Month: June 2024

Preface: “A budget tells us what we can’t afford, but it doesn’t keep us from buying it.” – William Feather

Growth Through Numbers: Effective Financial Planning for Small Enterprises

Navigating the financial aspects of running a small business can be daunting, yet creating realistic financial projections is crucial for long-term success. Accurate forecasts help you make informed decisions and prepare you to meet future challenges effectively. This guide provides essential tips to help you develop reliable financial projections, ensuring your business remains on a path to success.

Establish Realistic Financial Goals
The foundation of solid financial planning is setting realistic and achievable goals based on your current financial situation. Begin by conducting a thorough review of your financial statements to understand your revenue streams, expenses, liabilities, and assets. This detailed knowledge allows you to set goals that are ambitious yet achievable, aligning with your business’s operational capabilities and market realities. By establishing clear, measurable objectives, you create a roadmap for growth and stability that is both aspirational and grounded in financial prudence.

Research Industry Trends
Keeping a pulse on industry trends is crucial for predicting future financial scenarios. Research to identify emerging opportunities and potential risks within your industry. This insight helps you adapt to changing market conditions and anticipate shifts that could impact your business. Whether it’s new technology, consumer behavior trends, or regulatory changes, staying informed enables you to adjust your business model and financial projections to stay competitive and resilient.

Develop a Comprehensive Budget
A comprehensive budget is essential for tracking and managing your financial resources effectively. This financial tool should detail your expenses and predict future costs, helping you to allocate funds efficiently. A well-maintained budget ensures that your spending aligns with your financial goals and highlights areas where cost reductions can be made. Regular budget reviews allow you to stay on top of financial commitments and adjust your spending patterns as necessary to maintain financial health.

Digitize Financial Documentation
Digitizing critical financial documents is essential for streamlining your small business’s operations. Storing files digitally not only saves space but also ensures easy access and enhanced organization. Saving documents as PDFs offers the added benefit of maintaining formatting consistency across various devices. Using a PDF maker allows you to effortlessly create or convert any document into a PDF, adapting to your needs. Embrace this change with a PDF maker to improve your document management process.

Estimate Incoming Revenue
Accurate revenue estimation is pivotal for effective financial planning. Base your revenue projections on a detailed analysis of past performance and forecasted sales figures. This method provides a realistic view of potential income, helping you to plan for future growth and investment. Regularly updating your projections to reflect actual sales results and market conditions ensures that your financial plans remain relevant and responsive.

Enhance Your Business Skills
Building business skills through online courses is a strategic way for small business owners to enhance their financial projection capabilities. Virtual programs make this easy since you can learn at your own pace, fitting education seamlessly into your busy schedule. With business courses, you can level up your accounting, marketing, and operations acumen, ensuring a well-rounded skill set. If you’re aiming to strengthen your financial projections, this deserves a look.

Analyze Business Metrics
Regular analysis of key business metrics like cash flow, profit margins, and overhead costs is essential. These metrics provide insights into your business’s financial health, guiding strategic decision-making. Understanding these financial indicators helps you identify trends, optimize operations, and improve profitability. For instance, a positive cash flow indicates that your business is generating enough revenue to cover expenses and invest in growth opportunities.

Benchmark Against Competitors
Benchmarking your performance against competitors is invaluable. This comparison not only provides perspective on your market position but also highlights areas for improvement. Analyzing how similar businesses manage their finances, respond to industry trends, and attract customers can provide strategic insights that inform your financial projections and business strategies.

Creating realistic financial projections is vital as it not only forecasts the future but also helps in actively molding it to ensure your business’s success. By setting achievable goals, improving your financial knowledge, and keeping abreast of market conditions, you position your business for sustained prosperity. The objective is to do more than just survive; it’s to flourish in today’s competitive market. This approach enables you to steer your business confidently toward long-term achievements.

To elevate your business with expert CPA services and guidance tailored to entrepreneurs, visit Sauder & Stoltzfus today!

