Author: dsauder

Preface: The disciples were always learning continuously. Were they cognizant eyes!  Entrepreneurs are learning continuously, too; and accountability in the office is sometimes an easy trial to improve financial business performance.

Accountability for the Moneybag

Jake M. Dietz, CPA

A moneybag blesses your business when wisely spent for the entrepreneurs intended uses. Unfortunately, sometimes money disappears from the moneybag without the owner’s knowledge. Attempting to hire office employees with integrity minimizes the risk of fraud, but it doesn’t eliminate the risk. Even the disciples, most of whom were men of integrity, had a Judas among them. Fortunately, entrepreneurs can minimize the misuse of their resources. Businesses should separate duties, provide accountability, and oversee the use of business resources.

Segregation of Duties

As much as possible, segregate these three responsibilities:

• Custody of assets
• Recordkeeping for assets
• Authorization to use assets

Segregation, or separation, of duties makes it harder for one person to misuse resources without being noticed. Unethical office employees could still collude, or work together, to commit fraud, but proper segregation of duties deters employees from misusing assets because of the risk of being caught.

Let’s consider ways that duties could be segregated for a business checking account. The person that has custody of the assets should not be able to authorize their use, so the person with the blank checks should not be able to sign the checks. If they could, then they might write and sign a check to themselves. The signor shouldn’t sign a check made out to the keeper of the blank checks without proper documentation that the check should be paid. An example of proper substantiation would be payroll records indicating how much to pay the employee. Also, the signor could not sign a check to themselves unless the person with the checks provided a check.

Accountability

In an ideal situation, businesses could separate custody, recordkeeping, and authorization duties. Entrepreneurs without a large office staff, however, may not be able to fully separate these functions among employees. Even when the staff is small, entrepreneurs can still provide accountability to employees. Let’s review some ways to provide accountability.

• If there are not enough accounting employees in the office to provide accountability, then temporarily pull an employee from another part of the company to help with certain functions. For example, suppose a company has one bookkeeper, but it also has a salesperson. When the bookkeeper opens the incoming mail and prepares the bank deposit from the checks, have the salesperson be present. The salesperson can record a listing of the checks. This arrangement allows a second employee to create a record to be compared by a third person to the bookkeeper’s record.
• Entrepreneurs can outsource certain responsibilities, such as reconciling the bank statements, to an outside bookkeeper. That bookkeeper would not have access to the checks or the ability to sign the checks. They would reconcile the bank statement to the record of cash in the accounting software.
• Companies can use software to track who makes changes in the accounting software. Give separate user names and passwords for everyone who can modify records in the accounting software. Encourage employees to keep their passwords confidential. If an employee is changing transactions, someone else can then track who made the changes.
• Perform unexpected inspections occasionally. If you regularly get invoices for materials, then you may not have time to go out to the shop floor and inspect the materials every time you get a bill. You could, however, occasionally ask to see the materials that are listed on a bill. Ask at random times so that the employees do not know when to expect your inspections.

Trustworthy Oversight

In addition to your inspections, work with a trusted CPA who can inspect your accounting records. Your CPA can watch over your accounting and look for discrepancies and red flags. Some accountants looking out for clients best interest, with be on the alert for fraudulent and inaccurate activity when examining financial statements. Ask your accountant if they will do that for you. A quick review of the profit and loss statement, balance sheet, and statement of cash flows sometimes reveals problems in a company. Deeper research may be needed to pinpoint the exact nature of the problem.

If deeper research is needed, then your accountant may review bank statements, images of cancelled checks, and bank reconciliations to try to identify the problem. They also may look at your financial statements over time to look for unusual activity and trends. Accounting software often allows them to review deleted transactions.

If no one has combed your books recently looking for fraud, then contact an accountant with experience doing just that. If they find something, then the problem can be addressed before it grows larger.

