The 10 Year Target, 3-Year Picture, 1-Year Plan, and Quarterly Rocks

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If your organization stays aligned to its core values and maintains focus – sidestepping distractions – where will you be 10 years from now?

The Version Traction Organizer (VTO) is a thought exercise that takes you through a series of questions about your business. The objective is to help define the necessary steps for organizational success. And it all starts by challenging you to name your core values and your core focus.

It begins at that macro level to set the goal. But how will you get there?

The VTO continues with additional questions, each working backward toward your present state. This step-by-step process positions you on the runway and prepares you for takeoff.

Question of the decade

You’ve already selected your organization’s core values, which are things you care about and what you look for in others brought into the company. You’ve also defined your core focus, the common purpose, cause, or passion that aligns everyone plus identified the company’s niche – the one thing your organization does better than anyone else.

If your organization stays aligned to its core values and maintains focus – sidestepping distractions – where will you be 10 years from now? This is the beginning of creating your 10-year target, the things you plan to make happen well over the horizon. It’s a Big, Hairy, Audacious Goal (BHAG) that grabs everyone’s attention, energizing them so they synchronize in action and intention.

Strategy Roadmap

Vision and mission are future states that may not have an actual date attached. Now you’re getting more specific with a 10-year period. It’s time to plot a defined course.

The term “10-year target” is actually a bit of a misnomer. That’s because the goal might not really be 10 years away – it could really be five or 30 years out. What any of these different targets have in common is that they are long-term, which specifically means that they are far enough away that predicting accomplishment is hard to do precisely.

Much like elements of the core focus, they should be audacious goals. Where the 10-year target differs is that the objectives should be a little more specific and measurable. The acronym S.M.A.R.T. applies:

  • Specific
  • Measurable
  • Attainable
  • Realistic
  • Timely

“Become the most beloved widget company in the world,” for example, is not a very good 10-year target. It’s not very specific, it might not be realistic or obtainable, and – unless you’ve got a mathematical formula for quantifying love – it’s not measurable.

The target needs to be fairly tangible for both the leaders who are developing it and the rest of the team who are being inspired by it. And it must be attainable, or no one’s going to feel the compulsion or drive to try and make it happen.

A revision of that above 10-year target might go like this: “Become one of the most popular widget companies in the United States, with at least a 30% share of the domestic widget market.”

Notice how there can be qualitative and quantitative components to it; in this case, popularity and market share. The latter, specific numbers could be revenue; an oil company could specify the number of gallons pumped, or a manufacturer could define the number of units produced.

The 10-year target can be pretty specific, but it doesn’t have to be. It simply needs to be both as inspiring as possible and as realistic as possible.

From a decade to 36 months

You’ve got a big goal that’ll happen in (maybe) a decade. That 10-year target now needs the stability of an actionable plan. This is where things move to the three-year picture, which gets a lot more detailed. What does it look like?

  • What’s your revenue?
  • What’s your profit?
  • What are the agreed-upon metrics demonstrating forward movement? Get specific. For a construction company, these metrics might include a maximum number of workplace accidents and workers’ comp claims. A realtor might include the number of properties sold and perhaps the average price of the sales. And a SaaS company would very likely include a specific number of subscriptions, and perhaps a certain average response time for support issues.Other potential elements include the number of clients, business locations, product or service lines being offered, employee benefits, and the implementation of new marketing and sales strategies.
  • Put these elements into bulleted descriptions that show what things look like 36 months into the future.

This list of targets will inform the elements of your operating routine.

Increase the magnification

Next, you compress those goals and bring them closer to the ground by applying them to a 12-month plan. It’s really just a mirror image of the three-year picture, only a bit more specific.

What are three to seven things that must be done this year that will get you at least a third of the way toward the three-year picture? Once again, make those goals S.M.A.R.T. – specific, measurable, attainable, realistic, and timely.

On the rocks

The danger of compressing a 10-year target to three years and then to just 12 months is that it’s easy for everything to seem like it has to be a priority. But if everything is a priority, then nothing is. It’s why the last step is to define your quarterly rocks.

