The Pepperdine University Graziadio School of Business and Management hosted financial experts Jonathan Stouffer and Paul Salerno of Orange County-based firm Tax & Financial Group in a seminar on ways that business owners can cut costs and add revenue during tough times. Below are their top 10 tips:
1. Max out Corporate Deductions
Talk with your CPA about benefits you have set up for you and/or your employees. Oftentimes these costs can be deducted, including retirement plans, medical insurance, long-term care insurance, and various business expenses. Depending on how you have your company structured, make sure you review all areas of your business for deduction opportunities.
2. Increase Cash Flow
One way you may be able to increase cash flow is through a concept called “cost segregation.” This is essentially increasing the schedule of depreciation that you can take on commercial real estate that you own or on your company’s equipment and other physical assets. This may result in less income tax that you have to pay and increased cash to your bottom line. Consult with a CPA or cost-segregation specialist for an analysis of whether or not this will work for you and your business.
3. Seize the Opportunity of Discounted Valuations
The current recession can be your friend if you are trying to get assets out of your estate or transfer them to family members. You can also benefit if you would like to transfer or sell shares of company stock to key employees in your business. This is due to the low valuations of business values and real estate. You will end up paying less in taxes to transfer or sell these assets. If you wait several years to do so and the values go up (good for wealth accumulation), transferring or selling assets will incur a higher level of taxation.
4. Start Smart: Considerations When Starting a Company
If you are starting a new company, we always recommend meeting with a business attorney to discuss the best way to structure your company. Do you need to incorporate, start a limited-liability company or partnership, or simply begin as a sole proprietor? As mentioned earlier, how you set up your company may determine the type of deductions you will be allowed to take. Additionally, you need to consider what type of benefits you will offer your employees (retirement/insurance plans) and what you should do if you have one or more partners in the business (e.g., create a buy-sell agreement). You also should review what type of insurance may be needed now or into the future, including liability, property, casualty, workers compensation, etc. depending on the type of business you have started.
5. Design an Effective Retirement Plan
Retirement plans are a central benefit to employees and owners and should be evaluated on a yearly basis at a minimum. What type of plan you set up [401(k), defined benefit, defined contribution, profit sharing, etc.] will determine the tax advantages available to you and your employees. With the recession, we are seeing many companies cut back their matching contributions to retirement plans, and some eliminating their plans altogether. This is one way companies can reduce costs in the short term, with the goal of re-launching the plan when the economy and business improves. Additionally, an annual audit of your plan may help identify any fees or costs that can be reduced or minimized depending on the complexity and structure of your plan.
6. Tax Now or Tax Later?
Many of our clients ask us about taxes and whether they should pay them now or defer them for later in life. Our answer is usually based on what the individuals feel about their future income and tax rate. If you think your tax rate will be lower in retirement, you should defer taxes now and pay them later. However, if you think your tax rate will be higher, you should pay taxes now and take retirement distributions tax-free. Business owners should think about this, especially when starting a retirement plan, because some plans automatically defer taxes until retirement age, which may not always be the ideal time to pay the taxes on your investment earnings.
7. Fiduciary Responsibility of Retirement Plans*
This gets back to an earlier idea discussed about reviewing your retirement plan on an annual basis. As the business owner, you are the “de facto” fiduciary of the retirement plan you set up for employees. If you are lax in your duties as the fiduciary of the plan, it could lead to serious negative consequences. In fact, over the last three years, lawsuits regarding corporate sponsored retirement plans have increased. As the fiduciary, you are responsible for plan documentation, administrative procedures, employee education, and ultimately any liability associated with the plan.
8. Diversify Business Cash
Despite the recession, some companies have cash on hand or retained earnings as a result of their business operations. Often, we will see owners sitting on cash, with the idea of reinvesting back into the company. That’s fine, but sometimes that money is not used for several years, and as a result, very little interest is earned on that money. We often recommend owners to consider investing some of their retained earnings into a portfolio with a focus on capital preservation. If you know the time horizon of when this cash will be needed, diversifying these funds to potentially generate a higher return may make sense for your business.
9. Minimize Taxes Through Estate Planning
There are several strategies that owners can use to minimize estate taxes on business and personal assets. Depending on your situation, setting up different types of trusts and even establishing a simple will can help minimize estate taxes and costs.
10. Protect your Assets
There are several different strategies that business owners may consider for asset protection. Establishing a limited liability company may make sense for you. Additionally, placing assets in certain trusts can help protect assets. Also, you should make sure all of your personal and business assets are covered with insurance to replace any potential loss or liability concerns. Establishing a personal and commercial umbrella policy is a good way to do this.
If you have any questions about these strategies or would like more information, please contact Katie Konieczny (Pepperdine class of 2007) of Tax & Financial Group at (949) 223-8246 or Katie.Konieczny@tfgroup.com.
Financial Advisors do not provide tax/legal advice. This information should not be considered as specific tax/legal advice. You should consult your tax/legal advisor regarding your own specific tax/legal situation.
*Diversification does not guarantee against loss, it is a method used to manage risk
Paul Salerno (CA Insurance License No. OD71613) and Jonathan Stouffer (CA Insurance License No. 0D63975) are Registered Representatives of Securian Financial Services, Inc. Registered Representative and Investment Advisor Representative with Securian Financial Services, Inc., Member FINRA/SIPC, a Registered Investment Advisor, Tax & Financial Group, an affiliate of Securian, is independently operated. 181498, DOFU 05/10