An article about fraud can be disturbing, but fraud has been occurring for thousands of years. Even if there is no Judas among your employees, it is still wise to take steps to deter fraud from happening. It is far better to have accountability and no fraud than to have no accountability and fraud. If you have questions on how to provide accountability for the moneybag, call your accountant and ask for ideas.

Preface: In Part IV of our series, we look at the role a trusted advisor occupies in doubling business value; along with the three main reasons trusted advisors usually are, and should be, retained.

Investing to Double Your Businesses Value – Part IV

Credit: Donald J. Sauder, CPA

Socrates was once known as the name of a famous philosopher, today, it is also the name of a real world artificial intelligence system, a thinking machine.

When Bill Gates, the entrepreneurial face of Microsoft Corporation, was young, he was late for supper one evening. His mother inquired why he did not promptly appear to the table. His response. “I was thinking”. Asking and answering questions to stimulate critical thinking and draw out idea’s and underlying assumptions, will always be a key process to building business value.

Today, most entrepreneurs wouldn’t ask a computer for advice. For example: why do customer shop at our location? Or, where are the opportunities for our business? Or say, what will our customer service look like ten years from today? Yet, often leading to the right answer (resolution) is the right question. Let’s ask a rhetorical question relevant to this blog – Can we double the value of (your) business?

An entrepreneur’s trusted advisor(s) are part four of building business value. When entrepreneurs retain ‘trusted advisors’ to coach and advise on key business themes, the decision on what advisor to rely on for advice will ultimately be key to the success of the purpose. What do you want to achieve with an advisor(s)?

Trusted advisors are the people responsible for thinking through (and avoiding, and resolving) fundamental entrepreneurial risks. To mention a few risks a) marginalized pricing power, b) marketing campaigns, c) building expansions, d) human resource decision, e) new market jurisdictions f) new product or services, g) innovative changes in the marketplace, etc. Choosing the right ‘trusted advisors’ is as simple and yet complex as understanding what role they will be responsible for in your business.

Entrepreneurism is challenging, and often uncertainty abounds, i.e. “Why are we working to double business value, when we can’t get enough qualified help for current projects?” An advisor who brings reassurance, calm fears, and inspire confidence is invaluable to a business. A trusted advisor who has resolved specific problems before, or inspired marketplace confidence, holds substantial value to that question.

Say business is going well, and you’d like to expand into a new location or product line. Those prerequisites are sometimes the path to doubling fundamental value. Many entrepreneurs have specific skillsets that have led to success, and a decision in certain instances requires resources beyond those skillsets, i.e. a trusted advisor is necessary. A trusted advisor in the normal course of business can be someone of accomplishment, authority, education, and respect. A consultant(s) say, or an employee(s), or business partner(s).

Trusted advisors should be obtained with referrals and endorsements. Trusted advisors are usually retained for these reason – i) to bring confidence to a decision, ii) take away worry, iii) or resolve business hassles. A trusted advisor will not manage your business. A trusted advisor will help you build confidence to make sound business decisions, they will provide assurance and clear worries with clarity of the risks, and viable options towards resolution. A trusted advisor will advise – that is offer suggestions about the best course of action for you and your business; inform about the facts of the situations and circumstances; and recommend viable, practical solutions. You will ultimately be responsible for the outcome of those suggestions.

A trusted advisor will appreciate your values, principles, and ideals, and advise you in a way that supports those personal fundamentals towards business success. A trusted advisor will work to make their advice, your business successes.

A truly trusted advisor’s role keeps you true to your fundamental values, principles and ideals in business decisions, along with developing financial and operational business value. Burgeoning entrepreneurs can rarely double a business value alone. Who they choose as a trusted advisor(s) is focal.

Step four to doubling your business value – true trusted advisors

 

 

Preface: Leadership style and strategy may vary among businesses; leadership is a substantial contributor to doubling a business value; and leadership requires more than a good vision.

