US National Debt – How will your small business be affected if the debt ceiling is not raised?

Posted on July 31, 2011 by admin

I believe by now every small business owner knows that the two political parties have been negotiating to raise the debt ceiling so that the US can continue to honor its debts.  Why have they not yet come to a deal? I think you have all heard the arguments from both sides, but whatever the arguments, it is July 31st and they have not reached an agreement.  While it is said that Washington likes to be dramatic, and will ultimately make a deal at the last minute, it feels like the last minute already.  In my mind it is becoming more and more probable that they will not reach a deal.  If they do not reach a deal to raise the debt ceiling how will your small business be affected?

If there is no deal and Congress does not raise the debt ceiling, there will not be enough money to make all the usual government payments.  The government makes many payments including, interest on treasury bills, repaying matured treasury bills, social security payments to retirees, wages to government employees including soldiers, payments to Medicare and Medicaid providers, payments to contractors who provide military supplies and who operate prisons, and many more.

If your small business provides goods or services to retirees, soldiers, government workers, medical practitioners who serve Medicare and Medicaid patients, government contractors, and others who receive some form of payment from the government, you might expect to see a reduction in your income in the event that the debt ceiling is not raised.  As a result you may have to reduce payments to your suppliers, and workers; and generally spend less since you have less coming in. There would be a ripple effect resulting in a further contraction in the economy followed by an increase in unemployment followed by more contraction…..

Loans would also become more expensive.  It is similar to your having a credit card debt that needs to be serviced.  There is a minimum payment including interest that needs to be made every month.  You come to a point where your income is not enough to pay all your expenses plus the credit card payments.  You have a chance to get another credit card so that you can pay your expenses as well as service the credit card.  You hesitate about getting another credit card because it is just increasing debt, and creating another monthly bill, but if you do not get the new card, you become delinquent on the present credit card, and your interest rate moves from 10% to 23%. Your ability to get a new loan in the near future is also much more difficult, because the credit score is now in the toilet.

If the US defaults interest rates will rise for the government as well as everyone else.  If your small business has an adjustable rate loan, your interest rate will rise resulting in increased minimum payments, and generally worsen your cash flow situation.

Will the US default on its national debt?

The US is not going to default on its national debt even if the political parties can’t come to a deal.  The president would invoke section 4 of the 14th amendment.  So far the White House has insisted that they have no plans to invoke the 14th amendment and their legal advisors seem to disagree that it could be used.  It would be politically incorrect to say in advance that that the president plans to use the 14th amendment.  I believe the president would rather the congress send him a bill he can sign.  It would give him more political cover.  Invoking the 14th amendment is like stepping out on high ledge all by yourself.  If, however, Congress does not send the president a bill he can sign, he will have no choice but to invoke the 14th amendment. Technically he does have a choice, but it is a Hobson’s choice.  Invoke the 14th amendment or watch helplessly as the economy goes into a tail spin.

What does he have to lose by invoking the 14th amendment?

Some interest groups may go to court to establish that he does not have the authority to use the 14th amendment. His political opponents may even try to impeach him.  It would be said that he is not a leader because he could not bring the parties together to get a deal done.

What does he have to lose by doing nothing?

The US would certainly lose its AAA credit rating.  The economy would go into free fall on his watch, and unemployment would increase even more.  He and the democrats would surely be thrown out of office in 2012.

I believe if the congress does not send the president a bill he will invoke the 14th amendment and face the consequences as they appear less onerous than doing nothing.

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Offshore Bank Accounts – Disclose before August 31st and Save on Penalties.

Posted on July 23, 2011 by admin

If you are a US citizen or resident and own undisclosed offshore bank accounts, the 2011 Offshore Disclosure Voluntary Initiative (OVDI) may be of interest to you as it allows you to come into compliance and pay less than the normal penalties. Any interest earned on your offshore back account balance is taxable and should be reported on your form 1040. If you filed a return and did not include this income, on discovery, you will be required to pay the tax on the interest earned. You will also have to pay interest on the unpaid tax, and a non-payment penalty. You may also have to pay an accuracy related penalty or a fraud penalty. If you did not file a return, there is also a non-filing penalty.

An accuracy related penalty applies if you understated your tax liability by more than $5,000 or 10%, and is generally 20 % of your unpaid tax liability. If the non- compliance or understatement of taxes is egregious enough, you may be charged a fraud penalty, which is 75% of the underpayment, instead of an accuracy related penalty.

