Robert H. Gray CPA

Life is often viewed as a series of stages — childhood, graduation, parenthood, and retirement, to name a few. Like the points on a clock, time moves us from one stage to the next. No matter what “time” it is in your life cycle, you probably share a common worry: money. Managing money for today is one thing; making decisions to ensure adequate funds for the next stage is quite another.

The CPA commitment

As trusted advisors, CPAs across the country have made a commitment to increase financial literacy. How? By volunteering to educate the public about financial issues and the decisions that must be made at every stage of life. Americans are faced with significant financial concerns, but often have insufficient financial literacy. Bright and even highly educated people sometimes have trouble speaking the language of money, often to their economic detriment.

To combat this trend, the CPA profession has united around a cause to educate Americans, rich and poor, young and old, on how to better handle their finances. With the life cycle “clock” as a model, CPAs have taken a full, 360-degree view of the challenges Americans face. For each milestone, the profession has solid, practical advice to share. You might say CPAs are once again emphasizing the term “public” in their title.

Call on us

Which brings us to our firm. We, too, have accepted the call to educate our community. We would be pleased to speak to your organization about life’s financial challenges. We can also speak to students or provide classrooms with timely, interesting material on money and financial issues.

If you would like to find out more about the accounting profession’s drive to improve financial literacy, give us a call. Life’s financial clock is ticking. Let us help you before the alarm goes off.

Do you know what your business is worth? If you’re like many business owners, the answer to this question is probably “no.” That’s because business valuations can be both time-consuming and costly. Even so, there are many instances when it’s important to determine the value of your company.

Selling

Anyone considering selling a business should first have it valued. By doing so, you’ll help ensure that you don’t sell your company for less than it’s worth. Plus, knowing its value helps prevent you from setting the price, and your expectations, too high.

The same holds true if you’re selling a division, territory, or product line. It’s not uncommon to have a valuation prepared for just a segment of your business.

Partners

Looking to bring new partners into your business? Having your business valued by a third party is a fair way to set the buy-in price.

If you already have partners in your business, you should have a “buy-sell” agreement in place, detailing what happens if one of the owners dies, becomes disabled, retires, or wants to be bought out. Generally, buy-sell agreements dictate when and how your business needs to be valued.

Estate planning

Business valuations are also a key ingredient in your succession planning. Without knowing the fair value of your business, how can you ensure that there will be enough liquidity to allow for a smooth transition to your successors? Plus, if you’re gifting shares of your company to your family members, charities, or other people or organizations, being able to substantiate the value of the shares given is a must.

Tax deductions

Moving is expensive, but if you maintain good records, you may be able to recover some of those costs through tax benefits.

Some of your moving expenses are deductible if your move is work-related. To be deductible, the distance from your old residence to your new workplace must be at least 50 miles more than to your old place of work. If you are starting work for the first time or after a long period of unemployment, your new home must be at least 50 miles from your old home.

If you meet the requirements, here’s what you may be able to deduct:

• Costs of moving your household goods and personal effects to your new home.
• Travel costs, including lodging while en route, from your old home to your new one.

Other tax facts

Did you know?

• The cost of meals during your move is not deductible.
• The costs of pre-move house-hunting trips or living in temporary quarters in the new location are not deductible.
• Qualified moving expenses reduce your adjusted gross income. This treatment means you can deduct moving expenses regardless of whether you itemize deductions or take the standard deduction on your tax return.
• Also, by reducing adjusted gross income, your moving expense deduction may make it easier for you to claim other deductions that are limited by adjusted gross income (for example, the deduction for medical expenses, casualty losses, and miscellaneous itemized deductions).
• Reimbursement from your employer for substantiated moving expenses you incurred (and have not deducted in a prior year) is not subject to either income or payroll tax.
• You should keep records, receipts, cancelled checks, etc., of moving expenses incurred because the IRS will not take your word for costs involved. You must be able to substantiate your moving expenses or they may be disallowed.

After You Move

• Notify all current-year employers for all members of the family so that W-2 statements and other forms arrive on time at your new location.
• Review your insurance policies to make sure you still have the coverage you need. Your premiums may change on some insurance due to your new location. Find out when various policies expire so that you can get insurance in your new location without a lapse of coverage.
• Check on pension benefits at both your old job and your new one. If you are entitled to money from your old company’s pension plan, get advice on the tax consequences of the various options relating to the funds.
• Make an appointment for a tax planning session. You may be required to file tax returns in more than one state, and state tax laws vary. Schedule this session early to give yourself ample time to do tax planning.
• Review your investment portfolio. Moving may require some adjustments. For example, if you own municipal bonds issued by your old state of residence, earnings on them will probably be taxable in your new state.
• If you’ve moved to a new state, find out the laws governing property rights. Some states are community property states and, in general, consider husbands and wives to be joint owners of property acquired during their marriage. Other states are common law states and property ownership depends on title and the source of acquisition funds. Get the facts so you can arrange your affairs accordingly.
• Have your will reviewed to see if changes are necessary. State laws vary; be sure your will still does what you want it to do.