 

Preface: “Visionary companies display a remarkable ability to continue to grow and change while remaining true to their core ideology.” – Jim Collins, “Built to Last”

Exploring Timeless Success: Insights from Jim Collins’ “Built to Last”

Jim Collins, along with Jerry Porras, authored “Built to Last: Successful Habits of Visionary Companies,” a cornerstone in the realm of business literature since its publication in 1994. The book provides an in-depth analysis of what distinguishes visionary companies from their less enduring counterparts. It isn’t merely a manual of business strategies; it delves into the essence of organizational longevity, dissecting the core principles that enable some companies to thrive over decades, if not centuries.

The Essence of Core Ideology

At the crux of Collins and Porras’s argument is the notion that without a core ideology, a company cannot be visionary. A core ideology comprises the company’s core values and core purpose, forming the foundation upon which the organization builds its legacy. This ideology goes beyond financial performance and market share; it embodies the enduring character of the company.

Core values are the essential and enduring tenets of an organization—a small set of timeless guiding principles that require no external justification. Core purpose, on the other hand, is the organization’s fundamental reason for existence, beyond just making money. It is about making a difference and having a meaningful impact on the world.

The Cultures of Visionary Companies

Visionary companies often exhibit cult-like cultures, characterized by a passionate adherence to the core ideology. This strong cultural identity fosters a profound sense of belonging among employees. It’s a culture where you’re either in or out—there’s little room for those who don’t align with the core values and purpose.

The Misconception About Great Ideas

A significant revelation in “Built to Last” is the notion that you don’t need a great idea to start a great company. Or any idea, for that matter. Visionary companies often begin with a clear sense of purpose and core values rather than a singular, groundbreaking idea. The founders of these companies are usually more focused on building an enduring institution than on a specific product or market.

Take Hewlett-Packard (HP) as an example. HP didn’t start with a revolutionary product idea. Instead, it began with a strong set of values, encapsulated in the “HP Way,” and a commitment to innovation and excellence. Over time, this led to the development of numerous groundbreaking products, but the initial focus was on building a company that could endure and adapt.

Great Companies Produce Great Ideas

While a great idea isn’t necessary to start a great company, visionary companies consistently produce great ideas over their lifetimes. This continuous innovation is a byproduct of their strong core ideology and cult-like culture. These companies foster environments where creativity is nurtured, and innovation is a natural outcome.

3M is a prime example. The company’s culture encourages employees to spend a portion of their time on projects of their own choosing, leading to a steady stream of innovative products. This environment of trust and encouragement is rooted in 3M’s core values and commitment to progress, allowing the company to remain at the forefront of innovation in multiple industries.

Big Hairy Audacious Goals (BHAGs)

Another defining characteristic of visionary companies is their pursuit of Big Hairy Audacious Goals (BHAGs). These goals are bold, daunting, and serve as a catalyst for progress. They are long-term and often appear unattainable, yet they inspire and mobilize the organization towards achieving extraordinary outcomes.

A quintessential example is Boeing’s decision to build the 707, the first American jet airliner. This BHAG was a significant leap of faith at the time but ultimately revolutionized air travel and secured Boeing’s dominance in the aviation industry. BHAGs compel companies to push boundaries and achieve what might initially seem impossible.

Continuous Improvement and Adaptability

“Built to Last” also emphasizes the importance of preserving the core while stimulating progress. Visionary companies excel at maintaining their core values and purpose while continuously seeking ways to improve and adapt to changing environments. This dual approach ensures that while the company remains true to its identity, it also evolves and innovates.

Johnson & Johnson exemplifies this balance. The company’s credo, established in the 1940s, emphasizes a commitment to customers, employees, and communities. This core ideology has remained unchanged, even as the company has expanded and diversified its product offerings, demonstrating adaptability and a continuous drive for improvement.

The Enduring Impact of “Built to Last”

Jim Collins’ “Built to Last” offers timeless lessons for anyone seeking to build or sustain a successful organization. Its insights into the significance of core ideology, the power of cult-like cultures, the misconception of needing a great idea to start, and the relentless pursuit of innovation and BHAGs provide a robust framework for enduring success.