Investing to Double Your Businesses Value – Part III

Credits: Donald J. Sauder, CPA

Leadership is the third pillar to doubling business value. Leadership can mean different things to different people, in different situations. For instance, there are global leaders, religious leaders, political leaders, or say community leaders. A business leader, and a business leader approach are what’s required to double a business value. US President David Dwight Eisenhower said “Leadership is the art of getting someone else to do something you want done, because he wants to do it.”

A business leader inspires a vision of the business future, e.g. a local industry leader in automotive repair and service in 3 years. A business leader motivates and manages employees to deliver on the vision. A business leader coaches and builds a team(s) that is effective at achieving the vision. Leadership integrates skills and skillsets to accomplish development of a masterpiece. Leadership compels and convinces the talent you need to join in achieving the business vision. Proverbs say’s where there is no vision, the people perish. A leader’s business vision is not simply accomplished with an objective of doubling business value, it is accomplished with the vision of adding value, so much value and to such an extent, that your business receives a little bit of that value in reciprocation.

Leadership adds value to employees, customers, the community, and beyond. Successful business leadership is admired; from employees and customers, to the community at large; admired and respected because the vision is adding value.

Leadership is ultimately a core value of business value building. A leader will provide employees on the team the access to develop and gain the necessary skills to their job well. Leadership will provide accountability, give and receive feedback, and work towards the long-term success of enterprise. President Eisenhower also said his most important lesson in leadership was attitude begins at the top. A business leader must therefore be capable of peak performance under all types of conditions; and in the most formidable business circumstances a business leader must say “I prepared my entire life for this”.

Leadership is the heart of business value. A business leader will serve the business by managing with a customer and client satisfaction attitude, high employee morale; and a win-win mind-set. There is a difference between management and leadership. Professor Warren G. Bennis is quoted as saying – “Leaders are people who do the right thing; managers are people who do things right. Leadership is strategic; management is tactical.

Doubling business value requires applying G.B. Shaw’s thought – You see things and say ‘Why’? But I dream things that never were; and I say ‘Why not?’ To double a business or enterprise value is one things, but then maybe you could double it again. With the right leadership approach, that is realistic. If you’re a student, perform a case study on two successful businesses. Then ask yourself – has a leadership mindset contributed towards that success?

Leadership requires more than vision, it requires active listening, confidence, courage, an understanding of your strengths and weaknesses, problem solving, helping others achieve things they never imagined possible, and building the team for the future.

Leadership style and strategy may vary among business leaders, but  leadership is a pillar to doubling a business value.

Step three in doubling your business value – Leadership

Preface: Choosing an accountant for your business is an important decision.  This blog provides some characteristics for entrepreneurs to look for in potential accountants

The Importance of Choosing a Trusted Advisor for Your Accountant

Credit: Jake Dietz, CPA

Should I eat apple pie or pecan pie for lunch? Pie selection decisions do not have long-term consequences. Other decisions, such as choosing an accountant, have far-reaching consequences. We will examine three characteristics to look for in an accountant in this blog. Choose an accountant who initiates consulting, who guides you through the tax and accounting maze, and who helps you achieve your business goals.

Seek an accountant who initiates consulting for your business. Sometimes you will be the one to ask for help, but choose an accountant who offers advice when it is helpful. For example, suppose you have a veterinarian come to the farm because your horse hurt its leg. If the vet also notices degenerative joint disease affecting the horse, then you may want to be told about it. You may not want a vet who says “I didn’t diagnose your horse’s degenerative joint disease because you didn’t ask me about it.” Likewise, you don’t want an accountant who says “I didn’t tell you your company was failing because you didn’t ask me about it.” Choose an accountant who shares with you what the strengths, weaknesses, opportunities and threats are that face your business. When was the last time your accountant called and asked about your business?

