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One of the most important assets to consider for any small to medium-sized business is to have  good accounting procedures in order to be successful. However, the legwork for bookkeeping is more often than not, a full-time job. There are many small businesses that do not have the right expertise and manpower to perform the proper bookkeeping with its daily operations.

Did you know that nearly 40% of all large business in the US and Europe now prefer to outsource bookkeeping? It isn’t just a trend but it’s also a cost-effective way to keep up with the high demands of operating a business in contrary to the traditional in-house bookkeeping.

If you haven’t tried outsourcing bookkeeping yet, here are the good reasons why you need to:

1. Lower costs

Outsourcing bookkeeping from countries with lower labor costs compared to hiring an in-house bookkeeping professional is a way to save tens of thousands of dollars. For example, you can expect to see a reduction of 20% to 40% cost if you choose to outsource the bookkeeping. It is basically giving value to your money with the same quality of work but in just a fraction of expense from doing an in-house, bookkeeping.

2. Less management headaches

Having in-house bookkeeping would entail you to do training, hiring, directing or even firing which could take a toll on you and leave you disappointed. It would just exhaust your resources such as money, effort and most especially time. With outsourcing a bookkeeper, you will free yourself from the burden of managing in-house bookkeepers.

3. No hardware /software worries

As the popular saying goes, the things that you own end up owning you. With in-house bookkeeping, you have to keep a track of computers, software licenses and etc. Apart from the cost, you would also have to constantly troubleshoot your systems or update software.

4. Increase in-house efficiency

Outsourcing bookkeeping can give you and your team the spare time and extra energy that you so badly need. With the burden of bookkeeping out of your hands, you can focus on your sales /marketing team or any other area of your business that needs attention.

5. Do the work that you love

You surely did not go into business for the love of managing books. If doing bookkeeping is robbing you and your staff of their passion and de-motivating them, then its time you outsourced. Outsourcing bookkeeping can help you stay motivated by giving you the freedom to do what you love doing.

6. Better value creation

Instead of putting many hours in solving any in-house bookkeeping issues, you can concentrate on adding value to your customers by outsourcing a bookkeeper.

7. Save on infrastructure costs

As a business owner, you would know that rent is one of the largest fixed costs for a business. If you hire a team of internal accountants, there would be no space for your sales or marketing team that directly contributes revenue. Outsource bookkeeping and maximize every dollar of the rent that you pay.

8. Keep your books private

Outsourcing is the best way for you to keep your company’s accounting information confidential..

9. Unbiased financial advice

During a financial crisis, you would be required to make tough business decisions. A third-part bookkeeping service provider is sure to be more impartial than an in-house bookkeeper. This way, you can get unbiased financial advice from your bookkeeping service provider.

10. Benefit from improved control

Contrary to popular belief, outsourcing bookkeeping to a professional bookkeeping company can give you more control, in terms of the software that you want to use, the date by when you want the work to be completed and even how you want your reports to be accessed.

The only part that reflects certainty for the year 2013 is that wealthy tax payers will pay more taxes and face a more complicated tax regime than before. With the many tax provisions that had expired last 2012 such as research credit for businesses, above the line deduction for qualified tuition expenses, generous bonus depreciation allowances, expensing allowances for business and many more, it obviously would call for an in depth tax planning now because of the prospect of higher taxes in the coming months. In connection, here is a list of considerations,in tax planning for 2013 that could be a great help in this critical time. This list is very helpful in my own opinion since it is already explained simply especially to those without much background knowledge in taxation. I hope this will serve as something of value. Enjoy.

• Increase your FSA. Set aside more for next year in your employer’s health flexible spending account (FSA). Next year, the maximum contribution to a health FSA is $2,500. Remember – you will no longer be able to set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• Make HSA contributions. If you became eligible to make health savings account (HSA) contributions late this year (even in December), you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year.
• Realize losses on stock while preserving your investments. There are several ways this can be done. For example, you can sell the original holding then buy back the same securities at least 31 days later.
• Sell assets before year-end. If you are thinking of selling assets that are likely to yield large gains, such as inherited, valuable stock, or a vacation home in a desirable resort area, make the sale before year-end while still paying attention to the market.
• Sell and repurchase stock. You may own appreciated-in-value stock and want to lock in a 15% tax rate on the gain, but you think the stock still has plenty of room to grow. In this situation, consider selling the stock and then repurchasing it. You’ll pay a maximum tax of 15% on long-term gain from the stock you sell. You also will wind up with a higher basis (cost, for tax purposes) in the repurchased stock.
• Make contributions to Roth IRAs. Roth IRA payouts are tax-free and immune from the threat of higher tax rates, as long as they are made after a five-year period, and on or attaining age 59-½, after death or disability, or for a first-time home purchase.
• Convert traditional IRAs to Roth IRAs. This will help you avoid a possible hike in tax rates next year. Also, although a 2013 conversion won’t be hit by the 3.8% tax on unearned income, it could trigger that tax on your non-IRA gains, interest, and dividends. Conversions, however, should be approached with caution because they will increase your adjusted gross income [AGI] for 2012.
• Take required minimum distributions from retirement plans. This is applicable if you have reached age 70-½. Failure to take a required withdrawal can result in a penalty equal to 50% of the amount of the RMD not withdrawn. If you turn age 70-½ this year, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2013—the amount required for 2012 plus the amount required for 2013. Think twice before doing this.
• Deduct your medical expenses. This year, unreimbursed medical expenses are deductible to the extent they exceed 7.5% of your AGI, but in 2013, for individuals under age 65, these expenses will be deductible only to the extent they exceed 10% of AGI.
• Shelter gifts. Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.

