Why Keeping Accurate Tax Records Is Vital for Business Owners & Professionals

Spending a little time creating tax records and holding onto documentation could save you a lot of hassle in the future.

Business owners and individuals must, of course, retain relevant tax information to file accurately. But you’ll also want to hold onto all of your documentation in case the IRS wants to see it later. 

Saving your receipts, bank statements, invoices, and payroll records proves your income, expenses, and deductions, ensuring you have the right answers when the taxman comes calling. Other documentation you’ll require includes employment tax records and any supporting documentation that proves your financial picture to the IRS.

Keeping this tax information on-hand also makes it possible to deduct more business expenses and, potentially, save you significant money.

Here’s some information on why thoroughly organizing and holding onto tax records is essential to your bottom line:

Which documents you need

Many different recordkeeping systems exist, and the goal of each of them is the same: to show your income and expenses clearly.

As a result, whichever system you employ should include a summary of all of your business transactions and have information on your gross income, credits, and deductions. If you’re running a small doctor’s office, for example, having a business checking account makes it simpler to monitor your income and expenses. If your organization is a little more complicated, you might use a different system.

In addition to the numbers, you’ll need your gross receipts, which can include documentation like deposit information, receipt books, register tapes, your 1099-MISC form, and invoices. 

If you buy items and resell them to customers, including manufacturers that purchase raw material and sell the finished product, records of your purchases are required. Supporting documentation here includes canceled checks, invoices, credit card statements, and cash register tapes. 

Similar documentation can prove your business expense claims, which are any costs you incur, not including purchases, that you require to carry on the business. You’ll also need to substantiate travel, entertainment, transportation, and gift expenses on your return.

Assets are a vital part of your tax records, including your office furniture and any equipment you purchase. In this case, you’ll need documentation showing when you bought these assets, the cost, how you used it, and how and when you disposed of any old assets. If you’ve sold off some business assets, you must also include information on the selling price.

Finally, if you have employees, you’ll have to hang onto your employment tax records for the IRS to review. These records include all wages and benefit payments you make, employee information, and copies of your employees’ income tax withholding certificates.

Organizing all of this documentation in case the IRS wants more information from you can make your life much easier down the line. 

How long you need the records

The amount of time to hold onto tax information depends on your situation. 

If you end up owing on your taxes, you’ll want to keep your records on-hand for at least three years from their due date. After three years, the period of limitations for assessing tax ends, and the IRS can no longer amend a return and demand additional payments.

However, there are always exceptions, as the period of limitations never expires for a fraudulent claim or if you fail to submit your return. The IRS also has six years to audit if they believe you’ve underreported income by 25% or more. As a result, many businesses hold onto their detailed annual financial statements for as long as seven years, just to be safe.

There’s a slightly different employment tax process, and you’ll want to keep these records for at least four years from the date the tax is due or paid, whichever is later.

The gist is that as long as you keep diligent records, file your taxes on time, and make accurate claims, you’ll only need to hold onto your business tax records for at least three years and employment tax records for four years from their due date.

Avoiding fines and saving money

Of course, the main reason you’re keeping all of these records is that you don’t want to get on the wrong side of the IRS.

If the IRS goes back and looks over your tax returns, it’s up to you to prove expenses and deductions. If you don’t have the documentation to verify the return information, the IRS can demand back taxes and issue a penalty for tax underpayment. 

The penalty depends on a business’s structure and the reason the IRS audits you. Your business could also end up paying interest on late tax installments. In short, you don’t want to end up in this situation because it will lead to significant financial losses.

The other benefits of keeping tax records

Beyond using tax records to satisfy the IRS, you can use this information to monitor the business’s progress and provide an accountant with more items to deduct.

In the retail environment, you’ll see which items are selling as you go through these documents, providing insight into any changes that may affect projections. The same can be said for any business type because financial records show managers what’s working and what needs improvement. 

These records also make life easier for your tax professional. The more documentation provided, the easier it is to deduct expenses from a tax bill. For example, executives and investors can use certain travel and transportation expenses to bring about considerable tax savings.

You can even go after tax refunds from past reporting periods if you feel like you’ve overpaid. Taxpayers have three years from the date they filed a return or two years from the date they paid the tax, whichever is later, to revisit a claim. You also have seven years to recover a tax overpayment resulting from a bad debt deduction or worthless securities.

Get the help you need

Taxes can be confusing, but receiving professional advice and assistance delivers a clearer picture of the documentation needed to avoid tax problems. This help can also significantly lower your annual tax bill.

Provident CPA & Business Advisors helps our clients pay the least amount of tax as legally possible. We work with professionals, entrepreneurs, executives, and investors to provide maximum tax savings ethically. Contact us for more information about what we can do for you.