Find an accountant who can guide your business through the maze of tax filings and accounting decisions.   The Internal Revenue Code bewilders many people and traps the unsuspecting.   If you try to navigate the maze with inadequate advice, you may end up missing huge deductions or being on the losing end of an audit because of unreasonable tax positions. Choose an accountant who can help guide you through the risky pitfalls and help you take advantage of the beneficial areas of the tax code. If you are meeting with a potential accountant, consider asking them for an article they wrote about taxes, or ask them if there are any parts of the tax code that would help you. Most accountants don’t memorize the entire code and may need to research certain items before providing answers, but a busy entrepreneur should use an accountant who is familiar with the code and knows how to research the items that are not memorized.

Choose an accountant who will help you achieve your business goals. Entrepreneurs have different goals, and it can take hard work and discipline to achieve those goals. Do you want to grow your sales by 100% in five years? Do you want to pay your employees a livable wage? If you want to increase the wages you pay, your accountant may suggest increasing prices and sales. If debt is high, your accountant might point out opportunities to improve cash flow. A good accountant can help project what needs to be done and provide insight to achieve your goals. Choose an accountant who asks about your goals and values and then plans how to achieve them.

When considering pie choices, make a quick decision so you can soon enjoy the pie. When considering accountants, choose them like you would choose your vet. If your horse gets sick, you want a vet who has invested the time to gain the expertise to help the horse get up and running again. Likewise, an entrepreneur benefits from choosing an accountant who has the knowledge and experience to help your business. The benefits of choosing a trusted advisor to be your accountant can accumulate over the years. The consequences of a bad decision can be quite painful. Choose wisely.

Preface: A well-trained talent pool is consistently aligned with premium business valuations and appraisals. This blog provides 6 reasons why you should invest continuously to train your talent in order to build business value.

 

Investing to Double Your Businesses Value – Part II

Donald J. Sauder, CPA

Reducing investment risk to a potential buyer increases the probabilities of the business likelihood and probability of success, and therefore increases value. Management and the talent pool of the business is one such risk factor. Successful companies have well-trained, expert and talented management and staff that are adept at performing critical functions. This can be from customer service to strategic decision making, e.g. inventory and stocking decisions, or say purchasing. Assessing your intangible assets – your talent pool is imperative. Unless your business is asset based, i.e. rental properties, talent is key drive to long-term success. Given entrepreneurial interests, we’d say the chances of a coach services or carpet sales are more likely. In those two instances, safe drivers and friendly staff are as important as price. In fact, most customers would rather pay a premium to work with a business they like. I’ve heard one business advertise that their team is “good natured guys” or simply easy to get along with technicians. You’d call them because you want a good attitude solving your problem.

The premise is training. While good attitudes aren’t always easy to consistently maintain when stress levels climb, proper training and management prevent problems from ballooning. That prevention begins with a well-trained management team that can quickly identify and adeptly resolve problems.

Does your business have the expertise and talent to run without you? If you can’t step outside your business for a week, without a business as usual attitude prevailing, you’ve got work to do on value drive number two – an expertly trained talent pool. Your business will be more successful with talent that is well trained. While sometimes challenging to hire, it often requires costs and time to train and development that expertise. Studies show that training is worth the investment. Why?

1. It promotes your business successes from better customer service to more closed sales;

2. It promotes job satisfaction and nurtures employees to be more engaged in working for you, therefore, leading to more financial rewards;

3. It is a recruiting tool for the promising talent looking to excel in their careers;

4. It is a retention tool, that instills loyalty and commitment from good talent, and provides them with opportunity and challenge, and a fast paced current;

5. It adds flexibility for cross-training to help with schedule setting and absences;

6. It provides knowledge transfer that is vital to successful craftsmanship.

The benefit of not investing in a trained talent pool – short term cost savings. Forty percent of employees who leave their jobs in the first year, make the decision because of a lack of training and upward mobility. As an entrepreneur, you appreciate more than your employees, what employee turnover costs – the training is therefore the less expensive alternative.