President Obama and the congress hastily agreed to the American Taxpayer Relief Tax Act of 2013 also known as the “fiscal cliff” deal on January 1, after the New Year’s Eve deadline. Given its enactment, what are the different tax laws that have emerged after its effect?

Tax Provisions for Individual Taxpayers

Individual income taxes. Across-the-board tax rate increases scheduled for 2013 are repealed. Instead, the new law permanently retains the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent individual income tax rates. However, the top tax rate of 35 percent is boosted to a 39.6 percent rate for single filers with income above $400,000 and joint filers with income above $450,000.

Investment income. Prior to 2013, investors could benefit from a maximum tax rate of 15 percent on net long-term capital gains and qualified dividends (0 percent for certain low-income investors). Without the new law changes, long-term capital gains would have been taxed at a maximum 20 percent rate (10 percent for certain low-income investors), while qualified dividends would have been taxed at ordinary income rates. The new law retains the previous favorable tax rates, but still imposes a maximum 20 percent tax rate on single filers with income of more than $400,000 and joint filers with income of more than $450,000. In addition at this level there is a 3.8% medicare surtax on et investment income

Itemized deductions. Due to the return of the so-called “Pease amendment,” most itemized deductions were scheduled to be reduced by 3 percent of the amount of adjusted gross income (AGI) above a specified threshold, beginning in 2013. The new law establishes higher thresholds of $250,000 for single filers and $300,000 for joint filers. Note that the overall reduction in itemized deductions can’t exceed 80 percent. Also, this reduction rule doesn’t apply to deductions for medical expenses, investment interest expenses, wagering losses, and casualty and theft losses.

Alternative minimum tax. The new law provides a permanent “patch” to the alternative minimum tax (AMT) by increasing exemption amounts (the current exemption of $33,750 individual and $45,000 married is increased to $50,600 single and $78,750 married) and allowing nonrefundable personal credits to offset the full AMT liability. In addition, the exemption amounts will be indexed for inflation in future years. The change is retroactive to 2012, so an estimated thirty million additional taxpayers will avoid AMT liability in the upcoming tax filing season.

Payroll taxes. For 2011 and 2012, a “payroll tax holiday” resulted in a 2 percent reduction in the Social Security portion of FICA tax paid by employees on amounts up to the annual wage base; thus, the effective tax rate was reduced from 6.2 percent to 4.2 percent. Similarly, the rate for self-employed individuals was reduced from 12.4 percent to 10.4 percent. Now the 2 percent reduction has expired. For 2013, the rate reverts to 6.2 percent for employees and 12.4 percent for self-employed individuals on amounts up to the wage base of $113,700.

Family tax breaks. The new law extends several family-related tax breaks for varying periods of times. This includes provisions for tax relief from the so-called marriage penalty, the enhanced child tax credit, the expanded dependent care credit, the adoption tax credit and adoption assistance program exclusion, and the earned income credit.

Education tax breaks. Among other tax-based education incentives, the new law permanently extends the expanded $2,000 contribution limit for Coverdell Education Savings Accounts (ESAs), the expanded exclusion for employer-provided education assistance, and the enhanced student loan interest deduction. Also, the American Opportunity Tax Credit (AOTC) is extended for five years. A client can claim a maximum AOTC of $2,500 for qualified higher education expenses subject to a phaseout for single filers with a modified adjusted gross income (MAGI) of more than $80,000 and joint filers with a MAGI of more than $160,000. Finally, the new law extends for 2012 and 2013 the deduction for tuition and other fees, subject to slightly different phaseout thresholds. A $4,000 deduction is available for a MAGI up to $65,000 for single filers and $130,000 for joint filers, and then a $2,000 deduction is available for a MAGI up to $80,000 for single filers and $160,000 for joint filers. This above-the-line deduction may be claimed in lieu of a higher education credit.

