Written agreement. Most clubs are formed as partnerships. Every partnership should consider adopting a written partnership agreement.

This legal contract outlines how the business will operate and how profits and losses will be allocated among the partners.

In the beginning, your investment may seem small, and it’s easy to dismiss the need for this document. However, a successful club can accumulate substantial assets. Having this document in place from the beginning can prevent problems later, such as how to liquidate a partner’s interest when one leaves.

Taxes. Partnerships don’t pay income tax, but they must file an annual return with the IRS. They must also provide a Form K-1 to each partner. This form reports each partner’s share of income and deductions, which the partner must include on his/her individual income tax return. If the partnership fails to file a return, the IRS can assess a late filing penalty of up to $89 per month per partner for a maximum of 12 months.

Duties. As in any business, it’s a good idea for club members to share financial duties. Consider requiring two signatures to transfer funds between accounts. Periodically review the treasurer’s records to make sure that transactions were properly authorized by the club, that the recordkeeping is adequate, that tax returns were filed, and that all money and stocks are properly accounted for.

An investment club that gets off to a good start has a much better chance of a long and successful existence.

Here are nine ways you may be able to cut costs in your business.

1. Look at gross profit margins. If the margin has been deteriorating, find out why. Determine if increases in direct costs can be passed along to the customer. Analyze the product to see if it can be reformulated or redesigned for cost savings.

If you sell a number of different products, determine their individual gross profit margins and their mix. Give particular attention to low-margin products to see if it’s still worthwhile to carry them.

2. Payroll costs are a major item in most businesses. Perhaps a more efficient plant layout or automation would result in reduced labor needs. The initial investment may be costly, but more than offset by future payroll savings. Consider the use of temporary employees and subcontractors if your business is subject to seasonal variations.

Payroll-related costs are fertile areas for cost reduction. Fringe benefits can easily amount to 25-50% of direct payroll. Review employee classifications for workers’ compensation insurance. Improperly classified workers can be costing you significant premiums. Review group insurance programs. Solicit bids for the programs every three years. Consider higher deductibles as a means to lower premiums.

3. Review telephone and postage costs. Are all telephone calls necessary? Is the telephone being used effectively? Can money be saved by alternate shipping and receiving carriers?

4. Review credit policies. The longer it takes to get paid, the greater the risk of loss. The 80/20 rule states that 80% of your revenues are generated by 20% of your customers. If this is the case, it may be wise to review the other 80% of your customers to see if you can continue to serve them cost-effectively. Otherwise, your time will be better spent soliciting new customers.

5. Analyze inventory levels. Determine if any obsolete inventory can be reworked or sold for salvage.

6. Review fixed assets. Consider disposing of excess machinery and equipment. Determine whether it would be better to buy or lease major assets, especially those subject to rapid technological change and those assets used infrequently.

7. Review purchasing policies and costs of supplies, products, or raw materials. Compare prices of other suppliers. Switch suppliers where appropriate, or renegotiate for better prices with your current suppliers.

8. Enlist the aid of employees by soliciting suggestions on cost reduction. Many companies have generated significant savings using this approach. To encourage participation, consider implementing a bonus program based on a percentage of costs saved. Be wary of “quick fixes” that will have no impact, or worse, prove costly in the long run.

9. Review your expenses on a regular basis; don’t wait until a financial crisis develops. Avoid the temptation to make across-the-board cuts, because rarely do all areas of the company contribute equally to its success.

