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SEPTEMBER/OCTOBER 2012 Volume 36, No. 5

Lower Your Tax RateStrategies for lowering the rate at which income is taxed include the ra-tionalization of taxable income between tax years in light of marginal tax rates, moving income to persons or entities that are taxed at lower rates, moving income into accounts that are non-taxable or tax deferred, and conducting transactions in a manner that qualifies for lower tax.

Allocate Income Among Years to Avoid Higher Tax Brackets. A key fea-ture of our federal tax system is its progressive nature. Tax rates are higher at higher levels of income. Your marginal tax rate is the rate of tax you pay on your next dollar of taxable income. The individual income tax rates for 2012 are 10%, 15%, 25%, 28%, 33% and 35%. Most businesses today are organized as pass-through entities, i.e., limited liability corporations, s-corporations and partnerships, so it’s the individual tax rates that apply. Here are the income thresholds for 2012:

T A X

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If Taxable Income Is: The Tax Is:

Not over $17,400 10% of the taxable income

Over $17,400 but not over $70,700 $1,740 plus 15% of the excess over $17,400




Over $388,350 $105,062 plus 35% of the excess over $388,350

Standard deduction $11,900

You can lower your tax bills by knowing your marginal tax rates and allocat-ing income in a manner that minimizes the income that is subject to higher tax rates.

Example: You are married, file jointly, and estimate your year-to-date tax-able income for 2012 to be $213,100, which is the sum of interest income ($10,000), salary ($110,000), commissions ($50,000) and pass-through earnings from your company ($55,000), less the Standard Deduction ($11,900). You are close to completing a sale that will put another $50,000 on the bottom line. Should you push to get it done before year-end or let it slip into 2013? If we look at the federal tax rate table above, we see that married couples filing jointly pay a 28% income tax rate for income be-tween $142,700 and $217,450, and then 33% on income over $217,450 up to $388,350. If the sale closes this year, you will owe a total federal tax of

Lower Your Tax Rate .................................................. CoverYour Holiday Card Opportunity ......................................... 2The Income Statement ......................................................... 3What Every Business Seller Should Know ................ 6You Need Disability Insurance ......................................... 7Transactions Between You & Your Family Biz ......... 9New Representation for Small Businesses ........... 10Don’t Let Disaster Destroy Your Business .............. 11

fspa.TheBusinessOwner.com

Information Service from FSPA for Its Members

7901 Westpark DriveAlbuquerque, NM 87120

Tel: 505-839-7958, 800-843-608Fax: 505-839-0017

Email: [email protected]: www.fspa1.com

Many business owners I’ve talked to are having a profitable year. Some are booking record prof-its. How nice it is to again have to worry about tax minimization!

Our cover article, “Re-duce Your Tax Bill,” presents eight easy-to-implement strategies for legally lowering your tax bill. The time to take action is now. Wait until year-end and many of your options will have expired.

The presidential election is heating up and politics is the topic on everyone’s mind. I’m sick of it already, but I found a bit of fresh air recently in Mr. John Arensmeyer and his organization, The Small Business Major-ity. He, and they, purport to look into issues from the vantage point of small business and take stands based on merit rather than politics, people or ideology. When I read their articles, I don’t find put-downs, sound bites or hyperbole. Do they have office space? I’d like to move there.

I’m proud of this issue of The Business Own-er. It’s diverse, informative, and – as always – straight to the point. Read it and reap!

FROM THE EDITOR

TO SUBSCRIBE, ORDER REPRINTS, PRIVATE-LABEL THIS PUBLICATION OR PURCHASE ARTICLES FOR PLACEMENT IN YOUR OWN NEWSLETTER: CALL 800-634-0605, email [email protected] or visit www.thebusinessowner.com. COPYRIGHT © 2012 BY DL PERKINS, LLC. ALL RIGHTS RESERVED UNDER INTERNATIONAL AND PAN AMERICAN COPYRIGHT CONVENTIONS. REPRODUCTION, IN ANY FORM, IN WHOLE OR IN PART, IS PROHIBITED WITHOUT WRITTEN PERMISSION FROM AN OFFICER OF DL PER-KINS, LLC. ISSN. NO. 0190-4914. VOL. 36, NO. 5. PRICE $149.00 PER YEAR. “The Business Owner” is a registered trademark of DL Perkins, LLC — Registered in U.S. Patent Office

David L. Perkins, Jr.Managing EditorThe Business Owner® [email protected]

This publication is owned and published by DL Perkins, LLC, PO Box 700570, Tulsa, OK 74170 918-493-4900; Fax 203-347-4056 [email protected]

Stephanie Coit, Publisher [email protected]

David L. Perkins, Jr., Managing Editor [email protected]

Image credits: iStockPhoto.com, Andertoons.com

Your Holiday Card Opportunity

M A R K E T I N G

You should definitely send a holiday card to your customers, vendors, prospects, industry peers and friends, and referral sources. It’s an op-portunity to “touch” them in a high-quality way.