If you have one or more foreign bank account with aggregate balance exceeding $10,000 US dollars in any calendar year, you are required to file form TD F 90-22 -1 by June 30th of the following year. Failure to make this filing could cost you $100,000 or 50% of your account balance in penalties.

As an incentive for tax payers to come clean and pay up their taxes, the IRS has made an offer, the 2011 Offshore Disclosure Voluntary Initiative (OVDI) which expires on August 31, 2011. The OVDI covers the years 2003 -2010, and requires that you disclose all offshore accounts, file or amend returns as necessary, pay all back taxes, pay failure to pay penalties, and failure to file penalties for any year you neglected to file a required return, as well as a 20% accuracy related penalty. The final penalty is 25% of the highest bank balance maintained during the period under review, and is in lieu of all other penalties which would apply if the IRS discovered your offshore accounts on their own.

The penalties that you avoid by participating in the OVDI are 50% of the highest bank balance maintained during the period under review, fraud penalties and the possibility of criminal charges.

If you want to participate in the 2011 OVDI, contact the Criminal Investigation Office (215-861-3759) to see if you qualify or send Offshore Voluntary Disclosure letter to the IRS. Once you are accepted to participate in the program, you need to complete the following steps by August 31st, 2011:

  • Provide copies of the original returns filed for the years covered
  • Provide complete and accurate amended federal income tax returns for all years covered
  • File complete and accurate form TD F 90-22 for all applicable years
  • Cooperate with the voluntary disclosure process.
  • Pay 20% accuracy related penalty on the underpaid tax
  • Pay failure to pay penalties
  • Pay failure to file penalties for any year you did not file a required return
  • Pay a 25% Title 26 offshore penalty for not previously reporting offshore bank accounts.

The IRS has hinted that under certain circumstances you may request an extension of the August 31st deadline, but has provided no details. If you cannot pay everything by August 31, you may request an installment agreement which will allow you to pay over time.

You may wonder how on earth the IRS is going to find your offshore accounts. In recent years they have been very aggressive about finding undisclosed offshore assets. They sign tax treaties with other countries which give them access to information about offshore bank accounts owned by American citizens and residents. They also offer incentives for whistle blowers to provide this type of information. So it could be you ex best friend, you ex business partner, or you ex-spouse who wants to extract revenge for something. It could even be your banker. The bottom line is it is becoming easier for the IRS to find assets hidden overseas.

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Non-Profit Filing Penalties, and Solutions

Posted on June 20, 2011 by admin

Many not for profits may have all their ducks in a row as far as sponsorship , advertising, purpose so on and so forth, but tend to forget one thing which ends up costing them unnecessary penalties and in some cases licenses and special tax classifications that are a headache to get in the first place.  Filing annual  non profit tax returns with the IRS is required to maintain an organization’s tax exempt status.

Certain non profits (organizations with gross receipts under 50,000) were not required to file with the IRS until 2007, when the law was changed and a filing requirement was imposed on all tax-exempt organizations.  Since the law was changed, and all tax-exempt organizations became responsible for filing information returns annually, 275,000 non-profit organizations have lost their tax-exempt status due to not filing their non profit tax forms with IRS for three consecutive years.  The application for a non-profit to obtain a tax exempt certificate is time consuming and if being handled by a third party can be fairly costly.

Luckily, there are options for non-profits who have had their status revoked as a result of failure to file a non profit tax return for three years in a row.  The IRS provides transitional relief for all organizations that lost their tax-exempt certificate because they failed to file the required non profit tax forms.  Small organizations (i.e., with annual gross receipts of $50,000 or less for 2010) who file for reinstatement will pay a reduced user fee to reinstate their tax-exempt status. Instead of the typical $400 to $850 fee, eligible non-profits only have to pay $100 if their application to reinstate their tax-exempt status is postmarked no later than Dec. 31, 2012.  Further information regarding applying for the reduced fee can be found here.

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Small Businesses Must Bring New Discipline to Their Business Practices or Risk Failure

Posted on May 23, 2011 by admin

Officially the economy is out of recession and growing again, but growth is anemic and many small businesses are still struggling to keep their doors open. Even profitable companies are having severe cash flow problems. The program to encourage small business lending enacted by congress seven months ago is still not operational. The reality is that such help will be too late for many companies.

Given an economic reality where credit is almost impossible to find and revenues are weak, small businesses have to be more disciplined in their managerial practices to keep their businesses healthy. But what does discipline mean to the small business owner?

Discipline means keeping track of cash resources with budgets and cash flow projections so you know in advance if you are going to fall short. Knowing in advance allows you to make adjustments and prioritize.

