Studies show that only 30% of family businesses survive the transition from the founder’s generation to the next generation. Of the companies that weather such transitions, less than half successfully transfer the business to a third generation. Such statistics demonstrate the importance of succession planning, a task that can be especially difficult for small businesses. Ownership and management of such firms are often vested in the same person or small family group, so identifying and grooming those who will lead the company forward is critical and fraught with risk.

What factors should a business owner consider when evaluating potential successors?

First, you’ll want to know whether the candidate shares your values and vision for the firm. Perhaps you’ve built a reputation for strong customer service and paying bills on time. If your successor lacks that same commitment, your customer base may crumble. Vendors who for years have trusted your company may become less responsive to the company’s needs. Also, any potential successor should exhibit certain minimum technical competencies. He or she may not be expert in every aspect of the business, but any candidate should have a basic understanding of your critical operations, accounting systems, and products.

A family member who’s grown up with the business and has a strong interest in its future profitability may be a great successor. But just because your son shares a bloodline or name, don’t assume that he has the skills, temperament and motivation to nurture your company. Many firms crash and burn when junior takes over the helm.

In many cases, a family member — although the best choice for the long term — must “pay her dues.” That may mean spending time at another company, obtaining formal education in business or accounting, working her way up from the warehouse to the sales department to the executive offices. If possible, potential successors also should work alongside existing management for a transition period before assuming full management responsibility.

Remember as well that your successor will not operate in a vacuum. To make the transition as smooth as possible, your choice of a successor should be clearly communicated to employees, well in advance of the full transition. In a best case scenario, handing over the reins of your company should be a gradual and natural process — for employees, customers, suppliers, and anyone directly involved with your business.

If you need help with this important decision, give us a call. 970-207-9724

Remember August 8, 2011?

That’s the day the Dow Jones Industrial Average fell more than 600 points after the first-ever Standard & Poor’s downgrade of U.S. debt. The Dow’s one-day drop was its biggest point loss in a single day since December 1, 2008, and the sixth biggest point drop in its history. On that day the Dow closed down 634 points (5.6%) to 10,810. That single day’s decline in stock values wiped out about $2.3 trillion in investor wealth in the U.S. What happened to investors who panicked and sold their stocks or stock mutual funds that day? By letting emotions control their investing decisions, they locked in their losses.

According to studies in the field of behavioral finance, various biases tend to drive our investment decisions. For example, many people succumb to “anchoring” bias. That’s the irrational decision to hold on to something — a stock, a car, a piece of information — just because you already own it. Or you might fall prey to “recency” bias, the assumption that events in the recent past are a reliable predictor of the future. The stock market’s been going up, up, up. So you jump on the bandwagon, assuming that the next twelve months will mirror the prior year. Don’t count on it. When emotions rule the day, investment portfolios suffer.

To curb emotional investment decisions, consider the following two time-tested strategies:

• Dollar-cost averaging. This is a strategy in which equal dollar amounts are invested at regular predetermined intervals. Percentage contributions from your biweekly paycheck to a 401(k) account are a good example of this type of investing. When the market’s falling, you buy more shares in a stock mutual fund because the price of those shares is falling. Conversely, when the market’s climbing, you enjoy the appreciation of your existing shares and buy fewer shares at premium prices.

• Diversification. Because markets seldom move completely in unison, the strategy of investing in different industries, different countries, and different types of investments (stocks, bonds, and real estate, for example) can help reduce risk without substantially diminishing overall returns.

Above all, be honest with yourself. Sometimes a trusted advisor can provide an objective set of eyes to steer you away from poor investment decisions. You might also want to keep a journal to help you slow down, analyze your investment decisions, and allow your emotions time to cool off.

How important is location to business success?

For years, real estate developers have recited the mantra of “location, location, location,” and start-up businesses do well to take heed. Location is often the single most important determinant of a company’s success or failure. Place your brick-and-mortar building in a prime locale and, other things being equal, the firm will have a greater chance of accomplishing its objectives. Set it down in the wrong place, and the business may struggle for years.

What factors should you consider when deciding where to locate your fledgling business?

• Type of company. If you’re starting a roofing business that plans to provide services at clients’ homes, location may not be as important as, say, a barbershop that takes walk-in customers. The same might be true of a company that deals mainly with suppliers and vendors (a wholesaler, for example) versus a firm that generates revenue from drive-by traffic.

• Demographics. A careful study of your customer base should factor into the location decision. A child care service that caters to busy professionals will need a location that makes drop-off and pick-up easy and secure. A store that sells geriatric supplies to senior citizens may want to make easy access a priority. If your customers are mostly teenagers, a mall setting may fit the bill.