Don’t be cheap. Impressions matter, and for many it will be the only thing they see and touch about you and your company this year.

Yes, “the holiday card project” is a real chore when done right. You need to make sure you have all the names spelled correctly, titles and com-

panies and addresses updated. Some-one needs to get on it now – months in advance. And it’s best to mail them early. Drop ’em just after Thanksgiving, before “card fatigue” kicks in.

No, don’t add business promotions, ad-vertisements or pitches for more busi-ness. It’s about sending a genuine wish for a joyous holiday and prosperous New Year. Make the message short and sweet and not overly religious, unless that’s a real part of who you are and for

what you stand. Be careful, though. It’s about sending a positive mes-sage to all. Steer clear of anything that could alienate or offend.

Do include a quality logo or image of your company, and sign each card personally. Any person who is active on the “account” should also sign their name.

If you use a picture of your office or “team,” make sure it’s impeccable. Professionally produced. When in doubt, don’t do it.

Try to make it memorable without risking being unprofessional or of-fensive. Avoid the cheesy and overused “holiday poinsettia” card and “puppy stuffed in an elf suit type of stuff.” Move into the modern age and send something that has style, color and beauty.

Make sure to include a return address. Update your database for return mail and get the card rapidly on its way to the new location. A friendly call to the person who moved is in order, just to check in and see what’s up, show you care, and make sure you have their correct information.

The holiday season is an opportunity to touch those you know and care about in a positive way. Many of your competitors will fail to take full advantage, or will stumble out of the gate. It’s your opportunity to put a few more drops in the rain bucket of positive impressions. Over time, the raindrops produced by each of your many efforts will fill the bucket until it’s overflowing.

It’s your opportunity to put a few more drops of positive impressions into your rain bucket of success.

SEPTEMBER/OCTOBER 2012 3THE BUSINESS OWNER THEBUSINESSOWNER.COM

You record your income and expenses, tally a “bottom line” and provide the report to your banker. Is that it for the income statement? A report of bottom-line profit or loss for a period? If so, you are missing the boat.

Your income statement should be an indispensable tool for you. A source of insight into how you can improve the profitability of your business. In fact, if you are not skilled at organizing and mining your income statement for infor-mation of value in managing your business, it’s likely your biz isn’t very profitable. The income statement is one of the three reports known collectively as “financial statements.” The other two are the balance sheet and statement of cash flows. Financial statements serve three very important purposes:

1. Information for Management: Data that the direc-tors, officers and managers can use to make smart and effective management decisions.

2. Information for Creditors: Data that presents to creditors (such as bankers and insurance companies) a true and accurate picture of the financial strength and performance of the business. Creditors have a right to accurate, timely and informative data about the entity to which they extend credit.

3. Information for Investors: Every business is owned by investors, also referred to as “stockholders,” “own-ers,” “members” or “equity holders.” Clearly, the own-ers – current and prospective – want and need accurate data regarding performance, i.e., profitability, and po-sition, i.e., liquidity, value, assets, debt, equity and le-verage. They use the data to evaluate the performance of the directors, officers and managers and to decide whether to make changes and whether to continue as owner (or whether to invest in the first place).

The income statement is commonly referred to as a “profit and loss statement” or “P & L.” A company's income statement is a record of revenue and expense over a period of time. Of course, when you subtract the expenses from revenue, what is left is the profit or loss. What sometimes causes confusion is people using vari-ous terms interchangeably as follows:

Revenue = Gross Revenue = Sales

Cost of Goods Sold = Direct Expenses = Direct Costs

Gross Profit = Contribution

Gross Margin = Contribution Margin

Operating Expenses = Indirect Expenses = Sales, General and Admin. Expenses (SG&A)

Profit = Earnings = Income = Net Income

Useful and effective financial statements have the follow-ing basic organization:

+ Revenue - Direct Costs = Gross Profit – Operating Expenses = Operating Profit + Other Income - Other Expenses = Net Profit

The above organization is useful because it isolates and reports the gross profit of your business – a critical num-ber. Gross profit is what drives the profitability of your entire business. Every business must earn a gross profit that is sufficient to pay the overhead expenses (i.e., op-erating expenses). If revenue can be increased via sales that are profitable on a gross profit basis and overhead can be held stable, bottom-line profit will improve. Here is a review of each section of the income statement and some tips for organizing them effectively.

RevenueThe key is detail and categorization. You need to be able to run reports of revenue in a variety of categories: by customer, product, investment, geographic region, indus-try, salesperson, or whatever categories you think might provide valuable insight. The key is to find from where the revenue is coming and what the revenue trend is for each class. The data might surprise you. It might lead you to change the way you do business or prompt you to re-spond to unwelcome but previously undetected changes.

