How Healthy is Your Company?

By Tom Hager on February 13, 2012

I have read many financial statements over the years. There are many ways to evaluate the health of a company. You have no doubt seen all of the ratio analysis models. I have boiled down the analysis to one item per financial statement. Common financial statements consist of three statements:

  1. The Balance Sheet–a snapshot of the company at a specific point in time.
  2. The Income Statement–summarizes operations over a period of time, normally one year.
  3. The Cash Flow Statement–summarizes where cash comes from and how it is spent. In my estimation this is the most important and most overlooked of the three statements.

Here is all you need to know:

The Balance Sheet–do you have a continued and increasing “debt to worth” ratio? If the answer is yes, this is of concern.

The Income Statement–do you have a continued and decreasing “gross margin?” If the answer is yes, this is of concern.

The Cash Flow Statement–are you generating “cash flow from operations” and if so, is it enough to pay off existing debt. If the answer to this is no on either or both counts, this is of HUGE concern.

There you have it, complete financial statement health analysis made easy.

If you perform the analysis and determine you need assistance, we are here to help.
 

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Road Remains Bumpy For Business Taxation

By Debbie Petrone on February 12, 2012

 

The 2011 year started with a lot of talk about tax reform to spur the economy, create jobs, and promote investment and capital spending. However, no meaningful changes happened and probably will not until after the 2012 election. The Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 extended some 2011 tax breaks and expanded others.

EXPIRING TAX LAWS AT DECEMBER 31, 2011:

  • Asset expense election – In 2011 the purchase of tangible personal property (new or used) could be expensed up to $500,000 phasing out when those purchases exceeded $2,000,000. For 2012, the maximum deduction will be $139,000 phasing out for property purchases over $500,000.
  • Bonus depreciation – Eligible personal property put in service from September 8, 2010, through December 31, 2011, was eligible for an unlimited deduction (no phase-out) or 100% expensing as long as the equipment was purchased new. For property purchased in 2012, the deduction provided by the asset expense election is decreased to 50% of the cost of the property. To maximize the depreciation deduction, the asset expense election and the bonus depreciation rules will have to be considered together in order to figure the deduction.
  • Qualified Leasehold Improvements – Generally leasehold improvements are depreciated over 39 years. However, improvements made to the interior of non-residential real property owned by a non-related party, restaurant, or retail property could be depreciated over 15 years using the straight-line method up to $250,000.
  • Work Opportunity Credit – This credit benefited businesses hiring employees from certain disadvantaged groups, such as ex-felons, food stamp recipients, and disabled veterans.
  • Research and Development Credit – This credit was equal to a portion of qualified research expenses.

EXTENDED TAX LAWS TO DECEMBER 31, 2012:

  • Temporary payroll tax cut – A 2-percent reduction computed on the employee’s share of FICA tax until February 29, 2012.
  • Capital Gains Rates – Top capital gain rates remain at 15% including qualified dividends.
  • Estate Tax Threshold – Keeps the estate and gift exemption at $5,000,000.
  • Estate Portability Rules – Permits a surviving spouse to use the unused estate and gift tax exemptions of the last deceased spouse.
  • Annual Gifts – If the gifts per person do not exceed $13,000 per person no gift tax return needs to be filed.
     
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Are You an IRS Audit Target?

By Tom Hager on February 11, 2012

 

 

Your chance of getting audited is about 1%. A recent Kiplinger Tax Letter identified what draws IRS attention: 

 

  1. Making over $200,000
  2. Failing to report all of your taxable income–W-2s, 1099s, K-1s, etc.
  3. Taking a large charitable contribution deduction
  4. Claiming a home office deduction
  5. Claiming rental losses
  6. Deducting business meals, travel and entertainment
  7. Claiming 100% business use of a vehicle
  8. Hobby loss activities
  9. Running a cash business
  10. Failing to report a foreign bank account
  11. Engaging in currency transactions
  12. Taking higher than average deductions compared to IRS figures

This is not to say that if you have legitimate deductions you should not claim them. Just be aware that the above list will get you a little more scrutiny.
 

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529 Plan Overfunding–What to Do

By Les Smeach on February 10, 2012

Earlier this week Georgette Jasen of The Wall Street Journal discussed the dilemma of overfunding 529 plans. In her article, Georgette discusses the current economic environment and how most parents are concerned about not having enough money for their child’s education. Most of those same parents are using 529 plans to accumulate the funds they can afford to put away for education, but sometimes a 529 plan account can end up with more money than is needed. This can happen for several reasons, with the most common being a child decides they don’t want to go to college.

Here’s a summary of what parents can do if they accumulated more than they need?

  1. Take the cash and pay tax on the earnings and a 10% penalty. This is not a wise economic move.
  2. Direct the child to go to a post-secondary vocational school or a technical training program that is eligible for federal financial aid programs.
  3. If the child completes undergrad, use the excess funds for graduate school.
  4. Change the beneficiary of the account to another family member, maybe a parent who wants to further their education or possibly consider a grandchild.
  5. What happens if the child lands a big scholarship? In this case, there is no 10% penalty on money withdrawn as long as the withdrawal amount does not exceed the scholarship. The accumulated earnings would still be taxable.
  6. Heaven forbid a beneficiary dies or becomes disabled. If one of these events occurs, the 10% penalty is waived, however the accumulated earnings would still be taxable.
  7. If you don’t need the money, leave it alone. In most plans you can leave it in the plan and let it grow tax-free indefinitely, as long as the beneficiary is alive.
  8. A final idea: if there is no future beneficiary in sight, donate the money. You might get an itemized deduction if you can itemize, and this strategy will help mitigate the tax bite and penalty.
     
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Name Change? Notify IRS and Social Security Administration

By Tom Hager on February 9, 2012

Have you changed your name recently due to marriage, divorce or other reasons? If so, you need to notify the Social Security Administration on Form SS-5.   If you don’t it may complicate things with the IRS.

Need more information? Check out Tax Tips on the IRS Website relating to Five Tips for Recently Married or Divorced Taxpayers with a Name Change.

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