What absolutely must be done in the next 90 days to keep you on track to meet your one-year plan? Look back at that plan. Decide on about three to seven of the most important things. You’ll discover that perhaps they can’t all be done. The rocks are the things that put you in danger of failing if they don’t happen.

These rocks also add accountability. Make ownership of each one singular – just one person owns its execution and completion. Don’t back away from the S.M.A.R.T. concept here, either. And of course, you will get a lot more specific in 90 days.

These time horizons aren’t the end of the VTO process, and there are very specific steps that are worked into each of these periods, including your marketing strategy, your processes, and a wider array of measurable benchmarks. We’ll tackle these elements in additional pieces, so be sure to bookmark our blog.

If you have questions about creating an S.M.A.R.T plan that accomplishes your vision – or you’d like to learn about how we can save you $15,000 or more in yearly taxes – get in touch with Provident CPA & Business Advisors today.

Tax Strategies You Can Grow into Based on Your Long-Term Goals, Part Two

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Captive insurance companies give you control of your risk financing – with substantial tax advantages

Business owners too often take a passive approach to tax planning – only thinking about taxes once April approaches or quarterly payments are due. But as your business thrives, the only way to avoid unnecessarily painful payouts to Uncle Sam is by proactively creating a long-term strategic tax plan.

In this second installment of our series on long-term tax strategies, we explore how captive insurance companies can help you achieve your financial goals.

Captives were mostly unaffected by the new Tax Cuts and Jobs Act of 2017, and an experienced certified public accountant can help you weave them into a thoughtful long-term strategy that minimizes your tax liability as your company enters new stages of growth.

What is a captive insurance company?

Captive insurance is a form of self-insurance where the insurance company is owned by the people it ensures. But unlike mutual insurance companies, which are also owned by their policyholders, captive insurance companies are both owned and controlled by policyholders who put their own capital at risk in exchange for the financial benefits that come with better control of their insurance program.

Captives are typically established as wholly-owned subsidiary companies that mitigate business risks for a parent company or a group of related companies. They are most often formed if the parent company can’t find a third-party insurer to protect it against certain risks, if the premiums paid to the captive provide tax benefits, or if the insurance a captive can offer is more affordable or offers broader coverage for the parent company’s risks. Construction or professional services companies, for example, often find captive insurance appealing.

Here’s why: By decreasing payments to third-party insurance companies and supporting the captive program instead, the money the company pays accrues for the benefit of the owners – creating investment income in a tax-preferred way. The main goal of captive insurance is risk management, but a welcome side benefit is that businesses will profit if claims are less than the premium because underwriting profits and excess reserves are returned to the parent company.

Insurance premiums paid by a company to the captive are also tax-deductible. And since insurance companies are subject to special tax rules, a captive can claim deductions for loss reserves that open the door to tax deferrals. Some programs even qualify to exclude all insurance profits from taxable income.

Put simply, if a company is spending six figures on insurance but has a good claim history, it could easily take control of its risk financing through a captive program. It’s essentially building a war chest to fight its way out of tough situations, but the war chest may eventually be used for other things in the core business – if no catastrophes occur.

Captive insurance programs have been used by Fortune 500 businesses for decades, but new efficiencies are making them cost-effective for smaller companies as well. Today, more than 6,000 captive insurers exist, with more than 40 percent of major U.S. corporations owning one or more captive insurance companies.

Biggest tax benefits

  • The insurance premium paid by the parent company to the captive is completely tax-deductible but doesn’t count as income to the captive, thus reducing the parent’s marginal tax rate.
  • An opportunity to build wealth in a tax-preferred manner.
  • Distributions to the captive’s owners are paid at favorable income tax rates.
  • The ability to deduct a “reasonable and fair” loss reserve, meaning the number of reserves available to invest will not be decreased by taxes.
  • State premium taxes that would have been paid in a commercial insurance program may be lowered.
  • Business owners have a lot of flexibility when it comes to a captive’s ownership structure, and that can lead to invaluable estate planning benefits. If a captive is owned by a business owner’s children or other heirs, they can transfer large amounts of wealth to them free of gift and estate taxes.

