for an agent with at least a few years of full-time experience. As with many professions, real estate agents acquire most of their skills on the job.
Does the Agent Listen, and Communicate Clearly?
The agent must understand what's important to you in your home purchase and be able to tell you what you need to know about a home.
Is the Agent Willing to Negotiate For You?
To get the best home for the best price you'll have to negotiate with the seller. If the agent is not willing to show you houses that are 20 percent over your price range or to go to bat for you when negotiating with the seller, you should find a new agent.
Is the Agent Careful In His or Her Work?
You need an agent who will cover all the details that go into buying a home.
Can I save money by buying a home without a real estate agent?
You can shop for and buy a home without a real estate agent, but keep in mind that it will be more time-consuming. Homebuyers who already have a property in mind that they want to buy are the best candidates to forgo an agent, but if you're willing to do the extra legwork such as searching for properties, scheduling appointments to see them, coordinating inspections, and negotiating, then it's probably worth a try.
How can I negotiate the lowest price when buying a home?
Here are some negotiating tips:
Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.
Know what comparable homes are selling for.
When the seller won't budge on price try to negotiate something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
Don't forget the real estate agent's commission. This is negotiable, too.
Should I have the home I want to buy inspected?
The purchase of a home is probably the largest single investment you will ever make. You should learn as much as you can about the condition of the property and the need for any major repairs before you buy.
The standard home inspector's report will include an evaluation of the condition of the home's heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.
The inspection fee for a typical one-family house varies by region and may also vary depending upon the size of the house, particular features of the house, its age, and whether additional services are required such as septic, well, or radon testing. The knowledge gained from an inspection is well worth the cost, however.
Not all states require home inspectors to be licensed or certified. When hiring a house inspector, qualifications, including experience, training, and professional affiliations, should be the most important considerations. One organization that can help you find a qualified home inspector is the American Society of Home Inspectors (ASHI). You can contact them through their website: www.ashi.org
What should I watch out for when dealing with home contractors?
Once you find a home you may want to do some remodeling or updating. Before you get started, however, make sure that the remodeling you're doing is something that the average home buyer wants such as a modern kitchen, larger closets, and modernized or additional bathrooms. Improvements in electrical wiring are also a plus, and when redecorating, keep future buyers in mind and use neutral colors.
Do not pay the contractor too much money upfront.
Before you sign a contract, work out a detailed plan that includes a target date for finishing various portions of the job, and a payment schedule as well. The contract should detail the costs of materials and labor so that you know what the contractor's profit will be. The final payment should be due on completion and should be the largest payment.
Don't contract with someone who's not bonded, licensed, and insured.
To find out whether a contractor is licensed, you can contact either a state licensing agency or check with a consumer protection agency to find out whether complaints have been filed against that contractor. Always ask to see copies of insurance policies.
Ask for as much detail as possible from the contractor about what the job will entail.
You never know what you'll find when you rip open that 30-year-old wall or start replacing that electrical wiring. On a big project, hire an independent engineer to inspect the work. If you don't, you could regret it later if the work has to be redone at your expense because it's not up to code.
How much should I expect to pay in closing costs?
Closing costs vary by state and by lender so it pays to shop around if possible. In addition, many of the fees associated with closing costs are negotiable such as credit checks, application fees, title searches, broker fees, appraisals, and other processing fees. Property taxes, homeowners' insurance (usually paid one year in advance), and private mortgage insurance (PMI) are not negotiable. One of the largest closing costs is likely to be the origination fee, which is typically 1 percent of the mortgage. You may also pay from 1 to 3 points or 1 percent to 3 percent in up-front interest. If you put less than 20 percent down, you will also need private mortgage insurance, which includes a one-time fee of up to 1 point plus a specific dollar amount that is included in your monthly mortgage payment.
Your lender must send you an estimate of your closing costs, referred to as a GFE or Good Faith Estimate (required by law), within three days of receiving your application and your realtor, lawyer, or escrow agent will give you the exact amount of your closing costs before closing. If you have only enough cash for a down payment, you can fold closing costs into your mortgage, but you will have to pay a higher interest rate. You can also ask the seller to pay some of the closing costs when you are negotiating your price.
Should I buy or rent?
Depending on your particular situation, owning a home makes might make more economic sense than renting one. With home prices dropping and mortgage rates at historically low rates, people who are planning to stay in their homes long-term can build equity over time and reap the benefits of writing off mortgage interest on their taxes. A modest increase in value represents an even greater gain for people who make a typical down payment of 20 percent or less. The higher your income tax bracket, the better your return.