Discipline means understanding that the payroll cost is not the net pay. Many small businesses plan for net pay and forget about the taxes until the IRS comes knocking. This is in effect taking a loan from the IRS which is not a good idea as it is one of the most expensive loans on the planet.

Discipline means examining each expenditure, existing as well as proposed, to make sure that it is essential and adds to your company’s value, but knowing that although advertising or marketing may be easy to cut, such cuts may be unwise because they could further reduce revenues.

Discipline means calculating how much the business can afford to pay the owner and making your personal budget based on that number. The business owner may even have to cut personal expenses, but that is preferable to being closed down by an IRS levy, or because you can’t pay for supplies or because the bank canceled your merchant service account.

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Business opportunities abroad

Posted on February 13, 2011 by admin

If you are Egyptian, it may seem an opportune time to go back to Egypt and perhaps start a business.  This idea may be especially attractive to you if economic conditions here have been challenging as it has been for a lot of people.  To the 9% unemployed you can add the millions of small business owners who are barely keeping the doors open, and many times cannot take a salary, but have to borrow from family members to keep going.

It is generally larger companies who start businesses abroad, but for those Americans that hail from other countries starting a small business in your home country may be feasible because you know the place, and some of that learning curve of getting to know the business culture may be reduced.

As Egypt seems to have made a great change in the right direction, we suspect that many Egyptians are this minute contemplating going home to start a business.  In order to help you make the right decision, we encourage you to read this blog.

Do you have the personality and skills to be a successful entreprenuer?

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The business of Branding

Posted on February 2, 2011 by admin

So you’ve had a great idea and are ready to turn it into a product or service.  You’ve run the numbers and it turns out you can do it cheaper than the competition.  Well it sounds like you’ve already won, but have you?  In today’s world the straight forward answer is no, you’ve only won half the battle and the daunting part about the second half is that you’re likely be competing with some of the biggest names specific to whatever industry you’ve decided to make your foray into.  Today’s consumers rarely buy products or services anymore, instead the consumers of today buy brands, a complete package of product, service, logos, jingles, slogans, mission statements, prizes, charity, packaging and the list goes on and on and on.  For the small business owner it can feel overwhelming when you realize you may be in competition with household names like Staples, Officemax, or Wal-mart, but to overlook that you are in competition with them and not realize that to some degree you’ve got to compete on the same playing field is to your detriment.  Luckily there is good news, the corporate giants of advertising manipulation who throw their weight around by the share virtue of name recognition are no longer the only ones who can reach the masses.  With the advent of social s=media, yelling in crowded spaces is no longer the only way for the individual to get a message to a large quantity of people.  The fact that with a little effort, creativity, and time, a single person can get an idea to hundreds or thousands of people via social media means that the individual now has access to a major component of branding that was up until recently, inaccessible to anyone who didn’t have the financial resources for massive ad campaigns.  So for the entrepreneur ready to start a new business, or the small business owner looking to expand, it may be time to take a look at how you can transform your products and services into brands with a little ingenuity and the use of social media.

Related Links

http://www.emineomedia.com/

http://www.gourmetads.com/blog/competing-with-major-brands-online

http://www.slideshare.net/DigitalInfluence/business-impact-of-social-media

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Do you have the personality and skills to be a successful entrepreneur?

Posted on January 31, 2011 by admin

Answer these questions and find out.

Are you determined?

There will be many occasions when trying to start a business and even during the life of a mature business when you will feel like calling it quits because of some intractable problem. If you throw in towel at every stubborn problem, you will never have a successful business. You need grit and perseverance to be able to solve these stubborn problems.

Are you flexible?

You will need to alter products, services, and market strategies to suit the market and your customers. You will need the ability to use your core competencies in different ways depending on the need.

Do you know how to get on with people?

As a business owner you will need to negotiate with customers and suppliers, and deal with bankers, government officials, and outside professionals. The ability to manage those relationships is critical to the success of your businesses.

Are you a good decision maker?

A business owner has to make decisions all the time. Some decisions require gathering and analyzing information; others have to be made immediately. Do you know the difference?

Do you know how to effectively manage your time?

As a small business owner you will have responsibility for nearly all aspects of your business. Very often help is scarce as it is expensive to hire competent people. You will have calls to return, mail to open, bills to pay, invoices to send out and collect, returns to file, and new marketing strategies to develop. Invariably you have more to do than time to do it in. How will you prioritize?

Do you have financial management skills?