COVID-19 Tax Deductions That You May Qualify For

The COVID-19 pandemic has activated provisions in the Internal Revenue Code (IRC) that could make you eligible for tax benefits for certain relief payments. Learn more about IRC Section 139 and other applicable tax credits.

Section 139 of the Internal Revenue Code (IRC) outlines rules and guidelines for disaster-relief payments. As COVID-19 continues to impact the economy, causing record unemployment numbers and business closures, this section of the tax code has been triggered.

Whether you’re an employer or individual, you could be eligible for certain tax deductions related to COVID-19. While the CARES Act has provided stimulus payments and other benefits to Americans and businesses, these additional tax credits offer further assistance for those struggling during the pandemic.

Here’s an overview of what you need to know about IRC Section 139, the FFCRA, and other tax credits related to COVID-19 that you could be eligible for.

Section 139 and FFCRA relief payments

Section 139 outlines how employers can handle relief payments to employees during a disaster. Applicable payments are those made to staff members who have been directly impacted by the pandemic. This compensation is deductible for the employer and will also be excluded from the worker’s income.

According to Section 139, a qualified disaster relief payment can include the following:

  • Reimbursement or pay for reasonable and necessary personal, family, living, or funeral expenses incurred directly from COVID-19
  • Reimbursement or pay for expenses to repair or rehabilitate a personal home or its contents, which are attributable to the pandemic

Qualifying payments will be free of income, payroll, and self-employment taxes.

Note that emergency relief payments made to employees from charitable organizations are covered under Section 139. This means that if a business makes disbursements through a controlled private foundation and other applicable guidelines are followed, payments will be tax-free. 

The Families First Coronavirus Response Act (FFCRA) outlines how employers can provide paid sick leave or family and medical leave related to COVID-19. If eligible, business owners can claim tax credits on these leave payments made to employees if they had to take time off work because of COVID-19. These provisions are in place from April 1, 2020, to December 31, 2020.

Eligible employers are businesses with fewer than 500 employees, and those required to pay qualified sick leave wages or family leave wages under the FFCRA.

The FFCRA covers employees for: 

  • Two weeks or 80 hours of paid sick leave at the same rate of pay if the employee is quarantined or experiencing COVID-19 symptoms
  • Two weeks or 80 hours of sick leave at two-thirds of their pay if they need to care for an individual who must quarantine or take care of a child who cannot attend school normally

Other COVID-19 tax benefits

If an individual has experienced significant impacts from COVID-19 and has an IRA, they can borrow up to $100,000 from the account and pay it back within three years of the date of withdrawal. This can all be done as if it is a tax-free rollover. There is also no limit on what can be done with the funds during the three years.

Another credit applicable to employers is the employee retention credit. This tax break encourages employers to keep their workers on the payroll during the pandemic. The credit is 50% of up to $10,000 in payments made by an employer impacted by COVID-19. Eligible employers include those whose business is wholly or partially suspended, or whose gross receipts are less than half of the comparable quarter in 2019. Once the receipts reach above 80% of the comparable quarter in 2019, they no longer qualify.

Additionally, the CARES Act allows for deferment of employment payroll taxes. Both self-employed workers and employers can defer social security tax to be paid at the end of 2021 and 2022.

Work with a tax professional to understand COVID-19 deductions

Still have questions about tax deductions related to COVID-19? These changing regulations can be complicated and confusing. Work with a tax professional who can ensure that you’re paying the least amount of tax legally possible. You must always be sure that you’re complying with all applicable laws while taking advantage of any deductions and credits for which you qualify.

The team at Provident CPA & Business Advisors is here to help you during this time of uncertainty and financial distress. If your business is seeing impacts from the pandemic, contact us to find the best way forward. We can help you focus on growth and profit improvement in addition to accounting and tax considerations.

How Physicians Can Protect Themselves Against Tax Fraud

Tax fraud is rampant, and doctors are a targeted group. Here are steps physicians can take to lower the risks

Tax fraud is an ongoing battle for both U.S. citizens and the IRS. Victims often unknowingly share too much personal information that leads to the filing of fraudulent returns—or they provide false data on their returns after receiving bad advice. 

According to a report from the Treasury Inspector General for Tax Administration, there were 30,038 tax returns with approximately $135.6 million claimed in fraudulent refunds as of February 29, 2020.

Doctors are particularly vulnerable to tax schemes. As large earners, hackers target physicians in efforts to steal their tax refunds or engage in other activities that lead to financial gain. Some speculate—especially in years like 2014, when numerous doctors were attacked—that many physicians experience tax fraud because of medical database breaches. 

Stay ahead of the game by learning how to protect yourself against tax fraud.

