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Business Continuity Planning for Business Owners


Preparing for the Worst:
Business Continuity Planning
for Business Owners

Contemplating one’s own demise can be challenging but is paramount to sole owners and their businesses. Consider the fictional Harry Withers, the 54-year-old owner of Withering Hikes, a chain of seven retail apparel stores for outdoor enthusiasts on the Western Slope of Sierra Nevada Mountains. Harry was scouting new hiking trails and disappeared.

After several months of fruitless searching, Harry’s family opened probate proceedings only to find that Harry’s once-thriving business also had disappeared. However, Withering Hikes’s disappearance was far more typical than Harry’s. Because Harry had dreamed of selling his company at 60, he had given little thought to what would happen to his business if something happened to him. Thus, Withering Hikes died of all-too-common causes—human error and neglect—setting off a chain reaction of ever-worsening consequences for Harry’s family and business:

1. Harry’s key employees left the company for jobs with more certain futures. They feared that neither Withering Hikes nor their salaries would continue without Harry at the helm.

2. The departure of key employees meant that there was no one to manage the business. Total chaos reigned, and revenue took an immediate and irreversible nosedive. Longtime customers grew uneasy with what they perceived to be a rudderless ship and took their business to Harry’s competitors. Further, the company’s vendors demanded cash payments, cash that the company no longer generated.

3. Harry’s bank saw the drop in revenues and decided to call in the company’s debt, debt Harry had personally guaranteed.

4. Because Harry left no instructions or recommendations about who could run the business, who could offer advice, or even what to do with the business should something happen to him, both his business and family suffered.

Withering Hikes didn’t just wither away; it fell off a cliff. It could not survive without its top employees or Harry’s leadership.
The point of reviewing this list of mortal blows is to demonstrate that business-continuity planning is vitally important to owners’ companies and families. Without a well-considered business survival plan, the consequences for owners’ employees, customers, and, most importantly, family and estate are dire (estates rarely escape the notice of business creditors).

Fortunately, there is a process that sole owners can quickly and easily use to help avoid the type of business collapse that Withering Hikes experienced.

First, sole owners must motivate top employees to stay on after their demises by creating financially meaningful incentive compensation plans for them that vest over time. Creating a plan that provides these employees a substantial bonus (called a stay bonus) for remaining with the company beyond an owner’s demise is a strong strategy. The company can usually fund the stay bonus with life insurance on the owner’s life. This funded stay bonus provides designated employees with a cash bonus (usually about 50% of annual compensation) and a salary guarantee if those employees stay (typically 12-18 months) after the owner’s death. The sole owner’s job is to communicate these actions to these employees and assure them that he or she has made additional plans to ensure the continuation of the business.

Second, sole owners should alert their banks about their continuity plans. Meeting with a banker to discuss the arrangements made and showing him or her that the necessary insurance funding to implement these plans is in place can allow an ownership transfer to proceed smoothly. Additionally, it is wise to determine whether major creditors are comfortable with the succession plan. Sole owners should ask major creditors which arrangements they would like to see in place.

Third, create a written plan that does the following:

1. Names the person(s) who will take on the responsibility of running the business.
2. States whether the business should be continued, liquidated, or sold (if so, to whom).
3. Names the resources heirs should consult regarding the company’s sale, continuation, or liquidation.

Creating a contingency plan for your company should you depart unexpectedly is a vital part of your overall Exit Planning Process. Failing to do so invites the kind of disaster that befell Withering Hikes, Harry’s employees, and his family.

My expertise in crafting business-continuity plans that work can help you be prepared for the unexpected. Contact me today to learn more about how to begin creating a contingency plan and the options available for your business.

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How to Figure Your Social Security Benefits

How to Estimate Your Social Security Benefits

Social Security plays a vital role in the retirement planning of nearly every American. Yet it can be hard to guess how much you should expect from Social Security after you retire. By using some tools that are available, though, you can estimate how big your Social Security benefits will be when you need them.  Planning ahead is important, as there may be things you should be doing now to increase the ultimate benefit.

Here’s How its Determined

If you want to know exactly what to expect from Social Security, you’ll have to do a lot of legwork. To come up with the number, the Social Security Administration takes your entire work history, indexing your annual earnings for inflation and then choosing the 35 highest-earning years. Then, the SSA adds up those annual earnings for the 35 top years and then finds the average indexed monthly earnings.

