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5 Ways Life Insurance Benefits Small Business Owners

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

5 Ways Life Insurance Benefits Small Business Owners
The primary purpose of life insurance is to pay a death benefit – almost always tax free – when the insured dies. We’re all familiar with the need to insure the life of a breadwinner to protect a spouse and children from financial catastrophe. But business owners have some special needs to address, too, over and above their role as breadwinners for their families. Let’s take a closer look at the use of life insurance in a business context.

Life Insurance as an Employee Benefit

You can buy life insurance for your employees as an employee benefit, similar to any other benefit, under Section 7702 of the Internal Revenue Code. Generally, the law lets business owners deduct the premiums for up to $50,000 of term life insurance for their employees. This is important in a society where employees are more and more used to getting insurance coverage from work. In some cases, this coverage may be the only life insurance a worker has.

Funding Buy Sell Agreements

If you have a business with one or more partners or other shareholders who are active in managing or running your business, you should have a buy-sell agreement in place. In a nutshell, this is a written agreement that the survivor will purchase the deceased partner’s interest in the business for cash from the deceased’s estate ? and that the deceased’s estate will sell.

If you fail to create a buy-sell agreement, you may find yourself in business with your partner’s spouse. Or worse, your partners’ spouse’s lawyers. Your partner’s heirs may have no expertise in or interest in running your business, which could create big problems down the road. They will still be entitled to your ex-partner’s share of any dividends or distributions from the business, and will demand their fair share of cash even though they may contribute little or nothing to the business’s operation. A buy-sell agreement protects both sides by ensuring the heirs get the cash they need, while you get to continue running the business.

And where does the cash to fund the agreement come from? Life insurance. Each partner can own a policy on each of the other partners, or the business itself can own the policy.

Key Person Insurance

Does your business have a key salesperson, manager or technician who is so productive, or so crucial to your operation, that it would severely damage your business if this person were to unexpectedly pass away? If so, you have an insurable interest in that individual, and you may want to consider owning a policy on him or her. If the worst happens, the policy will provide your business with enough cash to keep functioning while you search for, hire and train a replacement. This could cost tens or even hundreds of thousands of dollars.

Bonus Plans

Some life insurance policies – specifically “permanent” insurance policies such as whole life or universal life policies, build cash value. The policy owner can use this cash value for any purpose. In some cases, you can structure a plan to award the cash value to a key employee as a bonus after a certain number of years of service. This so-called “golden handcuffs” plan gives your top employees a powerful incentive to stay with your company, and as time goes by, it gets very difficult for competitors to “poach” your key people.

Supplemental Retirement Planning

Cash value plans can also be a great way for you to supplement your retirement income, without all the many restrictions that come with standard retirement plans such as 401(k)s and IRAs. You can restrict life insurance-based retirement plans to owners and executives, for example, to supplement your other retirement savings. By purchasing a modest-sized death benefit, and funding the policy with substantial premiums, you can build significant cash value over time.

You can use this for retirement or even as a source of reserve capital for your business. You don’t have to wait until you are age 59 1/2 to use the money. Or you can simply keep the policy in force and use it for the purpose for which it was designed: Life insurance.

There are nearly as many ways to use a life insurance policy to benefit a business or business owner as there are businesses. Every business is different.

5 Common Mistakes Rental Property Owners Make

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
5 Common Rental Property Income Mistakes
Entering the property rental market is a common way to increase your net worth in the long run as well as generate some passive income in the short run. If you are new to the landlord business though, you may fall prey to some common rental property income mistakes when you file your tax return. Of course, the best way to ensure that you don’t make any of the following mistakes is to have a professional prepare, or at least review, your return; however, knowing what the most common mistakes are is a good place to start.

Not declaring rent when it is received – any rent received by a landlord must be declared in the year it is received. It is common, for example, to require a deposit as well as first and last month’s rent when leasing a property. Even though the last month’s rent isn’t actually due yet it must be declared in the year when you receive the funds.
Security deposits count as income if not returned – if you collected a $2,000 security deposit and find that you need to keep $1,000 of it when the tenant moves out to repair damages and/or clean the property you need to declare the $1,000 as income. Of course, you may also have corresponding expenses if the funds are used to complete repairs.
Expenses paid by a tenant are income to the landlord – if your tenant fixes something on the property, the money spent by the tenant is actually income to the landlord if the cost of the repairs is deducted off the rent. Again, you may also have a corresponding deduction for the cost of the repairs, meaning you need to declare both income and expenses.
Property and furnishings are depreciated differently – property is often rented “furnished”. You may deduct the cost of the furnishings but make sure you calculate the deduction properly. Residential rental property is depreciated over 27 1/2 years while furniture is depreciated over just seven years.
Failing to document – if it isn’t in writing is doesn’t count! Everything from your original lease agreement to the cost of replacing a lost key should be documented in writing. Not only does this ensure that you will get credit for all your allowable deductions but is also protects you in the event of an audit by the Internal Revenue Service.