Estate and gift taxes. The new law averts several dire estate and gift tax consequences due to a related series of provisions “sunsetting” after 2012. This includes the following permanent changes:

• The unified estate and gift tax system, which was severed and then reunified, will remain reunified after 2012. Thus, the estate tax exemption continues to apply to lifetime gifts as well as inheritances.
• The estate tax exemption, which was scheduled to plummet from $5 million (inflation-indexed to $5.12 million in 2012) to $1 million, remains at $5 million (with inflation indexing).
• The provision allowing “portability” of exemptions between spouses remains in effect for decedents dying after 2012.
• The top estate tax rate, which was scheduled to increase from 35 percent to 55 percent, rises only slightly to 40 percent, in 2013 and thereafter.
• The provisions relating to the generation-skipping tax are coordinated with other aspects of the unified estate and gift tax system.

Several other tax law provisions are extended for varying periods of time, including the following:

• The up-to-$250 deduction for classroom expenses allowed to teachers and other educators is extended through 2013, retroactive to 2012.
• The exclusion from mortgage debt forgiveness on a maximum $2 million of debt is extended through 2013.
• The maximum monthly $240 exclusion for employer-provided mass transit and vanpooling benefits is extended through 2013, retroactive to 2012.
• The deduction for mortgage interest premiums, subject to a phaseout for an AGI of more than $110,000, is extended through 2013, retroactive to 2012.
• The optional state sales income tax deduction, which can be claimed in lieu of deducting state and local income taxes, is extended through 2013, retroactive to 2012.
• Enhancements in the deduction allowed for charitable donations of property for conservation purposes are extended through 2013, retroactive to 2012.
• A provision allowing tax-free distributions going from an IRA directly to a charity by clients age 70½ or over, up to a maximum of $100,000, is extended through 2013, retroactive to 2012.

What are the keys to a successful business and what are the pitfalls for failure?

• Success of one’s business if defined differently by all owners.
• There are 3 Key components that all successful business share, that provide the cash flow, personal achievement and quality of life that are the characteristics of success.

• Provide an outstanding product or a service that is highly needed, desired or necessary in today’s economy which is not dependent on recessionary fluctuations.
• Innovation, dedication, and passion of management to entity goals and company’s mission statement
• Accurate and timely financial information to guide the entities financial direction.

Without these elements, true financial success isn’t obtainable

Pitfalls to avoid?

• Inadequate financial reporting.
• Hiring incompetent staff and drama surrounding employees

• Lack of dedication, motivation and innovation at ownership/management level.
• Owner trying to do everything by theirselves.  Delegation of proper staff is necessary so owner/management grow their business and not “work at” the business.  Having people function within their skill sets are of optimum importance.

How can our firm help you in achieving your desired success?

• In the last 30 years we have seen many businesses succeed and some fail.  As CPA ‘s and consultants, we can help you define and deliver your product or service as efficiently as possible and make your business financial environment, better than your competition.
• We provide accurate, timely, 24/7 outsourced bookkeeping and accounting services for our clients so they can focus on growing their business and not performing functions that are non revenue generating.  These services are quicker and less expensive option to providing these within your organization.  We eliminate drama within the work environment.
• Your business will become a paperless environment where all of your documents are stored on a heavily encrypted , secure remote server.
• Having this instantaneous financial information will allow you to make informed, accurate and sound financial decisions to guide you company of your version of success

So if you feel this would be helpful to your business,  call the toll free number on this website or feel free to email me.

One of the most common and widely utilized methods for valuing your business for sale is the  Multiple of Discretionary Earnings method.  This method establishes the business value by multiplying the seller’s discretionary cash flow by a calculated valuation multiple which is derived from a number of business, industry, market, and owner preferences factors.

The method is especially well suited for valuing owner/operator managed businesses whose purchase is driven by both economic and lifestyle considerations.

When a seller is contemplating their business exit strategy and eventual sale of their business, it is crutial for the business to have accurate and timely financial statements and position the financial statements for sale.  What is meant by positioning the financial statements for sale is showing as much profit as possible and one should avoid paying any non essential expenses through their business (autos, meals, insurances, personal expenses).

To arrive at the sellers discretionary earnings, one would start by taking the net profit or loss on the income statement and add back items such as depreciation, interest expense, owner salary and other discretionary owner expenses.  In addition to the above expenses one would add back any non recurring expenses which just may pertain to a one-time event.  It is quite common to do this exercise for the most current year of operations and the two prior years.  This will allow the seller a more accurate view of what the business is actually generating.

Once the discretionary earnings are calculated, that figure would be the basis for applying the valuation multiple of earnings.