After you have that number, you’ll run it through a formula that differs depending on your age. For example, if you’re turning 62 in 2017, then your benefit equals the sum of the following:

  • 90% of the first $885
  • 32% of the amount between $885 and $5,336
  • 15% of the amount above $5,336

The result is the primary amount, which is what your monthly benefit will be if you retire at full retirement age. If you retire early, then your benefits will be reduced. If you retire later, then you can get higher benefits. Delayed retirement credits for taking benefits past full retirement age amount to 8% per year, while the penalty for taking benefits early ranges from 5% to 7% per year.

Special Opportunities for Those Born Before 1953

For those born in 1953 or earlier, there may be opportunities to file for spousal benefits while allowing your benefits to defer and grow.  Be sure to check this out when planning your Social Security benefits or contact Bill Roeser for more information.

The Social Security Online Website Can Help

One place where you can always get a basic estimate that’s tailored reasonably well to your past work history is from your Social Security benefits statement. The SSA now mails out paper statements only once every five years, but you can always access yours via the internet from the mySocialSecurity website.

The Social Security Administration has created several calculators to try to make it easier to come up with reasonable estimates of what your benefits will be. In particular, four calculators can give you benefit estimates with varying degrees of sophistication and precision:

  • The Social Security Quick Calculator makes simple assumptions about your past and future earnings to give you a basic look at your estimated retirement benefit based on your current earnings. If your earnings have been relatively stable throughout most of your career, then this calculator gives a good estimate.
  • The Online Calculator offers more precision by letting you input your past work history. The calculator still has to make assumptions about the future based on what you’ve made in the most recent year. However, the actual work history makes a more accurate estimate possible than the simple calculator’s basic assumptions.
  • If you don’t want to type in your information yourself, the Retirement Estimator does some of the legwork for you. It accesses your Social Security work history directly to fill in blanks about your earnings. But it doesn’t work well if you’re currently receiving benefits based on another person’s work record.
  • The Detailed Calculator is the most sophisticated SSA tool. It gives information about both future and past retirement benefits, and dependent and survivor benefits are also available in addition to benefits based on your own work history. Still, you won’t get a complete picture of how any other benefits integrate with your own.

Until it’s actually time to file, you can’t know for certain how much your Social Security monthly benefits will be. Yet by looking at estimates, you’ll likely get close enough to be able to make good plans about your retirement finances.

Bill Roeser, CPA, CFP

 

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Business Books I’ve Recently Read

Read Any Good Books?

We have a book club here in the office at Roeser Accountancy Corporation.  We meet regularly to discuss and review great business books.  On occasion, we invite clients to join us.  Over the past year, I’ve personally read some really great business books.  My goal and expectation in reading these books is that I find a few good nuggets I can use in my business and personal life.  As Steven Covey, author of the Seven Habits of Highly Effective People illustrates in his book, we should constantly be sharpening the saw.  If not, we become dull and ineffective.  I’ve found reading books by today’s thought leaders to be an effective way of staying current and on the leading edge of business.  It’s a great way to get under-the-hood of successful business leaders – and the ROI is worth the time.

Many people wonder how I find the time to read.  Well, some I read and some I listen to using earplugs while walking my Labrador dog Duke.  He doesn’t seem to mind.

I found the following books insightful and fresh with new ideas on how to manage and lead in my business activities and personal life :

Purple Cow – by Seth Godin.  A must read for any business looking to differentiate and stand out from the crowd.  If you’re a brown cow, you won’t get noticed, but a purple cow stands out if it delivers remarkable service.  This book has reached cult status and its message frequently discussed in many business meetings I’ve attended.

The One Thing – by Gary McKoewn.  How to focus on what matters most in a world with many distractions.  The result is a more rewarding life and greater business success.  This book exceeded my expectations and would be good to read every year as a reminder to stay focused and not scattered.

Essentialism – by Greg Keller.  The disciplined pursuit of less to get more!  One of the best books I’ve read in years.

Tribes – by Seth Godin.  “We want You to lead us!”  A great book from which I draw from every day.  I actually give copies of this book out to new business entrepreneurs or those clients looking to up their leadership game.  What’s your tribe look like?

Disrupt You – by Jay Samit.  One of the most engaging books I’ve read in years.  The author speaks from personal success and addresses the need to constantly innovate and think differently in order to succeed in business.

The Life-Changing Magic of Tiding Up – by Marie Kondo.  My wife gave me this book to read after she finished it.  I can take a hint.  An unconventional book on organizing and cleaning up.  A compelling book on decluttering your life and a new system for achieving it.  This book has been widely read and well-received by anyone looking to stay ahead of clutter and bring some Feng Shui to their environments.