• If you itemize, you may deduct cash contributions to qualified charities, as well as the fair market value of donated property.
• Contributions to religious institutions and large, national charities usually qualify for tax deductibility, while contributions to individuals don’t. If you have any doubts, check with the IRS to see if your charity is on the list of qualified tax-exempt organizations.
• When you donate brand-new merchandise or stocks and bonds that are publicly traded, it’s relatively easy to determine market value. But what’s the value of used clothing, furniture, or appliances? According to the IRS, you may take a deduction for used clothing and household items only if they are in “good” condition.
• The value of your charitable services is not deductible, but you can deduct out-of-pocket and incidental expenses. Example: You drive to a charity dinner, help out in the kitchen, and donate your favorite casserole. You can deduct the cost of the food and your charitable mileage, but not the value of your time.
• Instead of contributing cash, consider donating stock, mutual funds, artwork, or similar items that have increased in value. You may deduct the full market value of the property, and you’ll avoid paying tax on the built-in capital gain.
• With securities that have decreased in value, it’s better to sell the securities first and donate the proceeds. That way, you can deduct both your charitable contribution and your capital loss on the sale.
• If you plan to make a large contribution to charity, seek tax advice before rather than after making the gift in order to maximize your tax benefits.

Good recordkeeping is required

If you plan to claim a tax deduction for charitable contributions, you need documentation to support your gift. Here are the IRS requirements:

• Under prior tax law, cash donations over $250 had to be documented by the charity. Now that dollar threshold no longer applies: cash, check, and other monetary donations of any amount can be deducted only if substantiated by a bank record or written documentation from the charity.
• If you donate used clothing or household items, you may claim a deduction only if the items are in “good” condition.
• If you contribute property with a value above $500, your personal records must also include details of how and when you acquired the property and your cost basis in the property.
• If you donate an item or a group of similar items worth more than $5,000, all of the previous requirements apply, but you must also obtain a qualified appraisal. There are special exceptions for publicly traded stock and, in some cases, for nonpublic stock.
• If you receive anything of value in return for your donation (“quid pro quo” contributions), your deduction is limited to the difference between what you donate and what you receive.
  For all quid pro quo donations over $75, the charity must provide you with a written disclosure of the value of the goods or services provided and must indicate that the deduction is limited to the difference between the donation and the value stated.

Whatever your financial goals in life – whether they include buying a new house, taking a trip to Europe, funding your children’s college educations, having enough money for a comfortable retirement, or all of the above – you are more likely to reach your goals if you do some planning. The fact that you are reading this indicates your desire to plan and to take control of your financial life.

After you’ve set your financial goals, the next step is to determine your current net worth. Only when you know where you are today can you calculate how far you have to go to reach your financial goals in the future.

On a sheet of paper, list everything you own (your “assets”) and everything you owe (your “liabilities”). Subtract the total liabilities from the total assets; the result is your current “net worth.”

In doing this exercise, it’s very important to review the actual documents for the specific assets and liabilities and accurately record account numbers, identification, and dollar amounts. It’s easy to forget details about assets and liabilities and to list misleading information.

After you’ve arrived at your current net worth, ask the following questions:

1. Has your net worth increased since you last did this listing? If it hasn’t, you need to determine the reason and perhaps make some changes in your spending, saving, or other financial habits.
2. Does your net worth statement reflect a preference for personal assets such as an expensive home, cars, furs, and jewelry? Your balance sheet should show a concern for acquiring investment assets, not just personal assets that are far less likely to increase in value or produce income that will help you meet other financial goals.
3. Is your debt out of proportion? If your sheet shows excessive debt, especially for personal consumption, that’s a signal to review your spending. Keeping debt under control is essential in good financial management.
4. Have you given enough thought to money needed for retirement? If your sheet shows total neglect for accumulating funds for retirement, you’ll want to make some changes as soon as possible.
5. Are your assets diversified? Diversification is a good hedge against inflation and changes in the economy. Having all your eggs in one basket is seldom a good idea. Also, don’t keep excess cash in no-interest or low-interest accounts unless you have an immediate need for the cash.
6. Where do you want to be three years, five years, and ten years from now, in terms of your net worth? You might determine this by doing projected net worth calculations for three years, five years, and ten years from now.

Do a net worth calculation like this every year in order to chart the progress you’re making in increasing your net worth.