Today’s accounting software makes it easy to break revenue down in multiple ways. Not all revenue, however, should be recorded on the “top line” (or top area of the income state-ment) as some forms of income are best placed at the bot-tom of the income statement – right after operating profit. This is where “non-recurring revenue,” or revenue not as-sociated with how the business actually earns revenue and income on a daily or weekly basis, such as interest income or income from the sale of a fixed asset, is recorded.

The Income StatementM A N A G E M E N T

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SEPTEMBER/OCTOBER 20124 THE BUSINESS OWNER THEBUSINESSOWNER.COM

Cost of Goods SoldMost sales/revenue streams have directly associated costs. For example, if you manufacture books, your direct costs might include royalty expenses, pre-press labor and materials, press time and materials, post-press cutting and gluing, shipping and handling, etc.

All costs associated directly with the delivery of a product or service should be matched with and expensed against the customer to which the product or service is provided. The customer or job should also be coded into its perti-nent groups (customer type A, salesperson #8, region 5, etc.). This will allow each job, job type, customer, custom-er type, salesman, etc. to be evaluated for profitability. It will also allow you to run gross profit reports for each view, segment or source. Gross Profit and Profit MarginGross profit is simply what is left over after direct costs are subtracted from revenue.

Revenue – Cost of Goods = Gross Profit

Example: $100 – $50 = $50

The profit margin is simply the percent that the gross profit is of revenue.

Gross Profit divided by Revenue = Gross Profit Margin

Example: $50 / $100 = 50%

There is more here than meets the eye. The profitability of a business is very sensitive to its gross profit margin since it is the gross profit that must cover all overhead or operating costs of the business. As such, it is important to recognize the effect changes in gross profit margin can have on operating profit.

To illustrate, if a company has a 40 percent gross profit margin (i.e., cost of sales takes 60 percent of revenue) and a 10 percent operating profit margin, a 10 percent increase in the cost of goods sold will reduce operating profit by 60 percent. Here’s the math with percentages:

The next time you look at the bottom line of your income statement and wonder what happened, look at your gross profit and gross profit margin. You might find some answers.

Furthermore, just as the overall profitability of a business is very sensitive to its gross profit margin, the overall gross profit margin of a business is very sensitive to the gross profit earned on the individual jobs/sales that con-tribute to the overall gross profit numbers. After all, the gross profit and gross margin earned by your company is simply the compilation of the gross profit and gross margin earned from your many customers, products, ser-vices, jobs, etc.

To illustrate, let’s look at the impact that money-losing prod-ucts can have on a company’s overall profitability. Jack’s Metal Treat, Inc. (JMT) has 20 types of jobs that it per-forms on a regular basis. JMT recently restructured their accounting system to report gross profit by customer, job and job type. Here is simplified 2012 year-to-date data:

• 2012year-to-daterevenue=$1,000,000

• The$1,000,000ofrevenuewasearnedvia20projecttypes, each of which brought in $50,000, on average.

• Fixedoverheadcostswere,andwillcontinuetobe,$205,000 per year

• Operatingprofitwasanegative$5,000

When the direct cost reports were run and analyzed, it was revealed that some job types required much more direct expense than others, primarily due to high labor time requirements. Two had combined direct expense to-taling $150,000 on revenue of $100,000, for a $50,000 gross profit LOSS. If JMT had eliminated these offerings altogether and the labor associated with these projects, revenues would have been just $900,000 but gross profit would have been $50,000 higher, as would have operat-ing profit. Here is the comparison:

Actual Adjusted Percent Change

Sales 100% 100%

Cost of Goods Sold (60) (66) 10%

Gross Profit Margin 40% 34%

SG&A (30) (30)

Operating Profit Margin 10% 4% (60%)

2012 YTD Actual Proforma

Revenue $1,000,000 $900,000

Costs of Goods Sold $800,000 $650,000

Gross Profit $200,000 $250,000

Fixed Expense $205,000 $205,000

Operating Profit ($5,000) $45,000

Operating Profit Margin (5%) 5%


As one can see, by simply eliminating 10 percent (two of the 20) of the jobs that lose money, JMT becomes a profitable company at a respectable operating profit mar-gin of 5 percent. If fixed expenses could also be reduced then the bottom line would increase dollar-for-dollar and the operating profit margin would increase sharply.

Operating ExpensesOperating expenses are also commonly referred to as either “indirect expenses” or “sales, general and ad-ministrative expenses” (SG&A). Operating expenses are any expenses that cannot be directly attributed to the creation or delivery of a product or service. Com-mon operating expenses are marketing, advertising, salaries of people that do not work directly on products that are delivered to the customer (such as “shop” per-sonnel that fabricate a particular sign for a particular cus-tomer), legal fees, rent, utilities, phone, travel, bad debt expense and depreciation.