Have you been offered a credit card lately? The industry sends out billions of credit card offers each year, and the average household has several thousand dollars in credit card debt. Credit card companies make it very easy and very tempting to say “charge it.”

Unfortunately, like so many tempting things, credit card debt can be bad for your financial health. It is one of the most expensive ways to borrow money, and big balances on your credit report can hurt when you apply for a home loan or a car loan. Also, in today’s uncertain economy, the last thing you need is high-interest debt that can jeopardize your ability to keep up with payments.

That is why one of your smartest financial moves might be to start paying down your credit card debt. Some people do this by taking out a home equity loan; others try debt consolidation. Neither of these strategies is without risk. You might want to talk to a reputable nonprofit debt counseling service before you adopt a plan. You can receive impartial advice on your financial strategy and useful practical tips too.

One way to get a handle on your debt is to list the outstanding balance and the interest rate on each of your cards. Then make the largest monthly payment you can afford on the card with the highest interest, while keeping up the minimum payments on all your other cards. Once you have paid off the first card, don’t use it again. Repeat the process for the card with the next highest interest rate, etc. In the meantime, don’t hesitate to call your credit card companies and try to negotiate lower interest rates.

Paying off your credit cards will take time and will likely require a change in your spending habits. But the effect on your financial health will be well worth the effort.

If you start your own business, improve your chances for success by avoiding these common pitfalls.

Lack of money

You’ll probably need capital to start your business, plus a cash reserve until your business becomes self-sufficient. Plan your cash needs carefully and realistically, and provide a generous cushion for setbacks and unexpected expenses.

Consider leasing equipment instead of buying. If you must buy, look into used equipment.

If your business is going to need a start-up bank loan or other financing, obtain the money before you make any major commitments.

People problems

Make sure that you’ll be able to hire and pay for the employees you need, especially if your business requires specialized skills.

Evaluate your own business skills honestly and objectively. Do you have both the financial and marketing skills that your business will need, or do you plan to hire someone who does?

If you plan to take partners into your business, take a very close look at your potential partners. Partners don’t have to be best friends, but they should like one another. Even more important, they should have mutual trust and respect for the contribution each will make to the business.

It is always a good idea to draw up a partnership agreement so that each partner can examine in advance the pros and cons of the partnership arrangement. Have your tax advisor and your legal advisor review the agreement before the document is signed.

Be sure to line up qualified accounting and legal advisors, as well as any other experts you may need. Good advisors can mean the difference between success and failure, especially in the early days of your business.

Insufficient planning

Research your industry and your competition in depth, and prepare a written business plan covering several years. Write a short mission statement for your company, identify your target market, and state your business plans as specifically as possible.

If you’re like some taxpayers, you have a pastime that brings in cash but produces a loss after you deduct your expenses. Example: an amateur artist who spends money for paint and canvas but who only occasionally sells a painting. If you could deduct “hobby” losses on your tax return, you could reduce taxes owed on your salary or other income.

Actually, you can deduct your losses, but only if you establish that you are carrying on your pastime with the motive of making a profit.

If you can’t prove you have a profit motive, the IRS views your activity as a hobby, not as a business. Expenses of a hobby can be deducted only up to the amount of income from the hobby. You can’t deduct hobby losses from your salary or other income.

You can help establish your profit motive in one of two ways. If you show a profit in three out of five years (two out of seven years for horse activities), the IRS will presume you’ve got a business and not a hobby. However, you can’t simply manipulate deductions and income to create profit years.

The other way to demonstrate that you’re operating with a profit motive is to conduct your activity in a business-like manner. Get advice from an accountant to assist with keeping accurate books and records. Maintain a separate checking account, advertise your services or products, and get a business phone listing. If you have losses, try to turn your business around by taking classes, consulting with experts, and changing your methods of operation. Be sure you spend enough time at your activity to demonstrate that you’re serious about profits. Remember, you don’t have to earn a profit, but you must try to do so. If you don’t have profits in three out of five years, the burden of proof will be on you to show the IRS that this activity is a business and not a hobby.

For more information or assistance in this area, give our office a call.

Long-term care insurance has the same tax-favored status as regular health insurance.

In recent years, a number of employers have started to offer long-term care insurance as an optional employee benefit, and most insurance companies offer individual policies.

Insurance typically covers the cost of extended care in a nursing home, or in your own home if you become chronically ill or disabled and unable to care for yourself. The costs of such care over an extended period can be overwhelming and can rapidly wipe out your retirement savings.

Regular health insurance usually doesn’t cover prolonged nursing care or home assistance, and Medicare only provides coverage for a few months of nursing care after you have been hospitalized. Medicaid will cover such costs, but only if you’ve exhausted virtually all of your assets.

The tax breaks

Both the premiums you pay for qualified long-term care insurance and the benefits you receive enjoy favorable tax treatment.

Benefits received under a qualified policy that pays only actual expenses are tax-free. In contrast, part of the benefits from policies that pay a set dollar amount (per diem) may be taxable.