You may want to rent however if you can find cheap housing, such as a rent-controlled apartment or the cost of renting is substantially less than owning. If you are young and single, newly divorced, move often with your job, or just don't want the responsibility of home ownership, then renting probably makes more sense. It's tough to recover the costs of buying a home within the first five to seven years, so if you're planning on moving before then renting is a better option. Retirees also may want to sell the family homestead and invest the proceeds. If you live in an area where housing prices are falling, then wait until the market bottoms out before you buy.
Financial Planning
Developing a Financial Plan: Frequently Asked Questions
How do I determine my long-term financial goals?
The first step is to decide what you realistically want to achieve financially. Financial goals might include early retirement, travel, a vacation home, securing your family's financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.
Is there any validity to financial planning "rules of thumb" such as "saving 10 percent of your gross income?"
The following rules of thumb may work for some people, but they do not make financial sense for everyone. What is more important is to be able to know whether a particular rule of thumb suits your situation. Here are six of the more common rules along with some considerations that should not be overlooked.
1. Life insurance should equal five times your yearly salary.
This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you need to buy for your particular situation. The amount of life insurance you need depends on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and a few other factors.
2. Save 10 percent of your salary per year.
You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life, for instance in their 40s, need to save at least 15 or 20 percent per year.
3. Contribute as much as you can to retirement plans.
This makes sense for most people, but if you've accumulated a large amount of money in a retirement plan, say close to a million dollars, you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.
4. You need 80 percent of your pre-retirement income to retire comfortably.
Although people may need 80 percent of their salaries during the first few years of retirement, later on, they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and other factors.
5. Subtract your age from 100 and invest that percentage in stocks.
This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating percentages among various types of investments depends on your investment goals and needs and your willingness to risk your capital. In this case, rules of thumb do not serve the investor very well at all.
6. Maintain an emergency fund of six months' worth of expenses.
Depending on your family's situation, three months' worth of expenses might be enough. On the other hand, for some families, even six months' worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short-term loan and how much money you have in savings and investments among other things.
Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and then calculate what you'll need to do to fulfill them.
What do women in particular need to keep in mind with regard to financial planning?
With more women remaining single, nearly half of all marriages ending in divorce, and the odds of becoming a widow by the age of 55 hovering around 75 percent, nearly 9 out of 10 women will be solely responsible for their financial well-being at some point in their lives. But many are ill-prepared to do so.
Here are several areas where women fall behind when it comes to planning for their financial future:
Women save considerably less for retirement, on average 60 percent less than men according to a 2010 study conducted by LIMRA of close to 2,500 employees. This is significant because women typically live longer than their male counterparts and need more retirement savings.
In that same LIMRA study, 29 percent of men and only 14 percent of women consider themselves knowledgeable about financial services and products. Fifty-four percent of women felt at least somewhat knowledgeable about financial products and services, but nearly three-quarters of men felt the same way.
And, in 2011 a Harris Interactive survey commissioned by RocketLawyer.com found that of the more than 1,000 people surveyed, 5 percent of the women do not have a will, 26 percent of them citing cost as the primary reason they don't have one.
What special problems do unmarried couples have to be concerned with in financial and estate planning?
In 2016, 18 million adults were cohabiting, according to a new Pew Research Center analysis of the Current Population Survey. This represents an increase of 29 percent since 2007. Because unmarried couples don't enjoy the same legal rights and protection as married couples do, financial planning considerations for issues such as retirement planning, estate planning, and taxes can be quite different. For example:
Unmarried partners do not automatically inherit each other's property. When an unmarried partner dies intestate (without a will) the estate is divided according to laws of the state, with property and assets typically going to parents or siblings and rarely or never to the beloved partner. In other words, married couples who do not have a will have state intestacy laws to back them up, but unmarried couples need to have a will in place in order to make sure that their wishes are met.
Couples who aren't married also do not have the right to speak for each other in the event of a medical crisis. If your life partner loses consciousness or becomes incapacitated, someone has to make a decision whether to go ahead with a medical procedure. That person should be you, but unless you have a health care directive such as a living will in place, you have no legal right to make decisions for your partner.
Tax and estate issues are also more complicated. In most cases, it makes more sense not to own property such as a car or electronics equipment together or to have a joint loan. Whereas marital assets can be divided equally by a judge, there is no legal recourse for unmarried couples in the event of a breakup. Another example is home ownership. If one partner is listed as the sole owner of a home that the couple lives in together and he or she dies, the surviving partner might be left homeless. This can be resolved by properly titling assets, in this case making sure the home is in joint tenancy with rights of survivorship.
Get In Touch With Us
Address:
2805 Fruitville Road, Suite 215 Sarasota, Florida 34237
Phone Number:
Phone: (941) 365-1172
FAX: (941) 529-0350
Email: info@phmmcpa.com