1. Do you have a plan?

Without a plan, your business has no direction and possibly no future. You can be sure your strong competitors have written plans. Write a business plan that includes both short and long-range goals. Include specific goals such as profit, growth, and market-share targets. Plans for conflict resolution and transition should also be included.

2. Who’s running the store – family, outsiders, or employees?

When several family members participate in the company, an organization chart should be drawn to clearly show lines of authority. Promotions should be based on a clear, fully understood set of guidelines.

3. Should the legal form of the organization be changed?

Whether your business is a sole proprietorship, a partnership, a regular corporation, an S corporation, or a limited liability company, you should review your business form periodically to see if it’s still the best choice for your business. The legal form under which you operate can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you’ll have.

4. Have you reviewed your retirement and fringe benefit plans?

The types of plans available depend on your business form. Besides being an excellent tax planning tool, such plans can be effective in motivating and retaining employees.

5. Are formalities observed?

Family members occasionally overlook the fact that business assets are not personal assets. Company loans to family members need to be documented. Shareholder or employee use of corporate assets, such as automobiles, may have income tax consequences. Get advice so you structure transactions properly.

6. Who’s next in line?

Many family businesses are lucky enough to have a very strong member at the helm. But that person won’t live forever.

The survival of any family business depends on how wisely one generation passes ownership to the next. The more family members, the more complex the situation is likely to become.

Facts show that only 30% of family-owned businesses survive to the second generation, and only 13% survive to a third generation. Careful planning while you’re still at the helm may prevent the demise of your business.

The change comes from the Tax Increase Prevention and Reconciliation Act (TIPRA), a law signed in 2006. TIPRA also eliminates the prohibition against converting to a Roth for those married taxpayers who file separate returns. Those individuals will be able to take advantage of the new rules too.

The first question to ask

Is converting a good idea? If it made sense before and you were unable to do so only because of the income limitation, the answer is probably yes. Switching gives you access to the benefits of Roth accounts. Those benefits include tax- and penalty-free distributions, both of which generally kick in once you’re 59½ and have met the five-year holding requirement.

In addition, Roths offer estate planning advantages. For example, unlike traditional IRAs, you’re not required to withdraw specified amounts from a Roth each year once you reach age 70½. The same is true when your spouse inherits the account as your designated beneficiary. Other heirs must take distributions, but the account balance can typically be withdrawn over a number of years.

The conversion to a Roth does have a cost. When you have no basis in your traditional IRA – for instance, you deducted your original contributions on prior tax returns – you’ll have to add the entire amount converted to your taxable income. The increase in income could have tax and nontax implications, such as reducing itemized deductions or affecting college financial aid.

Fortunately, TIPRA provides a one-time incentive to do a traditional to Roth IRA conversion in 2010.

The incentive works this way

If you want to do a conversion, here’s a reason to consider doing it in 2010. You do not have to include the taxable portion of the conversion in your 2010 income. Instead you are allowed to report half of the income on your 2011 tax return and the remaining half on your 2012 tax return.

The deferral gives you a multi-year period to plan for, and pay, the tax. Just be aware that taking distributions from converted funds may have tax consequences.

You can also choose to pay more quickly by making an election to report all of the conversion on your 2010 return. While prepaying seems counterintuitive, remember that present federal tax rates are set to expire December 31, 2010. Postponing income into future years could mean a bigger tax bill.

Your plans for retirement

There’s another way tax rates can affect your decision about converting. Say you intend to retire and relocate to a state with low or no income tax, and you expect the move to reduce your overall tax rate. In that case, you may decide to delay or forgo making a conversion.

Converting involves other variables too, and it’s important to weigh the pros and cons in your individual situation. Please give us a call if you would like to discuss the best strategy for you.

The two methods generally used are the cash method and the accrual method. The cash method is probably the easiest for most people to understand and the easiest for small business owners to use. This method recognizes income when you receive a payment from a customer, and a deduction is taken when you pay cash or write out a check for a bill you have to pay.