Operating expenses are necessary but should be mini-mized. Excess or unnecessary operating expenses rob your company of profit that could otherwise fall to the bottom line. Begin to manage your operating expenses more actively by putting each expense into meaningful groups. Then, study the trends in both dollars and per-centage of revenue. Often, substantial reductions are

possible by simply tracking the data and becoming more aware of the expenses that pilfer your profit. Operating ProfitOperating profit is simply what is left over after operat-ing expenses are subtracted from gross profit. Operating profit reflects the “normal” profit or income generated from the operation of the business – a very important in-dicator of overall performance of the business. Like gross profit, however, operating profit is the product of more complex interactions of things that occur higher on the in-come statement. Track operating profit in real dollars and in percent of sales (margin), but look higher in the income statement for ways to improve operating profit.

Other Income/ExpensesAs mentioned above, businesses will from time to time have expenses that are not associated with the ongoing operation of the business (such as legal settlement in-come or profit from the sale of equipment), are non-re-curring (such as a very unusually high bad debt expense), or are related to the financial structure of the business (such as interest expense or income). These expenses are best applied after the operating profit line so as not to cloud the performance of the “regular and normal and ongoing” operation of the business.

Net IncomeYou don’t have to worry much about calculating the net income as it is simply the money left over after all ex-penses are subtracted from revenue. Like gross profit and operating profit, net income is the product of more complex interactions of things that occur higher on the income statement. Track net income in real dollars and in percent of sales (margin), but look higher in the income statement for ways to improve it.

If you are a business owner and your financial books are a bore or nuisance, you’re missing the boat. You need to understand what an essential, powerful and useful tool your financial statements can and should be. Begin the process of studying your financial statements and they will come alive. You will find in them information that is life-giving and liberating to you and your business. How-ever, you must first organize and keep them in a man-ner that will yield useful data. Luckily, the task is easier and cheaper than it used to be with today’s accounting software packages. Talk to your accountant and develop a plan for creating and using your financials at a very high level. It literally might make the difference between mere survival and unabashed success.

Revenue from Product A Revenue from Product B Revenue from Service A Revenue from Service B

= Gross Revenue Less: Direct Labor and Materials of Product A Direct Labor and Materials of Product B Direct Labor and Materials of Service A Direct Labor and Materials of Service B

= Gross Profit Less: Indirect Selling Expenses Marketing Expenses Salaries (office administration and management) Facilities Rent and Utilities Professional Fees Travel and Entertainment Depreciation

= Operating Profit Less: Non-Operating Expenses Non-Recurring Expenses Loss on Sale of Equipment Interest Expense

Plus: Non-Recurring Income Non-Recurring Expenses Gain on Sale of Equipment Interest Income

= Net Profit

Organization of an Income Statement


You’ve devoted untold time, money and energy to build-ing and running your business. It may well represent your life’s work and net worth. Now you’ve decided that it is finally the right time to sell. Here are eight things you should know.

1. Financially, You May Be Better Off Keeping Your Business. Buyers buy businesses for the income they can receive. They look at past profit performance to predict the future and then pay a price that will allow a fair, risk-adjusted return. Small businesses sell for 3 to 5 times pre-interest, pre-tax earnings. If your business generates annual benefits to you totaling $500K, which includes $200K for managing the business, the true profit of your business is $300K. A buyer might pay $1.2 mil-lion. Some seller financing will probably be required as well. But assume you receive all the cash at closing, pay your taxes and expenses, pocket $800,000, and invest this sum at 5%. Your annual income will now be $40,000. You’ve taken a major pay cut. In short, selling a business may be more like buying your freedom.

2. If Your Primary Pitch Is “This Business Could…,” Save Your Breath. Buyers of private businesses are a conservative bunch. If they are not, their bosses, lenders or financial backers will require them to be. As such, they must rely on solid historical performance to justify their purchase price. Business sellers who try to peg most of the value on what the business “could” do typically waste everyone's time and lose credibility. Buyers don’t have to buy. They only put their money at risk when they find a good deal. If you take an impartial view and think you wouldn’t do it … it’s likely nobody else will either.

3. To Maximize Value, Be Open to Seller Financing. If you ask for 100 percent cash at closing, experience shows you’ll typically receive a much lower total price. This is because the amount of cash that the buyer has and the amount the bank will lend are usually relatively fixed amounts. The sum of the buyer’s cash and bank fi-nancing is the maximum you can receive at closing. Now, would you like more? Offer some seller-financing. Worst case is you don’t get paid your entire seller-financing por-tion, but you still received more than the all-cash price!