In determining the valuation multiple there are 10 business risk characteristics that need to be assessed by applying a multiple range indicator to the risk characteristic and then applying a weighted average multiple to each characteristic.  These characteristics are:

Stability of historical earnings

Business and industry growth

Type of business

Location and facilities

Stability and skills of employees

Competition

Diversification of products, services, and geographic markets

Desirability and marketability

Depth of management

Availability of capital/terms of sale

The application multiple range indictors and weighted averages can be subjective but it has been my experience that when both the seller and the buyer do their calculations and are informed and knowledgeable, that valuation multiple is not far off between the parties.

Now that the discretionary earnings and valuation multiple have been calculated just multiply one by the other to determine the value of the company’s operating assets.  This valuation normally includes machinery, equipment, supplies, leasehold improvements, a normalized level of inventory and intangible assets.  This capitalized value represents the estimated value at which many small businesses sell.  It does not, however, represent the total value of the business.

If necessary, the value would be adjusted for net working capital, excess assets, non operating assets and company debt.

Finally a sanity check should be performed to determine the reasonableness of the estimated value.

Dramatic tax increases scheduled to go into effect in 2013 make 2012 tax planning imperative. The following taxes may be impacted:

• Not only are the Bush Administration tax cuts set to expire, but a new 3.8 percent surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the tax rate on ordinary income to as high as an effective 44.6 percent for some taxpayers.
• Similarly, the tax rate on long-term capital gains could increase from 15 percent to 20 percent and the rate on qualified dividends from 15 percent to an effective 44.6 percent.
• Finally, if Congress doesn’t take action, the federal estate tax rate will increase from 35 percent to 55 percent and the exclusion amount will drop from $5,120,000 to $1,000,000.

This letter will suggest some ways to avoid or minimize the adverse effects of these changes. Planning for these likely tax changes is a major undertaking and many clients are beginning the process now rather than waiting for the fall elections. This is prudent because the additional time will allow you to become comfortable with the gifting process and provide time to custom design trusts for your family.

Gain Harvesting

For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of the current lower rates. You would sell appreciated capital assets and immediately reinvest in the same or similar assets. You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.

Deciding whether to use the strategy is not as simple as it might appear on the surface, however, because the lower tax rates must generally be weighed against a loss of tax deferral. By harvesting the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain harvesting would be.

In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, 2012 gain harvesting would always be favorable because it would give you a free basis step up. Gain harvesting would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. The time value of the tax deferral would be small compared with the future tax savings.

At the other extreme, if you are currently in the 15% long-term capital gain bracket and plan to die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now. You would be incurring tax now without any offsetting future benefit. Nor would it make sense to harvest losses to create additional capital loss carryovers. These loss carryovers would be better employed to offset capital gains in the future when rates are expected to be higher.

If you do not fall into one of these categories, you will have to do a quantitative analysis to determine whether 2012 gain harvesting would work for you. The decision could be thought of as buying a future tax savings by recognizing gain in 2012. By analyzing the decision in this way, you could measure a return on the 2012 investment over time. If this return on investment exceeded your opportunity cost of capital, gain harvesting would make sense. We have software that enables us to do this analysis quickly, easily and economically. Please contact us to find out which of your assets should be harvested in 2012.

Planning for the 3.8 Percent Medicare Surtax

For tax years beginning January 1, 2013, the tax law imposes a 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer’s modified adjusted gross income (MAGI) over an applicable threshold amount.

Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts. MAGI is generally the amount you report on the last line of page 1, Form 1040.

The applicable threshold amounts are shown below.

Married taxpayers filing jointly                                    $250,000

Married taxpayers filing separately                             $125,000

All other individual taxpayers                                       $200,000

A simple example will illustrate how the tax is calculated.

Example. Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).

Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) oil and gas investments, (7) timing estate and trust distributions, (8) charitable remainder trusts, (9) installment sales and maximizing above-the-line deductions. We would be happy to explain how these strategies might save you large amounts of surtax.

Accelerating Ordinary Income into 2012

A final opportunity that should be noted is accelerating ordinary income into 2012. Perhaps the best way to do this would be to convert a traditional IRA to a Roth IRA in 2012, if a conversion otherwise made sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2012 or selling and repurchasing bonds trading at a premium. Finally, you might consider exercising non-qualified stock options in 2012.

Estate Tax Provisions

The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1^st, 2013 unless Congress acts. The President is suggesting a $3,500,000 exemption. The potential reduction in the estate tax exemption is resulting in many client making large gifts, in trust, for their family. In some instances the trusts are for the spouse, children and grandchildren and in others just for children and younger generations. Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1,000,000. On a $5,000,000 gift the savings would be $1,800,000 ($4,000,000*45%).

We are prepared to assist you in modeling scenarios to determine which strategies are right for you. Please don’t hesitate to call me at 925-484-1658 to schedule an appointment to begin discussing your options.