1. Know the most common attack methods

First, familiarize yourself with how attackers generally commit these crimes. The following approaches are common:

  • Identity theft and fraudulent returns. A standard method for tax criminals involves stealing your personal information so they can submit fraudulent tax returns. 
  • Phishing. Fraudsters often send out communications that appear to be from organizations like the IRS. Be wary of any email or website asking you for your personal information—the IRS will not contact you via email, text message, or social media about your tax refund. 
  • Preparer fraud. Unfortunately, some people who claim to help you prepare your taxes are looking for ways to scam you and steal your identity or engage in refund fraud. 
  • False promises. If someone advises you to falsely inflate your income or expenses to qualify for deductions, it is likely a scam. 
  • Phone calls (aka “Vishing”). Just as attackers will try to email you posing as a legitimate entity, they will also call you to try to get your information or convince you that you need to deal with a tax issue immediately.

Watch out for these tax scam methods and attempts to steal your personal information. Be especially wary of sharing details like your Social Security number.

2. Understand your responsibility 

If you decide to follow bad advice, whether inflating your income or expenses or providing other fraudulent information on your tax return, you and you alone are legally responsible for that false data. It might seem unfair if you were acting on guidance you thought you could trust. But unfortunately, you’re still the party that lied.

If you work with an abusive tax return preparer, for example, that person could defraud you, and you’re ultimately still responsible for the tax return information you provided. Always be cautious when choosing someone to help you prepare taxes.

3. Be aware of the other risks of identity theft

When someone steals your identity for tax fraud purposes, there are other ways the information could be used to harm your practice. Attackers may not stop with taxes and also gain access to your financial accounts. One sign that someone else is using your identity is if you receive more credit card offers than usual.

Avoiding giving out your personal information to sites, organizations, or individuals you cannot verify is essential to reduce your risk of tax-related fraud—and it’s also crucial for other areas of your life and medical practice. 

4. Check your tax records

The IRS website has a resource called Get Transcript that allows you to search for your tax records. Doctors should especially review their tax records to ensure they have not been an unknowing victim of fraud.

Also, keep an eye on all bank and credit card statements and any changes to your credit score.

5. File your taxes as early as you can

Another step you can take to prevent tax fraud is to file as early as possible in the year. When you have all the relevant tax forms needed, don’t waste any time. Filing quickly will reduce the risk of someone filing dishonestly before you can send your legitimate return. If you submit the documents first, the second fraudulent return will be rejected.

Tax fraud is a serious issue for physicians. But you can reduce your risk by understanding how it usually occurs and implementing these steps to protect yourself. 

Always work with a tax professional you can trust. The team at Provident CPA and Business Advisors can assist you with questions, help you protect your assets, and optimize tax-related aspects of your medical practice. Contact us today to learn more.

How to Avoid Sinking Your Succession Plan

Even the strongest business can be decimated without a solid succession plan. Here’s how to avoid common pitfalls

As with any part of business strategy, succession planning is one piece to the puzzle for companies to have a long life. And it’s not a small consideration. Succession planning can drive continued business growth, lead to a smooth transition after retirement, and even reduce taxes. 

But according to a Deloitte report, only 30%  of family-owned businesses make it into the second generation, 12% into the third, and 3% into the fourth and beyond. These statistics don’t count the organizations that failed shortly after an owner sold them—often with financial repercussions to the seller.

Succession plans fail for a variety of reasons, but some of the most common are:

  • Leaving roles undefined
  • Failing to recognize internal talent
  • Not focusing on how the transition itself will work
  • Not planning for a business of the future and likely structural changes

Let’s dig into how to avoid some of these pitfalls:

Clearly define roles

Succession planning is more than just focusing on who will replace the primary business leader. In fact, it should involve all parts of the business. Just as important as naming your successor is figuring out how that change will impact other leaders and managers. You must recognize that succession planning is integral to the entire business strategy.

All units of the business should have a part in the succession plan. Instead of only focusing on who will replace the CEO, also outline who will be succeeding each department head or manager, even if these moments don’t all occur at once. Beyond managers and supervisors, detail which roles within the business are integral to success and include them in the plan.

Clearly define each key role and what specific responsibilities that person will have. Namely, what they’ll be held accountable for, who will report to them, who they will report to, and their role in critical business processes.

In addition to defining crucial roles, identifying who will fill these roles is also an area where many executives fail. Finding the best candidates won’t happen overnight, but many business owners may not put as much emphasis on current team members as they should. 

Pay close attention to internal employees and leaders who show promise. This requires looking at team- and employee-specific KPIs and actual performance results over some time. A management talent assessment should be conducted when you are succession planning so that the company’s next generation will be strong.