I’m always looking for new book titles.  I’d love to hear from you on a favorite business book you’ve read.  Email me at bill@roesercpa.com or comment on our firm’s Facebook Page, where you’ll find other blog articles.

Bill Roeser, CPA, CVA, CFP, CGMA

 

 

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Tax Reform is Coming! How Will it Impact You?

Roeser Accountancy – Tax & Financial Advisory

Today, the natural question for those of us in business or the  tax world is, “What does the election mean for tax policy in general, and tax reform in particular?”

The answer is somewhat mixed. To be sure, Republicans generally have supported lower taxes and the idea of tax reform, but they are not currently unified behind any particular plan or approach. In fact, there are meaningful differences among the policies being considered in the House and the Senate versus the tax plan proposed by President Trump. So it will be interesting to see how, or if, those differences will be resolved.

Here are five issues we think will be important in the coming discussion over tax reform. *

The Estate Tax

A number of factors make the estate tax an issue to watch in the coming year. Repeal of the estate tax is a feature of both the Trump and House Republican tax plans. Furthermore, it is a policy proposal that has fairly strong popular support. Third, it collects less than 1 percent of federal revenue, making it less of a deficit concern than many other tax-cutting priorities. And finally, the repeal of a tax is a relatively simple policy negotiation that could move quickly if it became a priority.

The House voted last year to repeal the estate tax, and the composition of the chamber has not changed much with Tuesday’s election. The main questions on this policy are whether any change to step-up basis would happen in an estate tax repeal, and whether it has the votes to pass the Senate. All in all, though, repeal of this tax seems like a priority that would have relatively little in its way.

Pass-through Businesses

Under current law, the tax code distinguishes between two major types of businesses. The first type of business is the traditional C corporation, which is taxed twice: once at the entity level at 35 percent, then again at the shareholder level when individuals pay tax on their dividends and capital gains. The second business form is known as a “pass-through” business. These businesses are not taxed at the entity level. Instead, their profits are passed immediately to their owners and are subject to the individual income tax.

The different treatment of these businesses is a challenge for tax reform. Most agree that the statutory marginal tax rate on C corporations is too high. Yet, if a tax plan only cut the corporate income tax rate, pass-through businesses would not receive a tax cut. In fact, if the corporate rate were cut in concert with base broadening, pass-through businesses could face a tax increase. As such, some plans attempt to deal with this by also cutting the ordinary income tax rate. However, cutting individual income tax rates is very expensive.

One way lawmakers have proposed to deal with this political issue is to provide pass-through business income a special, reduced rate compared to wage income. Both the House GOP tax plan and Trump’s tax plan provide a special low rate or system for pass-through businesses. Both plans have a top ordinary rate of 33 percent, but the House GOP plan caps the pass-through rate at 25 percent; Trump’s plan caps the pass-through rate at 15 percent. However, it is still unclear exactly how Trump’s tax plan would treat pass-through businesses.

While this deals with the political problem of pass-through businesses feeling left out of tax reform, there are significant policy concerns. Creating a special rate for pass-through businesses can encourage gaming. Individuals who own businesses would have an incentive to re-categorize their wage income to business income. There is no strong theoretical case that pass-through business income should be taxed at a lower rate than wage income. It would also increase the tax differential between corporate investment and pass-through investment.

It is worth noting that there is a tax reform proposal that could address this. Specifically, the corporate integration proposal from Senator Hatch (R-UT). His yet-to-be-released proposal would integrate the individual and business tax code by allowing corporations to deduct their dividends against their taxable income. It would also tax dividends at ordinary income tax rates. There are a lot of moving pieces with this plan, but the goal of this plan is make sure that all business and individual income are taxed at roughly the same marginal tax rate. If this is included in reform, lawmakers could reduce the marginal tax rate on corporate investment and make sure that pass-through and corporate income are taxed more equally.

Individual Income Tax

Tax rates

The Trump Plan will collapse the current seven tax brackets to three brackets. The rates and breakpoints are as shown below. Low-income Americans will have an effective income tax rate of 0. The tax brackets are similar to those in the House GOP tax blueprint.

Brackets & Rates for Married-Joint filers:
Less than $75,000: 12%
More than $75,000 but less than $225,000: 25%
More than $225,000: 33%
*Brackets for single filers are ½ of these amounts

The Trump Plan will retain the existing capital gains rate structure (maximum rate of 20 percent) with tax brackets shown above. Carried interest will be taxed as ordinary income.