It likely is not easily perceived, but nearly all business with a premium value — and that value expands with the employee count – has an expertly trained workforce, from top management to clerical administrative tasks. The value of investing in a well-developed talent pool is too often overlooked in the entrepreneurial community, yet it’s proven to hold substantial and incalculable value. Your business must have the expertise to succeed without you daily involvement to be truly valuable. That often requires at a minimum, appropriate training for management to be expert decision makers and supervisors.

Step two in doubling your businesses value – investing in continuous training for a well-developed talent pool.

Preface: A CPA provides more value to an entrepreneurial business owner than is often perceived. Here’s one more reason why an investment in expert accounting and tax services is cost effective – it increases or supports business value at time of appraisal.

Investing to Double Your Businesses Value – Part I

Credit: Donald J. Sauder, CPA 

Prudent and principled savings and investments are frequently heralded as the straight path to successful retirement planning; yet for many business owners, the largest investment asset in a portfolio is business ownership. There usually is a time for every business owner to sell a minority or majority share of a business interest, and appropriate planning of that interest’ sale is the purpose of this blog. Predicting business success is like investing, a long-term approach is usually advised.

Let’s say you never thought about selling any share of your business before. Maybe you’ve only launched your business 4 years ago, and success is easy, or perhaps you’ve plans to never retire. Either way, what would prohibit you from planning how you could strategically double the value of your business. After all, your personal balance sheet would give you more credit access. Well, omitting the time to plan and thinking through the possibilities is a likely reason.

Although business value is subjective, there are some standard characteristics relevant to business value. To start, you need a base line. What is your business worth today? What are the value drivers and what are the risk drivers? Do you know what your ownership interest is worth?

Business Value– the foundation is good accounting. A properly prepared business appraisal will include documentation relevant to the key metrics of that value. Without good accounting records for the businesses financial history, a business appraiser will not be easily able to accurately value your business asset, especially not with a premium. Therefore, the first value driver of business value is good accounting. Now, some business owners think of their accountant as mainly an advisor for tax planning and advice. After all, entrepreneurs understand how to use QuickBooks or say Eagle Business Software. Why pay an accountant thousands of additional dollars to review your bookkeepers work? Well, here’s why. In the auto industry, used vehicles sell for a premium when they have dealer certified warranty or service. That business premium is typically worth more in a business transaction than a vehicle sale. Errors in tax filings and accounting software files discount value in due diligence. A CPA say is that certified warranty of your business financial records.

Let’s consider for instance a business due diligence team, e.g. the buyer’s accountant and attorney, say, checking and comparing the prior five years’ data from tax returns to accounting software files. If the financial balances agree, you’ve added a possible value premium, or certainly avoided a discount to transaction, through the trust and assurance in accurate historical financial performance.

Yet many entrepreneurial businesses lack that level expert of accounting and tax compliance. It’s not that entrepreneurs don’t appreciate accurate records, it’s often they don’t realize the value or take the time or make the investment in expert accounting, neither realize that it is the first step towards a premium in business value. Expert accounting includes accuracy and consistency. If your accountant doesn’t require you to count inventory and document values, or request confirmation of balance sheet accounts, your records may appear accurate, yet have a problematic flaw perceptible to a skilled due diligence team preparing an independent appraisal of value for a potential buyer.

Working with a credentialed business valuator and experienced accountant, you can prepare your accounting and tax records for that due diligence team years ahead of gearing up your business for the marketplace.

Step one in doubling your business value – investing in expert tax and accounting services for your business, every year.

 

Preface: A CFO is a trusted advisor to your business. The trust factor is vital. A CFO provides in-house financial and strategic counsel. Discussion, management, and decisive resolution of these business themes can be as easy as a visit to your CFO’s office. What does a CFO do – this blog answers that question.

Your Business Needs a Chief Financial Officer (CFO)?