Focus on the transition

Make sure that the transitional period is prioritized when planning, not just the eventual outcomes of the shift. This may even require hiring or appointing a pivotal person to lead the transition. They can be involved in succession planning now to understand goals and how to implement the plan when the time comes. 

The transition doesn’t have to be instant, so focus on the concrete steps that will be taken when you’re ready to step down. One important step is communication with stakeholders. As Deloitte points out in the report above, failure to communicate with this group is “one of the biggest threats to a smooth transition of a business from one generation to the next.” 

Incorporate the needs and concerns of other stakeholders during the planning process so they’ll be more aware of and involved in the transition when it’s occurring. They’ll feel like they have a say in the process, and their help and support during the transition are vital.

Consider tax implications

Estate and tax planning can go hand-in-hand with succession planning, especially if a priority is preserving family wealth generated from the business. This requires knowledge about the best approaches to reducing taxes when you’re transferring ownership of the company, which can be easy to overlook for many founders.

Make sure that the current business entity structure makes the most sense for long-term success. The type of structure you choose can impact both business and personal taxation. And how much the company is worth will affect gift and estate taxes, so succession planning should prioritize effectively valuing the organization. 

Accommodate change

One important step is identifying what exactly makes the business valuable. In succession planning, preserving both assets and values should be top of mind, so the entity will continue that legacy and continue to grow. Passing down a company only to have its values changed or forgotten can easily happen when leadership changes hands.

Just as important as outlining key roles and figuring out successors is 1) defining the current operating structure and 2) thinking through how crucial business functions may change in the future. 

What about operations could shift? What will look different as the business becomes larger? What will change about the community the company serves? You won’t know how to identify roles and responsibilities until you can get a clear picture of where the organization is headed. 

Effective succession planning will lead to many benefits for both you and the business you’ve worked hard to build. These include:

  • Long-term survival and growth
  • Agreement among stakeholders, employees, family members, and heirs
  • Taking control of the process now so that it’s not out of your hands when the time comes
  • A smoother transition for everyone across the organization
  • Confidence that you’re leaving your business to the right people who share your values
  • Reduced estate and income taxes

There’s no avoiding the fact that you’ll be exiting from your business someday. Creating a sound succession plan will ensure an exit goes smoothly and achieves your goals.

Contact Provident CPA & Business Advisors to learn more about our advisory services.

The 5 Steps to Financial Freedom

It’s crucial to be equally strong in 5 key areas to maximize financial efficiency and ensure continued growth

Ensuring the financial health of your business relies on the diligent review and management of a combination of factors, not just one or two areas. This involves carefully evaluating where you’ve been and what your numbers look like right now. Only then can you make fact-based decisions about the future of your business. 

Minimizing your tax burden and choosing the right legal business structure are two other ways to be proactive about managing your finances. You must put practices in place that give you the right insights and the power to turn those insights into action.

Here are five steps to financial freedom that we practice at Provident CPA & Business Advisors, and how we approach each area.

 1. The Proactive Management System

First, you won’t be able to plan for where you’re going without knowing where you’ve been and what’s happening right now within your business. This is why we employ the Proactive Management System to focus on two main components:

  • Accounting: We make sure that your accounting process is effective and efficient. You need a method in place that will always be accurate and also provide the insights you need to keep improving.
  • Putting numbers to work: We help you take the critical numbers you’re tracking and combine reports into a simple, automated dashboard. This enables you to always see and use your most important financial metrics.

Our system helps you understand your cash flow, identify areas where you could make changes, and take the right steps to keep growing and improving.

 2. Tax minimization

Many individuals and businesses overpay in taxes each year without knowing it. We help our clients pay the least amount of tax legally possible through a concerted review of your situation and devising a strategy that matches it. Our 5 Star Program™ helps you create a long-term plan for tax minimization that enables growth.

Examples of tax-saving strategies include taking advantage of the gift-tax exclusion, understanding and applying deductions for entertainment and travel, the tax benefits of charitable giving, and many others.

It’s also important to know the tax implications of the different types of business structures, whether you want to form an LLC, a sole proprietorship, a partnership, or a corporation. Each has its own pros and cons for taxes, and we’ll help you select the option that fits your needs and goals.

 3. Growth and profit improvement

At Provident, we’ve come up with a structure to help you scale and financially succeed. Our plan revolves around these components:

  • KPIs: Identifying the most critical key performance indicators (KPIs) for your business is the first step to success. Monitor your progress and view business data that will help you make better decisions.
  • Critical drivers: What are the vital drivers of your business? There are between three and five essential components that we’ll help you identify and measure.
  • Budgets: Keeping a rolling 12-month budget helps you understand what’s happening each month and where you can improve.
  • Forecasting: The budget is linked to 12-month forecasts so you can keep tabs on revenue and plan more effectively.
  • Financial statement review: We review and analyze all financial transactions, so nothing is unclear.
  • Cashflow planning: Prioritize real-time planning by focusing on your future cash flow.