The accrual method recognizes income when the services are rendered or the product is sold, despite the fact that you may not get paid for several months. You have “accounts receivable” in the form of money customers owe you. Expenses are handled the same way. If you buy something today, but don’t pay for it until later, maybe even next year, you would deduct the cost now. What you owe for purchases you’ve made constitutes your “accounts payable.”

The cash method is easier to understand and more closely reflects how money is coming in and out of the business. However, it doesn’t tell you how much people owe you or how much debt the business owes. The accrual method better reflects how the business is actually doing, but it is more complex and, for most business owners, more difficult to understand.

All new business owners should sit down with their accountants to discuss the pros and cons of each method and to decide what works best for their business. Many businesses are required by tax law to use the accrual method for tax reporting.

For any assistance you need in making this and other decisions for your new business, give us a call.

What is the alternative minimum tax?

Enacted back in 1969, the alternative minimum tax (AMT) was designed to make sure that high-income taxpayers pay a minimum amount of taxes, even if they have sufficient deductions and credits to reduce their federal income tax liability to zero.

The AMT is like a flat tax. You get a lower tax rate in exchange for losing most deductions.

To calculate the AMT, start with regular taxable income, which includes all your familiar deductions and exemptions. Then make certain adjustments and add back certain “preferences” to arrive at your AMT income. Preferences include personal exemptions, state and local taxes, certain interest on home-equity loans, and miscellaneous itemized deductions.

After adding back the preferences, you’re entitled to an exemption amount, though the exemption phases out at higher-income levels.

You then calculate your AMT by applying a tax rate of 26 percent to the first $175,000 of AMT taxable income, and 28 percent to any additional amounts. Finally, you compare your AMT to your regular tax and pay whichever is greater.

Who is affected by the AMT?

Congress created the AMT to ensure that wealthier taxpayers, who often have the kinds of income and deductions that qualify for preferential tax treatment, would pay at least a minimum amount of tax. Congress also wrote exemptions into the law, so that middle-income taxpayers wouldn’t be subject to the AMT.

Unfortunately, these exemptions were not indexed for inflation. As incomes have continued to rise, more and more people have found that they need to calculate their tax bill twice — once under regular tax rules, and again under the AMT.

Though Congress has expressed a desire to eliminate the AMT, it is still in effect. Every year thousands of middle-income taxpayers find themselves subject to the alternative minimum tax.

Will the AMT affect you?

Do you need to concern yourself with the AMT? You do if you have a lot of dependents or if you claim substantial itemized deductions. You may also be subject to the AMT if you realized hefty capital gains during the year or exercised incentive stock options. Claiming certain tax credits might trigger the AMT as well. And if you are an owner of rental real estate or a capital intensive business, you need to be aware that the amount of depreciation allowed under the AMT is limited.

Don’t forget the AMT in your tax planning. You may be one of those middle-income taxpayers who is now subject to this tax.

• Information memo. Keep a list of your insurance policies, brokerage accounts, businesses you own, outstanding debt, credit cards, tax-related documents, and names and phone numbers of professional advisors in a single place that can be easily accessed. As time passes, review this document and update as necessary.
• A will. Your will is a written document that gives your heirs the blueprint of your wishes and intentions. In your will, you may bequeath assets to your heirs, appoint an executor to distribute your assets, and designate a guardian for your minor children.
• A durable power of attorney for finances. Designate in this document an individual or advisor to make financial decisions on your behalf if you become incapacitated. The individual can sign checks if necessary and can be given access to your checking and investment accounts.
• Medical directives. You name an individual to make health-care decisions for you in the event you become unable to make them yourself.
• Funeral instructions. Detail what you feel is best in your specific situation. Include a list of relatives, friends, and business associates to be notified by your immediate heirs.
• Taxes. The IRS imposes taxes when your estate reaches a certain value (currently $3.5 million). Your estate plan should include provisions to minimize taxes if your estate exceeds the taxable threshold.