4. They Won’t Appreciate the Work That Went Into Building Your Business. Unfortunately, buyers look at your business simply as an investment. They won’t ap-preciate the blood, sweat and tears you put into build-

ing it. You’ll always have the pride of knowing what you accomplished and the respect of those who watched you do it. Don’t expect any more from a buyer than a fair price. Oh, and don’t bother with the “this business is so very unique” shtick. Every business is unique. Buyers just care about the cash it generates.

5. Buyers Love It When You Represent Yourself. In fact, many buyers looking for the best deals will exclusively target private business owners who have no representa-tion and have little prior experience of buying and selling businesses. More often than not, they’re going to end up squeezing you for a better price for the business than they initially promised and you initially expected. They will flatter you in the early stages and become aggressive in negotiations in the latter stages. Few sellers are experi-enced in business sales or valuation. All sellers are emo-tional when it comes to selling their “baby.” No seller is objective. As the saying goes, “If you represent yourself, you have a fool for a client.” Do your heirs a favor and hire an expert to assist you. Choose right and they’ll more than pay for themselves.

6. Your Competitors May Not Be the Best Buyers. Sure, competitors are logical buyer candidates and quite easy to identify. So you contact the owner of XYZ and ask, “Are you interested?” Now he has a free chance to gather infor-mation that will help him compete against you. And even if you don’t send him your confidential information, he’ll use the fact that you want to sell against you – starting to-day. Oh, he competes in a different territory? These buyers won’t pay as much because the skill, expertise, processes and methods of your company are less valuable to those already doing what you do. More often than not, the better (and lower risk) buyers are individuals, financial buyers or companies in related or adjacent industries. 7. You Need More Than One Good Buyer. If you want to sell and you have just one buyer, who has whom? The business sale experience can be extremely frustrat-ing if you just deal with one buyer at a time. The buyers will have all the leverage. The key to getting a good deal done in a timely manner is to work all the qualified buy-ers simultaneously. Get all their offers around the same time and then you have choices, and leverage, and each buyer’s competitive instincts will kick in. Choose the best and if he stumbles, go right to the second best. Buyers need not be coddled. Sure, you are a nice person, but you don’t have time to waste. You have a business to run and

What Every Business Seller Should KnowB U S I N E S S S A L E

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What Every Business Seller Should Know

You Need Disability InsuranceR I S K M A N A G E M E N T

You’re the breadwinner. You’re the only one that knows how everything runs. What if you become sick or injured and cannot work?

You have life insurance? That’s great. Statistics show you’re more likely to become disabled before you're 70 years of age than die. Do you have dis-ability insurance in place?

Disability insurance re-places a part of your income if you become unable to work due to sickness or injury. Call

and get multiple quotes from your financial advisor and insurance agent or broker. Like life insurance, you’ll have to undergo a medical exam. No big deal.

Get quotes for non-cancellable and guaranteed renew-able policies. The cost will be a function of your health,

your age, the monthly income you will need, and the waiting period (60, 90, 120 days, etc.). Longer waiting pe-riods will reduce the premium but be sure you have the funds to make it through the waiting period.

You’ll have other terms to consider as well. Will you be paid if you become unable to perform your current job, or any job? Will the policy cover partial disability? What will be the definition of “disability”? Is mental disability included? Generally, you want the payments to be trig-gered for any condition – mental or physical – that ren-ders you unable to perform the substantial or material duties of your current occupation.

If your business depends on you for essential functions, now’s the time to consider training employees to handle key tasks and write instructions that can be used in the event something happens to you. If you have a partner, a buy-sell agreement is in order as well.

Always be prepared for the worst. It sometimes happens, and it’s always to people that never thought it would hap-pen to them.

you are either going to get a deal done or keep the busi-ness and continue enjoying all the money it makes. This is how you should run the process and the attitude you should show to buyer prospects.

8. Quiet Is a PART of the Plan, Not THE Plan. Confidenti-ality is important, but if you make it your #1 consideration, you’ll never get anywhere. The key to confidentiality is to move swiftly and get the deal done before the grapevine has the chance to do its thing. More particularly: A) Don’t start the process (or talk to anyone) until you’re sure it’s what you want; you have a good estimate of what the market will bear (price and terms) and such is acceptable to you; you have all the offering data ready; and you have identified all the buyer candidates. B) Reveal your inten-tions only to buyers who have the motivation and money to really make the purchase. C) Introduce the opportunity to all the good buyer candidates simultaneously. D) Make sure each knows you’re serious about confidentiality and

if they breach it, they’ll be eliminated as a buyer candidate. E) Run fast and get a deal closed in a timely manner. F) Tell everyone that you have a great business but have some other things you might like to do. If you find the right buyer at the right price, you might take it. If not, you’ll keep the biz and enjoy it and the opportunity is off the table.