These are all important areas that need to be reviewed regularly for continuous business improvement.

 4. Succession planning

Part of ensuring your business lasts for the long term involves creating the right succession plan. It’s not always easy to imagine how things will operate after you’re gone. But you likely don’t want the business to fail when you’re no longer running things—especially if you’re keeping it in the family, or a successful sale is tied to its continued financial performance for an agreed period. 

Start succession planning now. Key considerations when creating your succession plan include what individual will take over, the precise steps taken during the transition, and what to do if something changes. Other related strategies we help you with include selling the business, estate planning, minimizing taxes at the time of death, retirement planning, and buy/sell agreements.

 5. The EOS Model

The Entrepreneurial Operating System (EOS) is an effective method we use to help our clients. The model is centered around the idea that if you can clarify and achieve your business’s vision—and implement concerted steps along the way—you’ll find long-term success. 

There are six components of EOS:

  1. Vision: Everyone involved with the business should be on the same page about what they’re working toward.
  2. People: Every individual on your team must align with the vision and strengthen the organization.
  3. Data: Identify and track the numbers that provide an objective measure of success.
  4. Issues: Problem-solving in the right way is a crucial component of a well-run business.
  5. Processes: Identify the core processes that truly drive your business. Each department and each team member should know what to do, and these procedures should be transferrable and repeatable.
  6. Traction: Continuous growth is driven by discipline and accountability. Ensure you maintain traction by mastering the art of execution.

5 steps to financial freedom—exponential results

These five steps drive our values and services at Provident CPA & Business Advisor. We ensure that you aren’t leaving money on the table come tax time and continuously taking proactive steps to understand and improve your business.

Contact us to learn more about how we can help.

Every EOS® Step, Explained

Learn the six steps of the Entrepreneurial Operating System® (EOS) and how to use them when planning for business growth

The Entrepreneurial Operating System (EOS) is used by founders and businesses to improve processes and set up a successful path to long-term growth. The concepts and tools presented in EOS help teams become more aligned and enable a company to identify and harness its strengths and weaknesses. 

EOS can be broken down into six key steps: vision, people, data, issues, processes, and traction. Here’s what you need to know about how they play out in practice. 

 1. Vision

Part of creating a successful growth plan is making sure all team members are on the same page. By defining a clear vision—a statement that aligns your company’s mission, core values, purpose, and goals—and communicating it across your company, your people will come together to work toward shared objectives. 

Start by assessing your organization:

  • What are your strengths and weaknesses?
  • What makes you unique?
  • What are your problem areas?
  • What are your long-term goals? 
  • Who do you serve, and why?

Asking these questions will help you nail down your purpose and vision and put it into words. 

 2. People

Of course, you won’t get anywhere without the right people behind your brand. Make sure you’re surrounding yourself with individuals who will help you fulfill your vision. They need to be driven, capable, and passionate about what your company is doing.

Start with your recruiting process. Create screening questions and interview topics that show you not only a person’s qualifications and experience but their commitment to the same concepts that your company is all about. Focus on more of a culture-fit interview style when hiring, and less on a strict resume review. 

Paying closer attention to the people you bring on board will help you create teams that align on goals and values, and employees will be more likely to stick around. Use the EOS People Analyzer to identify if someone will fit in with your culture and be the right person in the right seat.

 3. Data

It’s not enough to hire the right people who all follow the same vision and core values. To grow and improve the business, you need to analyze real numbers that gauge your efforts’ success. Using data to drive your decisions, you can avoid guesswork and use facts to keep moving forward. 

Understand the numbers behind the business by putting data-gathering and analytics processes in place. You can view areas of weakness, such as slow response times or low sales numbers during certain times of the month. This gives you the power to address the problem where it starts and opens up opportunities for remedies like further training and process improvement.

 4. Issues

Success can’t happen without failure. Along your journey, and you and your team will face obstacles and challenges. There’s no avoiding it. But if you recognize this now, you can create plans for problem-solving that will help you get through those tougher times. 

Start by accepting these issues, instead of denying their existence. Embrace the mindset that you can learn from mistakes. Instead of punishing someone who takes a misstep, present the situation as a learning opportunity that everyone can benefit from.

 5. Process

Your day-to-day workflows drive results, and all systems should all be geared toward the same goals. Identify your core processes—those that directly impact outcomes and keep the business running. Ensure that your processes are consistent and robust, as this is the only way you’ll be able to scale.