The book’s impact transcends business; it offers a philosophy for building institutions that stand the test of time. By adhering to core values, fostering strong cultures, and continuously striving for improvement, organizations can achieve greatness that endures for generations. “Built to Last” remains a vital resource for leaders and entrepreneurs aiming to create lasting legacies in an ever-changing world.

Preface: “The one thing that unites all human beings, regardless of age, gender, religion, economic status, or ethnic background, is that, deep down inside, we all believe that we are above-average drivers.” ― Dave Barry

Deducting Expenses for Use of Your Car

If you use your car for business purposes, you can deduct car expenses from your business income. Business use includes delivery and rideshare (“gig”) drivers, but does not include drivers who are employees. Be aware that for tax years 2018-2025, the cost of using your car as an employee is no longer allowed as an unreimbursed employee travel expense.

This article will help you determine what costs are considered business use and explain how to figure your deductions.

You can generally use one of the two following methods to figure your deductible vehicle expenses.

• • • • Standard mileage rate.
      • Actual expenses.

Standard Mileage Rate (SMR)

The SMR method is the simpler of the two methods. The important thing for deducting SMR is to keep track of how many miles you drove for business during the year. You should use a logbook or app to track your business miles. To take the deduction, you just multiply the number of miles by a fixed dollar amount that is set by the IRS each year. For 2023, the standard mileage rate was 65.5 cents per mile.

There are four additional car-related expenses you are allowed to deduct if you use SMR. These are: parking fees and tolls, the interest portions of your car loan payments, and personal property tax assessed on your car by any state or local jurisdiction.

If the car is not used 100% for business, the interest expense and personal property tax must be prorated for the business use percentage of the car. If you use the SMR method, one easy way to figure business use percentage is to take a picture of your odometer every New Year’s morning. This lets you easily compute the total miles driven during the year. If you know your business miles, you may then easily find your business percentage by dividing your business miles by your total miles.

Parking fees and tolls incurred during business trips do not have to be prorated because they are direct business costs.

Parking fees you pay to park your car at your regular place of work are nondeductible because they are considered commuting expenses. Commuter expenses are never deductible, even for the self-employed.
Fines for violations, parking tickets, and other penalty payments are never deductible under any method.

If you want to use SMR, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either SMR or actual expenses. If you want to use SMR for a car you lease, you must use it for the entire lease period.

Actual Expenses

If you choose to deduct actual expenses, you cannot later choose to use SMR. If you use five or more cars for business at the same time during the year, you must use the actual expenses method.

To deduct actual expenses, you must track all car-related expenditures. This includes all previously mentioned car expenses like parking and tolls, interest, and personal property taxes, and also all other expenses such as gas, oil, tires, repairs, registration, insurance, and garage rent. If the car is not used 100% for business, you must figure a business percentage and prorate the costs.

Depreciation

Another business expense you can and should deduct if you choose actual expenses is depreciation. This allows you in effect to deduct the cost of the car itself over the period of its useful life, typically a five-year period. To figure depreciation expense, you will need to know the cost basis of the car and the date you first used it for business. Calculating the exact amount of depreciation to take each year requires a depreciation calculator or depreciation table.

If the car is not used 100% for business, you will need to prorate the depreciable amount.

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EXAMPLE: If you spent $50,000 on a car, placed it service on January 1, and used it 60% for business, one way to take the depreciation would be to deduct $6,000 of depreciation expense each year for a total of five years.

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You must decease the cost basis of your car for depreciation.

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EXAMPLE: Following the above example, you spent $50,000 on a car and deducted $6,000 of depreciation expense each year for a total of five years. If you then sold the car for $25,000, you would actually owe tax on a $5,000 gain on the sale. This might surprise you, since you sold the car for half of what you originally paid for it, but from the IRS’s point of view, the basis of the car is adjusted down by the amount of depreciation. Therefore, at the time you sold the car, it had an adjusted basis of just $20,000. So you actually sold it for more than its basis.