The premiums you pay for long-term care insurance may be deductible as unreimbursed medical expenses if you itemize deductions. There is a limit on the amount of annual premiums you can deduct, depending on your age. Also, it’s important to remember that unreimbursed medical expenses are deductible only to the extent that the total exceeds 7.5% of your adjusted gross income.

If you’re self-employed, you may deduct the same percentage of long-term care premiums that applies to regular health insurance premiums.

The need for long-term care insurance

Long-term care insurance is not for everyone. You should consider it if you are not wealthy enough to pay for long-term care as you need it.

You may also want to consider whether your family health history suggests you’ll die relatively early or live to old age.

What to look for in a policy

If you decide to buy a policy, determine whether it qualifies for favorable tax treatment, and look carefully at factors such as eligibility for benefits, the types of care it covers, and whether it contains inflation protection.

Some policies offer lifetime coverage while others are for a fixed term. If you choose the latter, look into restrictions on renewability.

In addition, most policies have a form of deductible, called an “elimination period,” which is the number of days before coverage begins. The longer the elimination period, the lower the premium. Match the elimination period to what you can afford, remembering that Medicare may cover your costs for an initial period.

And finally, these policies are not cheap, so take your time and do your homework before you commit.

Too often businesses emphasize increasing sales as the only way to boost profits. Cost-cutting, when done selectively and intelligently, can be a faster way to higher profits. “Trimming the fat” should continually be on every business owner’s or manager’s mind, and a serious cost-cutting review should be conducted every year or two.

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.

We see, hear, and read every day that the world is becoming more environmentally conscious and taking steps to “go green.” While many of these may be out of reach for smaller businesses, there are several things that even small businesses can do to head toward going green.

• Recycling. Most communities these days provide recycling centers. Therefore, businesses should find it fairly easy to provide internal receptacles and to transport or purchase recycling pick-up services for such recyclables as paper (including shredded), newspapers and magazines, aluminum cans, and plastic bottles.
• Installing energy-efficient light bulbs. Compact fluorescent light bulbs are more energy-efficient than incandescent bulbs, offering a greener alternative. Also, watch for the next generation of commercial-use energy-efficient LED (light-emitting diode) bulbs. While LED pricing currently is rather high, LED bulbs typically use one-tenth the power of traditional light bulbs and last up to 20 times longer. Also, as volumes increase, prices should fall.
• Going smoke-free (or tobacco-free). One way for businesses to create a cleaner, healthier environment is to go smoke-free. This might involve eliminating smoking indoors, while providing limited smoking areas outside; or a business might go totally smoke-free, prohibiting smoking anywhere on the premises – indoors or outdoors. Further, a business might offer its employees complimentary or discounted programs to assist them in their efforts to quit smoking.
• Providing favored parking spaces. Businesses might consider offering special parking spaces for hybrid vehicles and transportation forms that use lesser amounts of fuel (e.g., motorcycles, scooters). The provision of easily accessible bicycle racks also is important.
• Going “paperless.” While most would agree that going totally paperless probably is unachievable, many companies already have begun to make progress in decreasing the amount of paper they use. To reduce paper, consider offering electronic portals to clients or utilizing other electronic means of sharing and working with data.
• Offering “green” shopping bags. As you shop these days, you will see that many stores are selling reusable shopping bags. Consider distributing to your customers, clients, and prospects a green shopping bag with your business logo. You take a step toward environmental consciousness, while garnering some publicity at the same time.

These are just a few of the steps a small business can take toward “going green.” The benefit to your business includes energy cost savings and maybe a bit of positive publicity, plus making a contribution to a healthier environment.

Traditionally, women have kept the household accounts while their husbands handled investing. But these days, women are likely to have their own careers. They get married later in life and may get divorced. And on average, they live about seven years longer than men. So whether by choice or necessity, many women will be responsible for their own money at some point in their lives.

• Retirement fund. Saving for retirement is crucial for women. Even small amounts can go towards U.S. savings bonds or mutual funds with an automatic savings plan. If you have more money to work with, diversify your holdings among several types of investments. The younger you are, the more you should consider growth investments, which are likely to increase your nest egg in excess of the inflation rate. True, your strategy may change over time, depending on your age, total assets, tax bracket, and tolerance for risk. But you should never totally stop investing for growth.
• Disability insurance. Of course, picking winning investments isn’t the only goal of good financial planning. Adequate insurance is also essential. For example, disability is far more common among middle-aged people than death, yet disability insurance is often overlooked. Consider supplementing any employer’s coverage with your own policy. Most people aim to replace 60%-80% of pretax income, since disability payouts are generally tax-free. A disability policy should cover partial disability as well as total disability. You should be able to save money on premiums by opting for a longer waiting period before receiving benefits.
• Life insurance. If you have dependents, you need enough life insurance to protect them. This is true even if you’re a married stay-at-home mom, if your absence as caregiver would create financial hardship for your family.
• Estate plan. Finally, prepare an estate plan that meets your needs. Review it with your accountant and your attorney every few years to ensure that you stay current with the tax law and with changes in your personal circumstances.