The intent of the above tips is to save the business seller time, money and frustration. If the time is not right, focus your energy on growing the business and posting solid performance, then enter the market. When you do, keep in mind that selling a business is a sales activity. It's not a passive process. It's proactive. Doing it right takes a lot of time and energy. It requires some urgency. Even though it is done discretely, selling a business successfully re-quires the same elements as any successful sale: prepa-ration, presentation, representation and negotiation.

Questions? Call me. David Perkins. 918-760-2715.

Statistics show you're more likely to become dis-abled before your 70 years of age than die.


$16,283 on the additional $50,000 of income, computed by applying the 28 percent rate to the $4,350 left in the 28 percent tax bracket and the 33 percent tax rate to the remaining portion of the commission income ($45,650). That’s a blended 32.5 percent tax rate on the additional $50K. If, however, you delay closing until next year, when you expect your overall income to be lower, the income could be taxed at the 25 percent and/or 28 percent lev-els, saving you at least $2,283 in federal tax (assuming the $50,000 is all taxed at the 28 percent rate), and even more when you include state tax. A nice return consider-ing how little effort is required.

Hold Appreciated Investments for More Than a Year. Investments held for less than one year are taxed at ordi-nary income tax rates, which are higher than capital gains rates. Investments held for more than a year are taxed at long-term capital gains rates, which are lower at all in-come levels.

If You Plan to Sell Soon, Sell Before Year-End. Under current legislation, the “Bush Tax Cuts” are scheduled to expire at the end of this year (2012). To avoid paying higher tax rates, sell appreciated assets before year-end.

Make Charitable Contributions with Appreciated As-sets Instead of Cash. Doing so will save you from owing tax on the capital gain and you will still be able to deduct the full, appreciated value of the stock (if you have held the investment more than a year).

Gift Money, Assets or Investments to Entities That Enjoy Lower Tax Rates. Any person can annually give $13,000 in cash or property to any person or persons, with no income tax or gift consequence to either party. This tax code provision is most often used to move assets to chil-dren and grandchildren because the amount transferred will not be subject to estate and/or generation-skipping tax. It is an effective tool for moving income-generating as-sets to persons who enjoy lower tax rates. As long as the gift is $13,000 or under, there is no reporting requirement. Additionally, one spouse may give $26,000 and as long as the amount is reported and both spouses consent on the return, the amount will not be taxable.

Shift Income to Entities Domiciled In Places with Lower Overall Tax Rates. City, county, state and coun-try taxes vary significantly. Businesses that have multiple locations of operation and/or a non-local client base, and

even individuals, should consider how taxes could be re-duced if income could be attributed to another locale.

Maximize the Expenses Recognized In the Current Year. Do this by paying (cash basis of accounting) or booking (accrual basis) expenses in the current year that might otherwise be recognized in future years. This is ac-complished by incurring the expenditure before year-end by issuing a purchase order or paying expenses such as rent, insurance or taxes.

Contribute to a Qualified Retirement Plan. Employer contributions to qualified retirement plans are tax deduct-ible. Qualified plans generally mean employer-sponsored pension, profit-sharing or stock bonus plans that meet the requirements of Internal Revenue Code section 401(a), or an annuity that meets the requirements of Internal Rev-enue Code section 404(a)(2). There are three types of qualified plans: defined contribution, defined benefit and hybrid. If you do not have a qualified plan in place, talk to an attorney, accountant or financial advisor. In some cases, a plan must be in place before year-end to be fully utilized the following year.

Uncle Sam will get his lawful cut. It’s your right, how-ever, to use the law to legally minimize your bill. If you are having a healthy year in terms of profits, talk to your tax advisor well in advance of year-end about how you might minimize the government’s take.

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Lower Your Tax Rate

Ordinary IncomeCapital Tax Rate

Short-term CapitalGains Tax Rate

Long-term CapitalGains Tax Rate

2009-12 2013+ 2009-12 2013+ 2009-12 2013+

10% 15% 10% 15% 0% 10%

15% 28% 15% 28% 0% 20%

25% 31% 25% 31% 15% 20%

28% 36% 28% 36% 15% 20%

33% 39.6% 33% 39.6% 15% 20%

35% 35% 15%

“Great services are not canceled by one act or by one single error.”

Benjamin Disraeli

United States Capital Gains Taxation


Transactions Between You, Your Family and Your Business

R I S K M A N A G E M E N T

As the managing officer of your business you must make sure transactions that your business enters into with re-lated parties are each fair and at arm's length. That is, you must deal with the related party, whether an individual or entity, as if he or she were an unrelated outsider. This is because you don’t want to run into problems with the IRS, creditors or other equity owners.

On any transaction that involves money, i.e., salary, loans, interest, rental payments, etc., document the amounts and terms. For example, if you or your children buy a build-

ing that will be leased to your business, get an in-dependent appraisal to support the rental rate charged to the business.