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If you use the SMR, you do not need to calculate depreciation because the annual SMR amount includes an amount due to depreciation. For 2023, this amount was 28 cents per mile.

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EXAMPLE: If you use the SMR and drove your car 10,000 miles for business in 2023, you take a SMR deduction of $6,550 (65.5 cents per mile for 1,000 business miles). You do not deduct for depreciation expense because the implied depreciation is included in the SMR deduction. However, you must reduce the basis of the car by $2,800 (28 cents per mile for 1,000 business miles).

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What Counts as Business Use of a Car?

Traveling from one workplace to another, or to and from clients or customers, is considered business use.

If you have an office or other regular workplace you commute to, driving between your home and regular place of work is not considered business use, even if you are self-employed.

If you drive between many pickup and delivery sites, most of the miles you drive to, from, and between deliveries and pickups are business miles. One grey area is the drive from your home to your first working location and to your home from your last location. These might be considered commuting, and thus not business miles. However, if you are available for new orders at these times, say, by being active on an app that you get work through as you drive, you may plausibly claim these miles as business miles as well.

Side trips out of your way for personal errands should never be counted as business miles.

All documentation to prove your business miles and other vehicle expenses should be kept for three years after the due date of the return.

 

Preface: “The best inheritance a parent can give his children is a few minutes of his time each day. “– Orlando Aloysius Battista

Estate Planning and Power of Attorney: Managing Gift Giving

As people live longer, dementia and other mental disabilities become more common, posing challenges in estate planning. To manage this, elderly individuals often appoint an attorney-in-fact through a power of attorney (POA) to handle their financial and medical affairs. Typically, the attorney-in-fact is an adult child, which can lead to questions about the appropriateness of gift giving, especially when the attorney-in-fact is a recipient of the gifts.

IRS Ruling on Gift Giving

In a private letter ruling, the IRS allowed the annual gift tax exclusion amount ($18,000 for 2024) in cases where an attorney-in-fact made gifts to herself and her children. This can help reduce the taxable estate by the exclusion amount for each gift. However, the IRS requires certain conditions to be met, which may not be common for all taxpayers.

Example Scenario

A mother executed a durable power of attorney, naming her spouse as the agent and her daughter as the alternate. After the spouse died, the daughter, using the POA, created two trusts on her mother’s behalf:

• • • A qualified personal residence trust that would transfer the residence to the daughter after the trust term.
    • A trust for the benefit of the daughter’s children.

These transfers were reported on gift tax returns, and the applicable tax was paid.

The POA gave the daughter broad authority to perform any act her mother could do if personally present. The daughter was also the sole beneficiary of her mother’s estate. The mother had a history of making substantial gifts, exceeding the annual exclusion amount. When she died, her estate was much larger than the total value of the gifts made by her daughter.

IRS Criteria for Gift Authorization

The IRS’s decision on whether the gifts were complete for tax purposes depended on whether a state court would likely find the gifts authorized under the POA. The IRS considered the following:

Specific Authorization: Does the POA specifically authorize gift giving? If not, proving authorization is more challenging.

Beneficiaries’ Identity: Are the gift recipients also beneficiaries under the decedent’s will? This suggests the decedent’s intent to authorize such gifts.

Sufficient Assets: Did the person who executed the POA have enough assets to cover living expenses and avoid economic disadvantage after the gifts?

Previous Gift-Giving History: Was there a history of gift giving that aligns with the gifts made under the POA? Consistent past gift giving supports authorization.

Avoiding Tax Litigation

To avoid tax litigation, it’s beneficial to draft a POA that explicitly includes the power to make gifts and reflects the grantor’s intent to continue a gift-giving plan if appropriate. This is particularly useful for estates near or within the taxable range. However, if the grantor is less concerned about maximizing tax savings, as may be the case when the POA is granted, and the estate is not large, this situation may still attract IRS scrutiny.