Credit: Donald Sauder, CPA

A Chief Financial Officer (CFO) is a strategic financial partner for your business. A CFO’s primary responsibility is oversight of the financial decision making of a business. This oversight includes: planning, reporting, strategizing, and managing financial performance. A CFO reports to the CEO (Chief Executive Officer) and the board of directors.

 The role of a CFO has changed over the years, from solely financial management, to helping develop company plans and being a strategic partner and advisor to the CEO.

 A Chief Financial Officer needs to understand not only financial concierge and managing volatility, but also the strategy of developing the business position in the marketplace.

 A CFO will help provide answers to questions such as: are the financial statements timely and accurate? What is driving profits? How do we manage key assets such as receivables, cash, employees? How should we make decisions about capital expenditures? What are our measures of financial performance? What are the company’s overhead costs and break- even points? Are revenues trending up and why? Where should we invest excess cash? Should we develop a strategic plan? What information do we need to assess market conditions and make decisive business decisions? How will we finance expansion of the business? How can we manage the business more efficiently? What do key performance indicators indicate? Are we meeting cash flow projections? What does the balance sheet show as a strength or weakness in the business? What does our business do right, and what does it do wrong? How do we develop strategy? How do we provide our accounting staff with oversight? When should we obtain financing or refinancing for the business? What are our objectives and long-term goals?

 A CFO is a trusted advisor to your business, on payroll or with contract. The trust factor is vital. A CFO provides in-house financial and strategic counsel. Discussion, management, and decisive resolution of these business themes can be as easy as a visit to your CFO’s office.

 If your business is growing, a CFO can act as a trusted advisor and assist in developing a strategy–financial, operational, managerial–that prepares and positions your business for the future. A CFO is more than a numbers person. A CFO will work with your bookkeeper or accountant to understand what is important to business performance. They will monitor business performance indicators, financial statements, and environment, to prevent financial fires. They will also help with strategic business planning and pinpoint areas for improvement.

 If your business is exceeding $10 million in revenue, you likely need a CFO full time. If your business revenues are $3 million, a part-time CFO will likely provide you necessary pillar to your developing business framework. If you begin signing international contracts or complex deals, a part-time CFO probably cannot keep up with those pleasant surprises.

 If you think a CFO, either part-time or full-time, would benefit your business, talk with your CPA. Often small businesses begin with a CPA as the strategic CFO partner, and develop into a part-time or full-time CFO on contract or payroll. A CPA will also have the expertise to help you make the decision about what is in the best interest of your business when hiring a CFO–the expertise and experience required. You need a CFO who understands your business industry. A CPA can guide your decisions on the development and fulfillment of the CFO role in your business.

 In summary, a Chief Financial Officer or CFO is a strategic financial partner for your business. A CFO provides additional management of financial decision making and business strategy. CFO’s can be either part-time of full-time. For small businesses, a CPA can fill that spot well. If you think your business may have a need for a CFO, talk with your CPA.

 

Preface: Good business attorneys provide a valuable source of independent counsel in business decisions. Their expertise and experience when obtained in appropriate circumstances can be invaluable…..they know more than most what business inferno’s look like. Appreciate and respect an attorneys expertise….ask for their counsel and let them help you avoid the hot seat.

Why Your CPA Advises You to Work with an Attorney When Necessary

Credit: Donald Sauder, CPA

You are well advised to retain an attorney in certain instances. Why? Sometimes you don’t know what you don’t know. Your CPA appreciates this fact. After all, if you knew every tax and accounting angle, you wouldn’t need your CPA. When financial matters involve a peripheral individual or business, additional risks arise, and an attorney is worth the investment.

If you need accurate financial statements, tax advice, resolution of an IRS matter, or numerical analysis, your CPA is the right resource. If you need to amend a partnership agreement, write a buy-sell agreement, incorporate a new business, or draft a letter of intent, you need an attorney. If your CPA or attorney disagrees with this advice, you probably need a new CPA or attorney.