People involved in each process should know their role in both the specific procedure and where that role fits into the overall business. This gives them a sense of purpose, both on a granular level and a big-picture scale. 

 6. Traction

Don’t get caught up in a lofty vision for your brand without evaluating how you’ll get there. Create traction by making your goals a reality with small steps that lead to substantial outcomes and successes. 

Creating traction starts with implementing practices for accountability and discipline into all of your teams. Stress efficiency and cut out tasks or processes that don’t serve your objective. Traction is about executing daily goals and operational tasks that lead to faster and continuous forward movement.

The benefits of mastering the six EOS steps

When you’re able to take these steps—fully implementing the EOS principles—your business sees the following benefits:

  • Use a holistic model that strengthens the entire business, not just one aspect or department.
  • Get to the root of your problems to better address them—permanently.
  • Apply essential tools and concepts that you can use for years to come.
  • Foster focus, discipline, and accountability across your teams.
  • Assess and identify what’s most important about your company. 
  • Create better goals using actual numbers that define business performance. 
  • Improve productivity and work quality by delegating the right tasks.
  • Experience consistent growth and increased revenue.

At Provident CPA & Business Advisors, we help small businesses master the concepts and tools in EOS. We start the process with a free 90-minute meeting, which helps us understand your organization and customize the system to your company. Contact Provident to learn more about our growth and profit improvement services. 

The Fine Art of Estate Equalization

Crafting an estate plan that satisfies all of your heirs can be challenging. An unequal estate could mean that your legacy is compromised, especially if you own a business. Consider every angle in advance for the fairest outcome.

One of the trickiest components of estate planning can be knowing how to divide assets among beneficiaries.

It’s wise to revisit your estate plan to ensure equalization. It’s not enough to focus on tax implications, especially if you have a large estate or a business to pass down the line. While creating a truly equal inheritance plan can be challenging—especially when only certain heirs can perform specific responsibilities for your estate or business—an approach like utilizing life insurance could be the answer.

What is estate equalization?

Estate equalization does not necessarily mean that all heirs receive the same amount of money or proportion of assets after you’re gone. It means that the value of what they receive after you die is equitable and equal in value.

Value can mean different things to different heirs. For example, some family members may care more about a property or possession for its emotional worth, not its monetary value. Of course, these values and priorities can be hard to measure, making it even more challenging to create an equal and fair estate plan.

Equalizing a business legacy with life insurance

If you run a business and hope that it continues in the family for generations to come, there are some special considerations when estate planning. The fact is, some of your heirs may not always want to be part of the company. When you are gone, it’s not as simple as dividing up what the business is worth. It is not a liquid asset.

You first need to create a succession plan that outlines who will take over and what roles and responsibilities other heirs will (or won’t) have.

When it comes to estate planning, you may think that your two options would be to leave the business to all heirs equally or leave it only to the children capable of running it. But these two options are not always equitable.

If specific children or family members are involved in your business, and others aren’t, one solution is creating equalization via life insurance. This means setting up a plan so that the heirs involved in the company will get equity passed down to them. Heirs who are not will be able to receive the same value of inheritance from life insurance benefits, as well as assets unrelated to the business.

It’s a delicate combination that must be planned with care, mainly because the non-business liquid assets will be unequally distributed to make up for the business inheritance.

Without ensuring that the inheritance plan is equal and fair, your legacy—and the future of the business you’ve created—will be uncertain. It’s crucial to plan ahead.

Primary goals are to protect the business after you’re gone with the right leadership and ensure your family members will not end up in conflict with each other.

Creating an estate equalization plan

These matters can be complicated and emotional. You may decide to involve your children or other family members in the planning process to understand their commitment to the business or the sentimental value of a particular property. To ensure that your family can peacefully uphold your legacy after you’re gone, it’s wise to understand their priorities and goals. You can then start understanding how to balance liquid and illiquid assets.

Other considerations are related to avoiding a significant tax burden for your family when you pass away. The professionals at Provident CPA and Business Advisors can help with the tax aspects of estate planning.

Contact the Provident team to learn more.

How to Optimize Tax Strategy for Retirement

It’s never too early to start preparing for retirement, including when it comes to taxes

Whether you’ve just entered the workforce or have recently retired, saving and planning for retirement is an ongoing process. Though 57 percent of Americans say that saving for retirement is their top financial priority, nearly 19 percent of people over age 65 are still working either part- or full-time. Many people start planning too late, or just don’t take the right steps to succeed once the time comes.

While taking any step toward retirement savings is important, one of the most significant components is learning the tax pros and cons for each of your options. Making the right moves can end up saving you a lot of money in the long run.