Conclusion

Clear and specific provisions in a power of attorney help ensure that gift giving is authorized and consistent with the grantor’s intent, potentially reducing estate tax and avoiding IRS issues.

Preface: “Great things in business are never done by one person; they’re done by a team of people.” – Steve Jobs

When is a Partnership IRS Form 1065 Filing Required?

Understanding when to file IRS Form 1065 is crucial for anyone involved in a partnership. The Form 1065, also known as the U.S. Return of Partnership Income, is the form that partnerships use to report their income, deductions, gains, losses, and other financial details to the Internal Revenue Service (IRS). Knowing the requirements and deadlines for this form helps ensure compliance with federal tax laws and avoids potential penalties. Here’s a detailed look at when a partnership is required to file Form 1065.

What is a Partnership?

A partnership is a business entity where two or more people join together to carry on a trade or business. Each partner contributes money, property, labor, or skills and, in return, shares in the profits and losses of the business. There are different types of partnerships, including:

• • General Partnerships (GP)
  • Limited Partnerships (LP)
  • Limited Liability Partnerships (LLP)
  • Limited Liability Companies (LLC) treated as partnerships for tax purposes

Regardless of the type, these partnerships are considered pass-through entities for tax purposes, meaning they do not pay income tax themselves. Instead, income, deductions, credits, and other tax items pass through to the individual partners, who report these items on their personal tax returns.

When is Form 1065 Required?

A partnership must file Form 1065 if it meets the following criteria:

1. 1. 1. It is a Domestic Partnership: Any partnership formed in the United States must file Form 1065. This includes general partnerships, limited partnerships, and limited liability partnerships.
      2. It is a Foreign Partnership Engaged in Trade or Business in the U.S.: Foreign partnerships that are engaged in trade or business within the United States are also required to file Form 1065.
      3. It has Gross Income or Deductions to Report: Any partnership that has income or expenses to report must file Form 1065, even if it has no taxable income. This ensures that all financial activities are documented and reported to the IRS.
      4. It Meets Certain Other Specific Criteria: Certain partnerships, such as those with foreign partners or those involved in farming or other specific industries, may have additional filing requirements. For example, partnerships with foreign partners may need to file additional forms and schedules along with Form 1065.

Exceptions to Filing Form 1065

While the general rule is that all partnerships must file Form 1065, there are exceptions:

1. 1. 1. Qualified Joint Ventures: A qualified joint venture conducted by a married couple who file a joint return can elect not to be treated as a partnership for federal tax purposes. Instead, each spouse can report their respective share of income and expenses on their individual tax returns, thus avoiding the need to file Form 1065.
      2. Disregarded Entities: A single-member LLC that is treated as a disregarded entity for tax purposes does not need to file Form 1065. Instead, the sole owner reports the income and expenses on their individual tax return.
      3. Electing Large Partnerships: Large partnerships, those with 100 or more partners, may elect to file Form 1065-B, U.S. Return of Income for Electing Large Partnerships, instead of the standard Form 1065.

Filing Deadlines and Extensions

The deadline for filing Form 1065 is the 15th day of the third month following the end of the partnership’s tax year. For most partnerships operating on a calendar year, this means the due date is March 15. If the due date falls on a weekend or a legal holiday, the filing deadline is the next business day.

Partnerships can request a six-month extension by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. This extension moves the filing deadline to September 15 for calendar-year partnerships.

Consequences of Failing to File

Failing to file Form 1065 on time can result in significant penalties. The IRS imposes a penalty for each month or part of a month the return is late, multiplied by the number of partners in the partnership. This penalty can add up quickly, making timely filing essential.

Conclusion

Filing IRS Form 1065 is a crucial requirement for partnerships to report their financial activities accurately. Understanding when and why this form is required helps ensure compliance with tax laws and avoids unnecessary penalties. Partnerships should stay informed about their filing obligations and deadlines to maintain good standing with the IRS and ensure smooth business operations. Whether a partnership is domestic or foreign, has income or deductions to report, or falls under specific exceptions, staying on top of these requirements is essential for successful and compliant business management.