The 3.8 percent Obamacare tax on investment income will be repealed, as will the alternative minimum tax.

Deductions

The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000. The personal exemptions will be eliminated as will the head-of-household filing status.

In addition, the Trump Plan will cap itemized deductions at $200,000 for Married-Joint filers or $100,000 for Single filers.

Childcare

Americans will be able to take an above-the-line deduction for children under age 13 that will be capped at state average for age of child, and for eldercare for a dependent. The exclusion will not be available to taxpayers with total income over $500,000 Married-Joint /$250,000 Single, and because of the cap on the size of the benefit, working and middle class families will see the largest percentage reduction in their taxable income.

The childcare exclusion would be provided to families who use stay-at-home parents or grandparents as well as those who use paid caregivers, and would be limited to 4 children per taxpayer. The eldercare exclusion would be capped at $5,000 per year. The cap would increase each year at the rate of inflation.

The Trump Plan would offer spending rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65 percent of remaining eligible childcare expenses, subject to a cap of half of the payroll taxes paid by the taxpayer (based on the lower-earning parent in a two-earner household).

This rebate would be available to married joint filers earning $62,400 ($31,200 for single taxpayers) or less. Limitations on costs eligible for exclusion and the number of beneficiaries would be the same as for the basic exclusion. The ceiling would increase with inflation each year.

All taxpayers would be able to establish Dependent Care Savings Accounts (DCSAs) for the benefit of specific individuals, including unborn children. Total annual contributions to a DCSA are limited to $2,000 per year from all sources, which include the account owner (parent in the case of a minor or the person establishing elder care account), immediate family members of the account owner, and the employer of the account owner. When established for children, the funds remaining in the account when the child reaches 18 can be used for education expenses, but additional contributions could not be made.

To encourage lower-income families to establish DCSAs for their children, the government will provide a 50 percent match on parental contributions of up to $1,000 per year for these households. When parents fill out their taxes they can check a box to directly deposit any portion of their EITC into their Dependent Care Savings Account. All deposits and earnings thereon will be free from taxation, and unused balances can rollover from year to year.

Federal Revenue

Trump will enter office promising a large increase in infrastructure spending, additional military spending, and a pledge to not touch entitlements. At the same time, he will bring with him a tax plan that would reduce federal revenues by about $6 trillion over the next decade. Without adjustments, Trump’s plan would significantly increase the federal deficit, which is already projected to increase significantly under current law. According to the Committee for a Responsible Federal Budget, his complete fiscal plan would increase federal debt by $5.3 trillion over the next decade

Given this disconnect, it is likely that Trump will need to either revisit his spending priorities, his tax plan, or both. If he revisits his tax plan and wants to keep the marginal rates the way they are, he will need to find ways to reduce the cost.

Trump could reduce the cost of his tax plan if he follows the lead of the House GOP tax reform plan and takes base broadening more seriously. Overall, the House GOP plan has a significantly smaller impact on the federal budget and could be more realistically matched with spending cuts. We estimated that the House GOP plan would reduce federal revenue by $2.4 trillion over the next decade. However, when accounting for economy growth, the cost is about $200 billion (a little more if you include the elimination of the ACA-related taxes). It maintains a relatively small impact on the deficit compared to Trump’s plan by significantly broadening the individual and business tax bases. It limits itemized deductions for individuals, eliminates the net interest expense deduction for businesses, and border-adjusts the corporate income tax.

The Corporate Tax Rate

Both the Trump plan and the House GOP plan include substantial reductions in the corporate tax rate, from its current 35 percent to top rates of 15 percent and 20 percent, respectively. The current rate is the highest in the developed world. The Trump plan would be a bold step that leapfrogs the United States all the way to having one of the lowest rates in the developed world, while the House GOP plan is more modest in its reduction.

The House GOP plan, furthermore, contained a number of significant base broadeners in order to offset the revenue lost from lower rates. The Trump plan does not have those base broadeners, and as a result its corporate income tax raises substantially less revenue than that of the House GOP plan. If Trump decides to scale back the size of his net tax cut, he may give the House GOP’s 20 percent corporate rate, or its base broadeners, another look.

Please let us know of any questions – and we’ll keep you informed as matters develop.

Bill Roeser, CPA, CFP, CVA

*Reference: TaxFoundation.org