Often your CPA and attorney will work together to provide your business with a financial fortress. The fortress works like this. You wouldn’t pay a carpenter to install a new phone system in your business, nor would you pay marketing experts to install carpet in your new office. You understand the importance and value in working with a business or individual specializing in the task at hand. You would, perhaps, pay a human resource specialist to hire the right talent for a managerial role in your business. These are understandable examples of specialization. In too many instances, entrepreneurs have the wrong impression of what trusted advisors, such as a good attorney, can do for their business.

Suppose you are selling an interest in an LLC to your partner. You tell your accountant your plans, and he writes an agreement of sale document and amends the Operating Agreement. Your accountant makes the appropriate adjustments with the tax filing, and you receive payment. Here’s how things can go wrong. Three years later you decide to contact the bank for a loan on investment real estate. Your banker says your credit score is too low, but when you checked five years ago it was stellar. The problem–the partner who bought your business interest has a delinquent credit card with a $35,000 balance. Who forgot to take your name off the business credit card, or the at-the-limit-line of credit with your personal guarantee? Don’t sweat a business attorney’s fees if you want savvy advice. It should be obvious why your CPA advises you to retain an attorney. They don’t want to pay the line of credit or credit cards from a malpractice lawsuit, and the professional oversight of an attorney provides additional financial protection to you and your CPA.

Think of your attorney as saving you and your business from making major mistakes, not just getting you and your business out of major mistakes. Listening to your CPA when they advise you to retain an attorney, it is in your best interest.

In summary, attorneys can save you and your business from legal hassles.  An attorney is an asset to your business, not a liability. Your CPA will likely give you a referral to a trusted attorney, should the need arise within your business.

Your Destination – A Business MAP Credits: Donald J. Sauder, CPA Twenty years ago a man walked up to me at church and inquired point blank, “If you get where you are going, where will you be?” It’s clearly important; destination matters. You don’t get lost driving to a local venue for the tenth time. The danger is when you step outside your comfort zone into a new responsibility, new product, or new service area in your business. The Chinese Admiral Zheng didn’t make seven successful voyages to Arabia, East Africa, India, Indonesia, and Thailand in the 1400’s  A.D. without planning. The important fact is that he had a destination in mind, then planned appropriately. He also had a very high quality map, or he wouldn’t have gotten back to China too. Entrepreneurism is very similar. You need to map out a plan to reach your destination. Few entrepreneurs invest the appropriate time to think through their business endeavors. Why? Do they think they’re too busy? Do they think it’s time and money wasted? Would a plan require too much energy? Do they already know in their mind where they want their business to be in three years or five years?   Maybe they’re simply satisfied with the status quo. A Business MAP, a Marketplace Assessment Profile, is a good tool to help you reach your business destination. A Business MAP is a business planning tool that helps you make sense of your business: the services and products viability in the marketplace, your business’s competitive advantages, industry risk, resource risks, opportunities, and value drivers. A Business MAP looks at your business on both a macro and micro scale and provides a guide for your businesses future. A Business MAP helps you plan your business destination, whether it’s organic expansion, a gear-up for sale, etc. Studies show that people forget 50-80% of what they’ve learned after one day, and 97-98% after a month. You must map your plan on paper for it to be of any value. Those who do, and follow it with a single purpose, (there are lots of distractions)  often harvest, not double, more like 30-, 60-, or 100- fold, of the initial investment. There is often a reason for a chosen destination. If the destination for your business is $5 million of revenue, $50 million or $500 million, remember this: you won’t get there alone. You will need a articulate plan and vision to convince others to join you and help achieve that plan. You either have a plan with a vision, or you become part of someone else’s. If you don’t have the time to plan and map in detail the vision of your business, you will never have time to reach the destination of your vision or to recognize when you get there. If you’ve built one or more successful entrepreneurial businesses, then it will be easier to build on prior successes; but if you’re just entering the entrepreneurial world, or experiencing only mediocre developments, or experiencing pain points on the current path, you’re best advised to retain advisors who can help you map a plan to arrive at your destination successfully. Chance favors the smartest decision as getting the right advice early with mapping and working toward your business destination, even if you’re surprised at the cost upfront.