    One caveat: There can be gift tax consequences if the captive owners receive their shares as gifts, but otherwise, they can reap rewards from the captive’s growth free of transfer taxes.

A few more caveats

  • For the most part, all captive insurance companies taxed in the U.S. will benefit from the new tax law. Since all insurance companies are C corporations, large captives will see their underwriting profits reduced from as high as 35 percent to a flat 21 percent tax rate.Tax on investment income will be reduced to 21 percent as well. Small captives – receiving annual premiums of $2.3 million or less – will continue to be taxed at 0 percent on their underwriting profits but will also see their investment income tax rate drop to 21 percent from as high as 35 percent in previous years.

    So, what’s the catch? The tax benefits captives provide may be reduced – but not eliminated – as the new tax law decreases parent company taxation for most businesses. The impact will vary from company to company and is best explained as a possible reduction in the tax arbitrage between the captive and parent.

  • Captives need to be set up and managed properly to avoid IRS scrutiny. The IRS may challenge premium deductions if it believes the company is focused only on the deduction instead of actuarially-sound practices. Due to abuse of the program, captive insurance was included among the “abusive tax shelters” on the 2017 IRS “dirty dozen” list of tax scams.Among the abuses listed are premium amounts that are significantly higher than premiums for comparable commercial coverage, unsupported by underwriting or actuarial analysis, or simply geared toward the desired deduction amount.
  • Captive insurance companies can be expensive to create – including fees to actuaries, attorneys, and an insurance expert – and government compliance can be tricky to navigate. Once established, the captive operates like any commercial insurance company subject to regulatory mandates, including reporting, capital, and reserve requirements.A qualified CPA is best suited to help you determine if the tax and other benefits outweigh the initial costs.

The new tax code makes taxes more complicated than ever – and that also makes the benefits of long-term strategic tax planning more valuable than ever before. Once a hallmark of Fortune 500 companies, today, even small businesses are taking advantage of the many tax, financial, and estate planning benefits captive insurance programs can offer.

But while captives can provide substantial tax savings as your company grows, they are not the right fit for every business. An experienced CPA can help you determine if captives can help your company meets its goals and fold them into a long-term strategic tax plan that propels your business along the path toward success.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create more tax-free wealth for life. Contact us for expert advice on the new tax code, and to find out how we can help your business exceed your expectations.

How to Define Your Company’s Core Focus

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There’s a reason for your existence. The definition your leadership team selects should be an intersection of the “why” and the “what.”

How do you get your people all on the same page? It can be as simple as coming up with the answers to eight questions that outline the steps necessary for success. While some of these questions are easy, they won’t make any difference if your leadership team doesn’t completely agree – down to the last person – about the answers.

This Vision/Traction Organizer™ exercise starts with establishing core values, and then it’s time to define your core focus.

There’s a reason for your existence. The definition your leadership team selects should be an intersection of the “why” and the “what.” The “why” is your purpose; your reason for getting out of bed in the morning. And the “what” is your niche.

The sweet spot

If you play golf, you understand the sweet spot. The harder you swing, often the worse your accuracy becomes. But when you find that natural stance, everything aligns – and it becomes effortless. Your core focus is basically what’s accomplished when you find that sweet spot for your business.

It usually comes from the founder – though it’s important to remember that people don’t always lead, but purposes do. That’s why it’s so important to define and distill a clear core focus.

Start with why

An organization’s core focus is inspiring. People can rally around it and think passionately. That passion is important because it’s what ultimately fuels both performance and innovation. An optimal core focus as it applies to your VTO describes the future state of the company.

The reason you will achieve that future state – your why – brings you back to the sweet spot. It shouldn’t be difficult or take much effort at all to maintain your core focus. It is your purpose, after all. Your cause. Your passion. It’s why you exist.

Provident CPA & Business Advisors’ ”why” is helping entrepreneurs achieve financial freedom. It’s a simple, extremely clear explanation of why we do what we do.

Once you have your core focus defined, you’ll discover that it acts as a guiding and filtering mechanism. Your leadership team will make decisions based on the core focus. Basically, if an action doesn’t align with your organization’s purpose, cause, or passion – you shouldn’t be doing it.