As a new business owner, it is likely that you will have to be your own financial manager, because it may be impossible to afford one when you are just starting out. Can you prepare a budget? How will you know if you are making a profit?

While there are many successful entrepreneurs who are not millionaires, I do invite you to study the stories of these entrepreneurs who became millionaires before the age of 25. How to be a milionaire by age 25

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Does Your Small Business Qualify for the Health Care Credit?

Posted on January 19, 2011 by admin

In an effort to make it more affordable for small businesses (including non profits) to provide health insurance for employees, one of the provisions of the Affordable Care Act was the Small Business Health Care Tax Credit. Beginning with the 2010 tax year, small businesses can get a tax credit worth 35% of health insurance premiums paid on behalf of employees. Your small business qualifies for the full credit if:

1. You have fewer than 25 full time employees or the equivalent in part time employees. A full time equivalent of part time employees is 2 or more part time employees altogether working 40 hours per week. The owners of the business and their families are not included in this count.

2. Average annual salary (not including owners and family members) is less than $25,000.

3. You pay at least 50% of the single rate insurance premium for each employee.

This credit reduces your regular income tax liability, in other words it only helps you if you have a tax liability.

Qualified non profits qualify for the credit in the same way, but the credit is worth 25% of health insurance premiums paid on behalf of employees. Also for the non profits the credit is refundable, in other words although the non profit has no income tax liability, the IRS will send the qualifying non profit a check for the credit. This credit cannot exceed the amount of Medicare tax (employee and employer amounts) paid for the year.

Small businesses and non profits with more than 25 but fewer than 50 full time employees, or whose average annual salary is more than $25,000, but less than $50,000 qualify for a reduced amount of credit.

See more details here

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Are You Ready to Start a Business?

Posted on January 15, 2011 by admin

Do you know the compliance requirements of your city, county, state and federal governments? This is a question you should answer before getting started.

Businesses have been known to fail to get started because they could not obtain the licenses or permits required by their county or state. Others having started and invested substantial amounts of capital are shut down for code violations. Yet others fail to comply with state and federal filing requirements, thus incurring huge penalties. These penalties can put a real dent in your capital, making it difficult if not impossible to succeed.

Each locality or city will have its unique ordinances or other codes, but it is the business owner’s responsibility to be informed about these rules. Here is a story that demonstrates the problem codes and ordinances pose for small businesses.

An entrepreneur began holding occasional organic gardening classes in her backyard. In 2008, neighbors complained and circulated a petition against her company. The City of Los Angeles shut her down. But the story did not end with the shutting down of her business. This determined entrepreneur gathered a group of seven like-minded entrepreneurs who formed an organization they called Urban Farming Advocates in 2009 to lobby the city to legalize such businesses. Determination is definitely one of the qualities a business owner has to have.

This past July, a Los Angeles city code, originally adopted in 1946 to allow “truck gardening”, was amended to explicitly allow the residential growing of vegetables, fruits, flowers, seedlings, and nuts for sale off-site. Read full story here

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There Are Advantages to Filing Your Tax Return on Time

Posted on January 4, 2011 by admin

Many new business owners choose not to file their initial return on time for various reasons including but not limited to the following:

1. They did not know when it was due. Now you know that your business return for calendar year 2010 is due March 15th.. If you are doing business as a C corporation, you also need to file a state return. In Florida these returns are due April 1st. You may request extension of time to file these returns, but such requests must be filed before the due dates.

2. I did not make any money. The returns are due and late filing penalties apply even if you made a loss. Furthermore many business owners say they made a loss, but the tax return may reflect a different result, because not all expenditures from the business account are tax deductible expenses.

3. I did not have the money to pay a CPA or an accountant. If that is the case try to do the return yourself. It is better to file an imperfect return and correct it later, than not to file at all.

4. I owed taxes but I did not have the money to pay. File your return anyway, and request time to pay the amount you owe. There are penalties and interest for late payment, but the penalties are less when you file the return, and request time to pay.

Here are some of the advantages of filing on time.

1. You avoid late filing penalties. Business owners are often surprised at how onerous these penalties can be. Having to deal with these late penalties can seriously impact your cash flow and profitability.

2. You learn of any problems with your filing status early. Many new businesses file as S corporations only to receive a letter from the IRS saying there is no record that the business is an S corporation. Limited Liability corporations also have problems with filing status if they fail to file form 8832. The IRS may treat your LLC as an individual or a partnership, when you wish to be treated as a corporation. These problems are much easier to fix if your return is timely filed.

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