By avoiding these five common rental income tax mistakes you can dramatically reduce the chances of an error on your tax return.

Steps to Take When Your Sensitive Data is Breached

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Steps to Take When Your Sensitive Data is Breached

Roughly 267 million records exposed during data breaches just in 2012 alone, the global information services organization Experian estimates. With numbers like these, most businesses find that it’s not a matter of “if” their data will be breached, but “when” it’s going to happen.

With data breaches becoming such a common problem for people and businesses alike, occurring roughly eight million times each month according to IBM, it’s important to know the steps to take once you become aware a data breach has occurred in order to properly protect your business, your reputation, and your financial interests,

Create a Data Breach Action Plan
It’s necessary now, before breaches occur, to create an action plan to follow when they do occur. These are a few of the steps small business owners should include in any response plans involving data breaches.

  • Discover and investigate the breach internally.
  • Contact law enforcement officers if this is a case where that might apply (hacking is a crime)
  • Notify financial institutions you do business with. Change account numbers or close accounts as appropriate.
  • Engage the services of professionals to assist with the investigation as well as the potential fallout for your business. This may include computer forensic investigation firms, data recovery specialists, law firms, crisis management teams, and/or PR firms.
  • Notify customers and employees who have been directly affected by the breach and purchase identify theft protection services for those who were affected. Many states have laws regarding notifications involving data breaches. Make sure you know the law in your state so that you’re in compliance.
  • Get ahead of the breach in the media. It’s best to be proactive with statements regarding the breach, so that you control the narrative. This protect you from the need to do damage control after someone else goes public with their version of events first.
  • Keep those who were affected by the breach up to date about what’s going on through notifications in the mail or via email. Give customers and employees details, facts, and information about what’s going on and steps they can take to protect themselves.
  • Respond to questions and inquiries. Transparency dispels thoughts that you are trying to hide things from a concerned public. For small businesses this may involve hiring someone to field calls and calm concerns.

The key is to stay on top of things from start to finish. How you deal with the fallout says a lot about you as a business and will determine whether or not your customers choose to ride out the storm with you.

 

Most Common Mistakes that Lead to Lawsuits for Small Business Owners

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

For a small business owner a lawsuit can have a devastating impact, both on company moral and on company finances. The longer you stay in business, the higher the probability that your company will be sued at some point in time. There is no surefire way to prevent every lawsuit; however, there are some common mistakes that small business owners make that increase the likelihood of a lawsuit. Avoiding these common mistakes will decrease your likelihood of becoming the defendant in a lawsuit.

Failing to hire a reputable attorney – probably the single biggest mistake that small business owners make is failing to retain the services of a reputable attorney. Yes, hiring an attorney to review contracts and provide you with legal advice will cost money that you may think is better spent elsewhere. In almost all cases, however, the money spent on an attorney now will save you considerably more down the road by dramatically decreasing the likelihood a lawsuit—a lawsuit that would cost much more to defend than to prevent.
Failing to document – regardless of the size of your business, or the type of business you own, documentation is both the key to success and an important element in preventing lawsuits. Every agreement you enter into should be in writing and signed by all parties. Every purchase and every sale should be documented. Communication with suppliers, advertisers, clients, and anyone else related to your business should be documented.
Failing to pay bills on time – This one may seem obvious but many small business owners struggle financially while trying to get the business off the ground. The result is often some creative juggling with accounts payable and accounts receivable. Creditors who do not know you personally are often quick to file a lawsuit if you get behind on a bill. This can damage both your company’s credit and your own personal credit if the business is a sole proprietorship.
Failing to understand employment law – An employer who does not understand at least the basics of federal and state employment law is almost certain to end up as a defendant in a discrimination, sexual harassment, or wrongful termination lawsuit. Failing to understand how broadly sexual-harassment is defined by the law, for example, can land an employer in court defending a sexual-harassment lawsuit.
Failing to respond to complaints — It is very rare for a lawsuit to be filed without an attempt made to settle the issue outside of court first. The attempt may be in the form of a telephone call, a personal e-mail correspondence, a conversation with an unhappy employee, or a formal demand letter. An employer who fails to respond to an informal complaint leaves the other party with no other recourse than to file a formal lawsuit.

As a small business owner if you can avoid making these five mistakes you will significantly decrease the odds of landing in court defending a lawsuit.

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TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.