These suggestions will help you optimize your tax strategy:

Analyze tax brackets and expenses

A first step in optimizing taxes in retirement is understanding what tax bracket you’re in—or which one you plan to be in. Then, take a look at your expenses. What can you cut back on? Try to lower your costs to stay in a lower tax bracket, and you won’t need to withdraw larger sums from retirement savings accounts. Withdrawing less, of course, means that you’ll pay less tax.

Understand Social Security income tax

Social Security income tax is different than regular income tax. If your Social Security income is over $25,000, or $32,000 for married couples, it will be taxed. Up to half of this type of income could be taxed, and up to 85 percent, if your income is $34,000 or above ($44,000 or higher for married couples).

These numbers are calculated based on adding your other retirement income to half of your Social Security income. So, to avoid paying these taxes, make sure you know how to balance all of your retirement income effectively. Working with a tax professional can help you understand the requirements.

Medical expenses

If you have significant medical expenses in retirement, you may qualify for itemized deductions for the unreimbursed eligible medical expenses that are over 10 percent of your adjusted gross income. Eligible expenses could include necessary aids and equipment, visits to your doctor, testing, or Medicare premiums.

Take advantage of charity tax breaks

You’ll be required to pay income taxes on distributions from your traditional IRA. But if you can live without some of that income, you can opt to donate funds directly to a charity. These charitable contributions won’t count toward your income, so you won’t have to pay income taxes on them.

Another route is to donate securities to charity. You can then deduct the amount of the appreciated investment, which is more tax-advantageous than selling the investment and then giving a portion to charity.

Contribute to retirement accounts while in “retirement”

If you’re retirement-age but still working, you are likely still able to contribute to a 401(k) to save for later retirement years. You can make those contributions and defer paying taxes on them now.

Another option is to put money into a Roth IRA. You’ll have to pay taxes on contributions now, but this avoids paying them when you’re withdrawing from the account.

Required minimum distributions

Once you reach 70½, required minimum distributions from applicable retirement accounts begin. Make sure you’re withdrawing the right amount regularly. Otherwise, you’ll have to pay a steep penalty, which is 50 percent of the required withdrawal amount. This is a big mistake with expensive consequences.

Careful, long-term tax planning

It’s essential to not only analyze your current tax bracket but to make projections for the future based on how tax rates will change. Long-term tax planning allows you to manage your sources of income to save the most possible. You will better understand when to withdraw money from which accounts, and how to manage your investments to limit taxes.

Work with a tax professional

When you’re creating a tax strategy for retirement, an experienced professional who knows the rules can help you pay the least amount legally possible.

Provident CPA & Business Advisors offers tax minimization services that can help you devise an effective tax-minimization strategy. We also offer tips on retirement savings and succession planning strategies for your business.

Contact Provident today with questions and to learn more about our services.

How to Identify and Track the Critical Drivers in Your Business

Critical drivers are your business’s core items that maintain momentum and spur growth

The successful operation of your company depends on a set of critical drivers, those core items that keep a business moving and growing. Taking the time to identify these drivers helps you better manage your teams and your business while helping you evaluate the right metrics.

Start putting more time and energy into the most valuable areas. Also known as value drivers, critical drivers should be clearly identified and tracked to have more visibility into what’s happening.

Identifying critical drivers

Critical drivers are the processes that most impact value and efficiency. These are the behind-the-scenes gears that keep things functioning. So how do you identify these items?

There are generally three types that are directly related to value. Growth drivers are processes within the sales, marketing, and business development areas; efficiency drivers are those within operations, and financial drivers are finance processes.

To be considered a critical driver, these processes must be measurable and illustrate performance and progress. They also must be controllable. Here are two questions to ask when identifying critical drivers:

  • How much do changes in this process or component impact the business?
  • What factors can be controlled by management versus by the market?

Think of all the components of your business like a flow diagram, in which one concept breaks into two others, and so on. Thus, if priorities within your business are working toward growth and profit, start there. Then, outline each component that drives profit. Within those components, like sales, break it down further.

Once you identify the components of your business, you can define the critical drivers within those categories. What processes are most closely tied to your company’s core values and vision? Which processes have the most impact on profit and company value?

All organizations will be different, so there’s no one formula. To start, try to nail down three primary activities that drive your business.

Tracking critical drivers

Tracking key performance indicators (KPIs) is just as crucial across departments and processes. But these metrics are especially important for critical drivers and will help you isolate your main value drivers.

There may be many components that comprise a key process for your business. And while all relevant performance metrics should be tracked and monitored, set up additional measures for the most valuable drivers. Focus on ways to improve these metrics, and improvements to revenue, sales, or profit will follow.