Do not rely on oral ap-provals from other stock-holders. Prepare written memoranda, have them sign, and attach any sup-porting documents. Have your board approve the transaction and record both the details and the

approval in the corporate minutes. Abstain from voting on transactions that involve you or your family members.

On related transactions, a different lawyer should repre-sent the related party. Don’t have your company lawyer represent both sides.

Try to use standard forms and agreements. For example, don’t make a lease agreement between a related party and your company too different from a lease your com-pany would negotiate with an independent lessor.

If there are minority stockholders, they may question a transaction. Obtain their written approval in advance. In addition to family members, related parties can include:

• Stockholders, partners, an estate, custodial accounts, and trusts

• Other individuals or entities directly or indirectly in-volved in the ownership of a business, or an affiliate of the business

There are, of course, minimum percentage ownership tests that determine when another owner is considered related. Normally, the IRS may not be interested in a one-percent stockholder unless that owner is related to other persons or entities that own a greater interest.

Your business is an entity that's separate and distinct from you, the owner. As an officer of the business you have a legal and fiduciary obligation to manage the busi-ness with prudence, reasonable care, and fairness to all shareholders and creditors. So, be cautious with trans-actions between the business and yourself, other share-holders or family members. Make sure each transaction is at arm's length, and thoroughly and credibly docu-ment evidence (or proof) of such. By doing so, you'll have a defense in the event a creditor or shareholder sues you personally for damages or self-dealing. You'll also avoid the risk that creditors could hold you person-ally liable for debts of the business.

Make sure each transaction is at arm's length, and thoroughly and credibly document evidence (or proof) of such.


Everyone is tired of politics as usual. The vantage points of politics and parties cloud our view of individual issues. “Liberals” reject all that comes from the right, and vice versa. What if we just looked at each issue in a pragmatic way and, based on the facts and our best objective study of the impacts and issues at hand, chose whether to sup-port or oppose?

Yes, but how many business owners have the time and, quite possibly, the knowledge, education and perspec-tives to take the deep dives necessary? Of course, that’s

why so many of us de-pend on “thought lead-ers.” Enter our trade and industry associations.

Well, a new organiza-tion has entered the fray on behalf of small busi-nesses. It’s called the Small Business Majority.

As best I can tell, it’s an entity very similar to the Na-tional Federation of Independent Business (NFIB). Not a replacement for industry and trade associations, to say the least, but a “think tank” and lobbying organization that purports to be non-partisan and focused solely on taking independent and pragmatic stances on issues of importance to owners of small and mid-size, private U.S. companies.

The founder and executive director, John Arensmeyer, appears to be well-educated, experienced, and “one of us.” He grew up in New York, attended the University of Pennsylvania, and then Rutgers Law School. He practiced law in New York, was COO for a private company (SoftAd Group) and then formed, built and sold a private company called ACI Interactive. He founded Small Business Major-ity in 2005. He felt the organizations that lobby on behalf of small businesses did not well represent him and other small business owners.

According to a recent article, Arensmeyer felt the or-ganizations purporting to represent small businesses were “… overly ideological and partisan and didn’t re-ally look pragmatically at what small businesses really need. So I felt there was an opportunity and a need for a new voice.”

Small Business Majority (SBM) now boasts 8,000 small business owners in its nationwide network. SBM takes positions on issues such as tax law and regulation. And they don’t “follow the pack.”

For example, SBM is in support of “ObamaCare.” Arens-meyer explains that his stance (and that of the SBM) fol-lowed a great amount of thought about the new legisla-tion in light of the needs of small business and the health care system currently in place. He says the existing sys-tem is so broken that he was compelled to look at the new legislation to see if it could possibly provide some benefits.

“Small businesses pay 18 percent more than big busi-nesses for the same health insurance coverages,” he explained. “The exchanges should come pretty close to leveling that.” That’s real savings for small businesses, he says. And we are all now paying for millions who are not currently insured, so the individual mandate should drastically reduce the number of freeloaders. And the employer responsibility provision? It’s so narrow that it should only affect about 4% of businesses, and most of those are already providing health coverage, so they won’t be impacted.

Regarding energy policy, he’s for “clean energy.” He says our dependence on oil is unhealthy, costly and unsustainable. He says the world is moving to clean energy and we need our businesses to also move in that direction. Doing so will make our busi-nesses more competitive in the world marketplace.

Well, it seems to me like a fresh and pragmatic voice. I’ve reviewed the SBM website. It’s filled with articles. I didn’t find partisanship or politics, just thoughts and opinions on issues and their impact on small business.

I say “bravo” to John Arensmeyer! I’m signing up.

New Representation for "SmallBusiness Majority"

E C O N O M I C S

A new organization has entered the fray on behalf of small businesses.

The existing (health care) system is so broken, he was compelled to look at the "ObamaCare" legislation to see if it could possibly pro-vide some benefits.