Then move on to what

There is something that your organization does better than anybody else. The reason you’re better at it than everyone is another reason why you exist, of course. That one thing is your niche.

It’s how you approach your purpose, cause, or passion. It’s the demonstrable thing that moves you toward your goal.

Your niche might be a product or a philosophy, or it could also be a process. Again, there must be unified agreement about your niche. It’s going to propel the entire organization forward.

It keeps you focused on what you can be better at than anyone else in the world while helping you avoid business decisions that distract you from what you should be doing. (e.g., A paper company that makes great paper but then decides to start selling printers – it almost never works.)

Flip-flopping is normal

As you work on defining the why and the what that comprise your core focus, don’t be surprised or frustrated if you discover that your answers flip back and forth – what you thought of as your passion suddenly makes more sense as your niche, and what you’ve described as the one thing you do better than everybody else is ultimately an answer to why you exist.

These two concepts are inextricably intertwined. Defining your core focus can take a matter of minutes – or it might take weeks. It’s an answer with two steps. Explain why you exist, and then define what uniquely accomplishes that purpose, cause, or passion.

Remember, Provident’s “why” is “to help entrepreneurs achieve financial freedom.” Our niche is “is building great family businesses.” It’s easy to see how the niche could have started out being defined as our passion – but in the end, it’s what makes us stay focused on what we can be the best in the world at.

Do not pass go

You might be tempted to move on to the remainder of the eight VTO questions if you struggle with reaching a definitive answer about your core focus. Don’t.

Once your core focus is defined, the rest of your answers become more detailed. They’re all based on operating from that sweet spot. You understand why you exist and the one specific thing that sets you apart from the competition. The decisions you’ll make that become actionable steps on your VTO are all based on your core focus.

Read more about why we exist.

The Tax Benefits of Putting Your Kids on Your Payroll

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The family that works together, saves money together

What are your kids doing this summer? While they may just plan on relaxing or having fun with school out, it might be good for them – and you – if you put them to work. Not a lot of business owners know this, but they can get a pretty nice tax break by hiring their own children.

How it works

If you run a business and can find legitimate work for your kids who are under age 18, you can pay them up to $12,000 per year and they won’t have to pay any income tax. The benefit for you is that you will not have to worry about worker’s comp or unemployment insurance.

And, depending on the structure of your business, you may not have to pay any payroll taxes either. The companies that fall into this category are sole proprietorships, LLCs taxed as disregarded entities, and LLCs taxed as partnerships and owned by you solely. This does not apply to corporations, however, though they may be able to do something about that:

How corporations can get around this

With the right strategy, an S Corp or C Corp business may not have to pay payroll taxes on the income of children either. In order to do this, you would need to create a family management company, which would be set up as a sole proprietorship separate from your corporation. You would then pay your children out of this company. And as a sole proprietorship, it would be exempt from having to pay those payroll taxes.

Additional tax benefits

With a child – or children – on your payroll, you get to move income into their lower tax bracket from your higher one. You can also take advantage of business deductions to reduce your tax liability even more.

Just remember that it has to be real work

The word “legitimate” used earlier should not be taken lightly. This means that doing chores around the house will not count. What you hire your kids to do should be directly related to your business, but this doesn’t have to involve anything too complex or taxing.

Mowing a lawn or otherwise taking care of the landscaping would work. They could also do simple tasks like filing or shredding old documents. And if they have some tech skills, you may want to utilize them for your website or social media networks. A younger child who becomes part of your advertising campaign may qualify. Just remember to carefully document exactly what you have them do.

What about paying a spouse?

Another family member some business owners are often eager to put on their payroll is their spouse. But, in many cases, this doesn’t always make good sense. For one thing, you probably won’t save any money on taxes.

If you plan to file a joint return, paying your spouse may give you a business write-off, but it counts as income on your personal return. Plus, there are the payroll taxes to think about. And as for Social Security, in most cases, it is more beneficial for a spouse to claim the spousal benefit than their own.

Questions about putting the family on your payroll? Contact Provident CPA & Business Advisors

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities.

Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on the new tax code, and to find out how we can help your business exceed your expectations.