For example, factors driving your sales numbers include KPIs like the number of new customers, the number of leads, the number of conversions, and the number of customers retained. These metrics are tracked over a given period so that changes, like new marketing strategies, can be evaluated. For example, focus on sales KPIs that have the most significant impact on moving sales numbers.

Set clear objectives and benchmarks for each critical driver you define. If you’re not hitting the goals, focus your energy on improving that element. It may take trial and error to see the results you want, but it’s a huge step to simply know where you should be focusing.

Give your time and money more value by prioritizing the core processes that have the biggest impacts on success.

A business advisor can help

One of the easiest ways to identify and track your critical drivers is to work with a professional advisor. These concepts can be challenging to grasp, especially for new or smaller businesses. An advisor can help you isolate value drivers and assist in putting methods in place to track and analyze the performance metrics.

The team at Provident CPA & Business Advisors can assist you in reviewing practices and performance numbers. We utilize the Entrepreneurial Operating System (EOS), which involves nailing down the six essential components of your business: Vision, People, Data, Issues, Processes, and Traction. We’ll make sure you’re tracking KPIs and focusing on critical drivers that can lead to long-term growth and success.

Get in touch with Provident today to learn more about our services.

How to Build a Better Business Budget

The rolling budget model allows you to actively respond to changes, assess strengths and weaknesses, and revise spending strategies.

Finding the right approach to budgeting is not always straightforward. There are several techniques that small to large businesses can integrate to plan for upcoming expenses and changes in revenue. Effective budgets not only provide essential visibility into cash flow and expenditures, but also show what continued growth, stability, and success will look like.

Traditionally, budgets are created in advance of a long-term period, such as a year, and they remain relatively unchanged until that same date rolls around again. While this does work for some businesses, there is a more flexible approach.

What is a rolling budget?

A rolling budget is updated regularly, as opposed to a static or traditional budget that’s set up in advance of the year ahead and not significantly altered for that period. The rolling budget model is continually updated for the next short-term period so that it is managed based on actual data and any business changes.

For example, a budget may be created for the next 12 months. But after each month or quarter completes, the budget is revised based on that period’s performance and new projections. The new budget still includes the next 12 months, but it has changed to make it more accurate and actionable.  The rolling budget allows for flexibility and month-by-month revisions based on a shifting market or updated priorities.

The benefits of a rolling budget

The biggest plus is that a regularly updated budget can help a company spend more wisely based on what’s actually happening, rather than adhering to a static projection during changing conditions. Strengths and weaknesses are more apparent, and that information can be used to improve approaches to expenditures.

Another benefit is added visibility. When spending and sales are analyzed regularly, whether monthly or quarterly, the business gains a much better sense of how their practices are working—or not. Trends are better assessed, and a more accurate budget can be put in place to reflect real insights. For example, if one season of the year has much different sales numbers than the others, this knowledge helps inform future years’ budgets and business practices.

A rolling budget also allows the entity to adapt to market changes or new technologies that must be implemented to improve efficiency or contribute to growth.

It’s important to note that this model does take extra time for team members. It’s more involved than a static budget, so some businesses aren’t willing to invest additional time and energy. However, it gives managers much more control over planning, which impacts both the short- and long-term success of budgeting and cash flow management.

Getting back to budgeting basics

While a rolling budget is a departure from the more traditional, static budget, there are still some basic practices that should be implemented for any plan.

1. Round up expenses

Planning for expenses isn’t a time to be modest. Unforeseen business costs are common, and the fees from vendors and other partners are always increasing. When projecting expenses, overestimate the costs so that you’re prepared. It’s better to overbudget than underbudget.

2. Include employee time

Estimating costs should involve assessing the time employees or contractors will spend on specific tasks, projects, or clients. Don’t forget to include these projections in the budget.

3. Involve other departments

Don’t approach the budget on your own. Depending on your business’s size, you’ll need to involve all departments in collecting data, such as marketing metrics that impact sales. Creating the budget should be a group effort so that everything is represented accurately, and everyone is on the same page about their portion of it and approved expenditures.

4. Research competitors and the industry

Research what your competitors’ spending looks like and any changes your industry sees, especially if you’re just starting out. This data can impact your spending and revenue, and keep you on top of what’s ultimately happening for consumers.

5. Cut back where you can

Ensure that each time you evaluate and update your budget, you’re looking for ways to cut back on expenses. A rolling budget allows you to respond to any months of poor performance by assessing what’s necessary and what isn’t.

6. Work with a professional

Hire a financial expert who can help you take a look at your cash flow and create a budget that is not only realistic, but that also ensures you’re on the path to growth.

Get in touch with the team at Provident CPA & Business Advisors today to meet with our experienced team. We provide entrepreneurs and small businesses with profit management services that promote growth, stability, and continued financial success.