How to Minimize the Possibility of a Wrongful Termination Lawsuit

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Tax Tips  are not a substitute for legal, accounting, tax, investment or other professional advice.  Always consult with your trusted accounting advisor before acting upon any Tax Tip.

How to Minimize the Possibility of a Wrongful Termination Lawsuit
As a small business owner, a wrongful termination lawsuit can quickly drain capital reserves, even if you ultimately win the lawsuit. Litigation costs along could bankrupt a fledgling business. As is often the case, the best defense is a strong offense. While there is no sure fire way to prevent the possibility of a wrongful termination lawsuit, there are steps you can take to prevent a previous employee from filing one, or at least be prepared in the event one is filed.
The term “wrongful termination” is a broad term. A statutory claim for wrongful termination can be made on the basis of one of the many federal or state anti-discrimination statutes. An employee who was employed pursuant to an employment contract can allege that the termination was in violation of the terms of the contract. Additionally, a somewhat vague “termination against public policy” argument is sometimes asserted as the basis of a wrongful termination lawsuit. Regardless of the basis of a potential wrongful termination lawsuit, taking steps before a lawsuit is even contemplated is your best defense.
Read, understand, and implement an anti-discrimination policy. Federal anti-discrimination statutes are much broader than most employers realize. Consult with your attorney if necessary to make sure that you are in compliance.
Don’t turn your “at-will” employee into a contract employee unwittingly. Most states are “at-will” states, meaning that, in theory, you do not need a reason to terminate an employee’s employment. Contracts, however, can be implied and verbal as well as express and written. Be certain that you do not verbally imply a contract between you and your employees if that is not your intention.
Negotiate a separation agreement when possible instead of an outright termination. If the employee agrees to the “separation” from employment, then it is not a “termination” for purposes of a future wrongful termination lawsuit.
Draft a well-written section in your employee handbook regarding the “at-will” nature of employment as well as a section outlining your compliance with all state and federal anti-discrimination laws. Your disciplinary procedures should also be explained at length in your employee handbook.
Document all disciplinary action taken against all employees. Allow the employee to review the summary of action taken and ask them to sign the summary. Keep these in the employee’s personnel file. Keep all personnel files at least as long as the applicable federal and state statute of limitations for wrongful termination lawsuits.
Give your employee a concrete reason for the termination. Conversely, do not offer any information to third parties regarding the reason the employee was terminated unless absolutely necessary and, even then, only if it can be easily and adequately substantiated.
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TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.

What are Consumer Operated Health Plans (CO-OPs) and How Do they Benefit Small Businesses?

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What are Consumer Operated Health Plans (CO-OPs) and How Do they Benefit Small Businesses?

Traditionally, freelance workers and small business owners have been unable to afford the high costs of health insurance. The investment was simply too high to justify the potential reward. However, as part of the health care Affordable Care Act, there are several new CO-OP (Consumer Operated and Oriented) plans being created to help generate competitive pricing among insurers and pass savings along to consumers.
What are Consumer Operate and Oriented Health Plans?
More commonly referred to as CO-OPs, these health plans have a single primary purpose, according to The Commonwealth Fund, to promote the long-term health and well-being of their customers as affordably as possible. The federal government is investing heavily in these startups in hopes of providing creative solutions to the healthcare problems throughout the country. They are investing by providing funding to help these programs get started and by also exempting them from paying federal taxes.
How Do CO-OPs Help Small Businesses?
Many small business owners want to offer benefits to their employees. They know it’s necessary in order to compete for talented employees. However, the high costs of health insurance for employees have always made the gesture impractical in the past. CO-OPs are private nonprofit health insurance companies. The fact that they aren’t “for profit” agencies means they are able to offer options traditional insurers, who have investors and boards to answer to, cannot. It helps keep the prices lower while offering more innovative and creative treatment options to the insured.
When Will CO-OP Health Insurance be Available?
HealthAffairs Health Policy Brief explains that, “Starting in October 2013, people without access to coverage through an employer, Medicaid, or the Children’s Health Insurance Program will be able to purchase health plans through health insurance exchanges for coverage taking effect in 2014.”  The brief goes on to say that while the initial law required funding for at least one CO-OP in all each of the fifty states, budgetary restraints have limited the number to the 24 CO-OPs that have already been created – for the time being.
There are many benefits to gain as a small business owner, or even a freelancer, or contract worker, for considering the benefits of a CO-OP health plan. Aside from the fact this law requires insurance coverage beginning in 2014, the peace of mind of having insurance coverage is a huge weight off the shoulders of small business owners everywhere.
To learn more about Consumer Operated Health Plans and how they can benefit your small business, we encourage you to speak to us.
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TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.