 

 

 

Preface: Appropriately planning contactor costs when renovating business property can result in tax benefits; read this blog to see how certain qualifying improvements have tax advantages.

Depreciation of Real Property Improvements

Credits: Jake Dietz, CPA

Is it time to renovate your business property? Have you considered how quickly you can deduct the expenditure? The IRS allows some capital expenditures to be deducted in the first year, either in whole or in part, using Section 179 expense or bonus depreciation. On the other hand, some capital expenditures must be deducted over decades. This timing difference can affect your tax liability and therefore your cash flow. This article examines certain categories of property and rules that apply to deducting them.

Qualified retail improvement property is an improvement made to the interior portion of a building that is accessible by the public and is part of retailing tangible personal property to the public. An example would be a hardware store. Qualified retail improvement property excludes:

1. “the enlargement of the building,”
2. “any elevator or escalator,”
3. “any structural component benefitting a common area, or”
4. “the internal structural framework of the building.”

 

The qualified retail improvement must be made more than 3 years after the building was first placed in service by any taxpayer. It therefore will not apply to constructing a new building, but it can apply to remodeling an existing building even if it was originally placed in service by a separate taxpayer. For example, ABC Building was constructed in 2011 for use as a store. In 2017, it is sold, and the new store owner makes qualifying improvements immediately. The 3 year rule is met because the building had originally been placed in service more than 3 years before, even though it was by a different taxpayer.

Another category is qualified leasehold improvement property, which are improvements to leased property. The improvements may be made by the lessee or lessor. This property must be placed in service more than three years after the original building was first put in service. Certain improvements are not included. The exclusions are the same four improvements that are excluded from the definition of qualified retail improvement property listed above.

Related party leases do not qualify for the leasehold improvement rules. For example, suppose John and Samuel own an LLC that operates a construction company, and they also own a separate LLC that rents a shop to the construction company. Improvements to the shop would not qualify as leasehold improvement because of the related party rules.

Qualified restaurant property is a third category we will examine. This category is a building, or building improvements, “if more than 50 percent of the building’s square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals.” There is no 3 year in service requirement.

Qualified improvement property is an improvement to the interior of the building. The improvement must be placed in service after the original date of the building, but there is not a three year waiting period. QIP excludes 3 types of improvements:

1. “the enlargement of the building,”
2. “any elevator or escalator,”
3. “the internal structural framework of the building.”

Now that we have defined these categories, how can they be written off?

Qualified restaurant property, qualified leasehold improvement property, and qualified restaurant property qualify for section 179 expensing. This allows them to be written off immediately, subject to the Section 179 limits. Qualified improvement property is only subject to section 179 if it also qualifies as one of the other three categories.

Bonus depreciation allows a certain percentage of qualifying property to be depreciated in the first year. That percentage is 50% for 2017. Qualified retail improvement property, qualified leasehold improvement property, and qualified improvement property qualify for bonus depreciation. Qualified restaurant property, however, is excluded from bonus unless it also qualifies as qualified improvement property.

Qualified retail improvement property, qualified leasehold improvement property, and qualified restaurant property are each 15 year property that is depreciated straight line. Qualified improvement property, on the other hand, is 39 year straight line property unless it falls into one of the other three categories. The 15 year life can make a nice difference for annual depreciation because depreciation is deducted more quickly than the normal 39 year life for nonresidential real property.

While each of the categories discussed has its benefits, they also each have qualifications that must be met. If you are renovating, part of the job may fall into one of these categories, and another part may not. Talk with your accountant beforehand to see what might qualify, and then ask your contractor to give you invoices that have the appropriate breakdown of expenses.