Don’t Let Disaster Destroy Your BizR I S K M A N A G E M E N T

How would your business be impacted if your physical facilities disappeared tonight? It could happen. It can and it does.

If your answer is unacceptable, such as you might not be able to recover, you need a disaster prevention and recovery plan. Consider as well that the risk of not having an effective recovery plan can go beyond the loss of assets physically destroyed in the disaster. Legal action can be taken against a business and its owners and executives for negligence. Damaged parties and potential claimants can include cus-tomers, employees, shareholders, creditors and lenders.

Faced with the risk, why do so many business owners fail to plan? First, disasters are random and rare, so the tendency is to assume it won’t happen to you. Second, the payoff for efforts taken to avoid such a loss is uncer-tain. Owners naturally want to dedicate their limited capi-tal (time, money and labor) towards more predictable re-turns. Neither reason is acceptable given what’s at stake.

You need a disaster prevention and recovery plan. The cost in time and dollars need not be significant. Use the following as a guideline.

1. Identify What You Cannot Live WithoutIdentify your most critical assets. List the assets you and your business use in the creation and delivery of your goods or services. The primary asset categories are facili-ties, personnel, data, network/connectivity, voice, hard-ware and software. Add to the list items that are nec-essary to prove ownership of valuable assets, rights or interests, such as titles and insurance policies. Rank each from most valuable and/or critical to least. Estimate the impact to you and your business if each were lost. Gauge the impact in dollars, customer relationships, public per-ception and contingent liability.

2. Eliminate or Reduce Likelihood of Loss Begin by listing any perils that could cause damage or loss to one or more of the assets that you listed for step one above. Disasters, referred to as “perils” in the insur-ance industry, include: fire, flood, tornado, earthquake, bombing, riot, etc. Initiatives could include updating elec-trical wiring, installing and maintaining fire extinguishers, moving computer data and systems from a basement where flooding could occur, or locating in an area pro-tected from tornados. Implement strategies that offer the highest reward as it relates to the associated cost.

3. Develop a Survival PlanConsider each asset listed in step one and develop ways to mitigate or recover from its loss. This might include backing up critical computer data, storing data off-site, buying and maintaining an electricity generator, and de-veloping a detailed action and recovery plan. Consider the maximum length of time that you can tolerate being without the use of each asset or capability. The recovery plan should adhere to these thresholds.

Next, identify disaster recovery teams, team leaders and their alternates. Consider having leaders carry disas-ter recovery cards in their wallets or purses at all times. Include important phone numbers, addresses, meeting places and action steps. Assess the merits of having pre-written scripts that can be issued to the media upon the occurrence of a disaster. Include in your plan the location of your temporary or alternative office or how the location will be determined.

4. Test the Plan PeriodicallyThe final step is to test, implement and periodically audit the plan. Test to make sure the plan, and each component of the plan, works. Check every step before you adopt it. Don’t bet your company on a plan you can’t test. When the bugs are worked out, implement that plan and make all employees aware of it and their duties and roles. Pe-riodically check to be sure that the plan is being main-tained. For example, make sure backups are being made of data and that the backups are of acceptable frequency and quality.

Business owners invest, strategize and labor year after year to grow revenue, profit and capabilities. Much or all could be instantly lost if a disaster strikes. With proper disaster re-covery planning, losses can be limited to acceptable levels.

A terrific resource for additional information, products and services is the Disaster Recovery Yellow Pages (disaster-plan.com). There’s also software that can help. Business Impact Analysis Software helps a company assess the im-pact that a disaster could have. Recovery Plan Development Software assists in the development of a recovery plan.

In summary, don’t gamble your life’s work or your career on whether or not a disaster will hit your business. Assess the risk, develop a plan, make sure it works and then test it regularly. Do so and you will sleep better and your business will be more likely to survive for the long run.

In clear, concise English it will teach you the basic con-cepts of business valuation, to help you maximize the value of your company in anticipation of a possible sale.

You’ll learn what small and midsize businesses really sell for.

You’ll be given a simple technique for determining wheth-er the price you want for your business is reasonable.

You’ll learn how to handle the balance sheet, how and why to recast financial statements, and how to deter-mine the true value of your business.

You’ll read about the six big mistakes commonly made by do-it-yourself business sellers.

You’ll learn about the 17 “value drivers” that could en-hance your business and improve your selling price.

What are some of the mistakes commonly made by business owners in trying to sell their businesses?

• Theywastetimeandmoneywithbuyerswho will never close.

• Theyhavenorealisticunderstandingoffairvalue and terms.

• Thoughnaive,theynegotiatedirectlywith experienced buyers.

• Theyfailtocontrolegoandemotion.• Theyhireanattorneytoosoon.• Theysufferfrompoorsalesmanship.• Theydealwithbuyersoneatatime.• Theyarewaytooaccommodating.

Don’t make these mistakes!

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