• Competitors. Ever notice how fast-food restaurants are often clustered along the same highways or near the same malls? Hotels and motels often locate near each other as well, in close proximity to airports and freeways. It may seem counter-intuitive, but placing your storefront close to your competition is often a wise choice. You can take advantage of your competitor’s marketing, and customer traffic they’ve generated may spill over to your store. If Home Depot doesn’t stock that widget, your specialty hardware store is just around the corner.

• Affordability. Be realistic and find a location you can afford. A spot in an upscale mall might be great for snagging boutique customers, but if those clients don’t bring in substantial revenue, rental costs may eat your business alive. You might be better off locating on a busy street near your target demographic. By renting a more affordable space, you’ll ensure that more of your income stays in the company.

Above all, remember: There’s no substitute for doing your homework — before you put down roots.

Late filing penalties

Sometimes smart people forget to do smart things — and when taxes are involved, a lapse of memory may be costly. For example, two penalties can apply if you forget the federal income tax filing deadline.

1. The failure-to-file penalty is assessed each month or part of a month from the due date until you submit your return. The penalty is calculated on the net amount of tax you owe — so no tax due means no penalty.
2. The failure-to-pay penalty comes into play when you owe tax but fail to pay it by the due date of your return. This is true even if you received an extension of time to file the return.

When both situations apply — that is, you did not file a return and you would have owed tax if you had — the penalties can be combined.

The failure-to-file and failure-to-pay penalties may be abated when you have good reason for forgetting to send in your return and/or your payment. What’s a good reason? One example is when paying the tax would cause undue hardship, such as a situation where you are forced to sell property at a sacrifice price.

An extended period of unemployment may also qualify you for relief. As an illustration, you could request a one-time extension to pay your 2011 income tax if you were unemployed for 30 consecutive days during the fifteen months prior to April 17, 2012. The extension may also be available if your 2011 business income dropped by 25% or more due to economic conditions.

Give us a call if you haven’t yet filed your return or paid your income tax for 2011 or an earlier year. We can help you find a payment option that will keep the penalties to a minimum.

Gambling income is taxable

Think it’s a good bet that Internet gambling will soon be legal in your state? One thing is sure: A payoff from that wager, or any other, is taxable income. So are prizes from bingo, lotteries, raffles, and radio station contests.

Those winnings, and others, are taxable whether or not you receive Form W-2G, “Certain Gambling Winnings,” from the sponsor of the wager or contest. It doesn’t matter how much you win either. On your federal income tax return, all your lucky bets are ordinary income, taxable at your regular rate.

What about unlucky bets? Gambling losses are deductible — as long as you itemize. That means you’re not allowed to subtract your total losses from your total winnings and report the net amount on Line 21 of your federal Form 1040.

Instead, you claim some of your losses as an “other miscellaneous deduction” on Schedule A, Itemized Deductions. Why only some losses? Because the rules limit the amount you can deduct to the total of the winnings you report.

A minor consolation: Gambling losses are not subject to the two-percent-of-AGI haircut, so the only limitation is the amount of your winnings. Of course, you’ll also need to be able to support your total claimed losses with records such as the actual vouchers or a log book.

Give us a call before you cash that winning  ticket. In addition to helping you sort out the tax reporting, we have planning suggestions so you can keep more of your windfall.

Save on pet costs

Studies have shown that over 60% of all families in the United States own a pet, and pets aren’t cheap. The cost of basic food, supplies, medical care, and training for a dog or cat often runs $700 to $875 annually. Add to that surgeries, grooming, kennel boarding, and miscellaneous costs, and you may end up spending $10,000 or more to keep your pet healthy and happy throughout its life. Fortunately, many of the costs associated with responsible pet ownership can be controlled or at least reduced. Here are a few ideas.

• Buy a mutt. Besides being cheaper, mongrel pets often have fewer health problems than purebreds. One study found that caring for a mixed-breed dog was about a third as expensive as caring for a pet with a sterling pedigree.

• Get it spayed or neutered. Animal shelters often provide this procedure at relatively low cost. Unless you want to open a pet store, this step should be first on your to-do list. Getting your dog or cat “fixed” may also mean fewer health problems down the road.

• Buy food in bulk. For most pet owners, food is their largest ongoing expense. So reducing that cost often generates the greatest savings. Although big-box retailers offer substantial cost reductions for large quantities of pet food, it always makes sense to shop around. (Specialty stores have sales, too.) Generally speaking, the more you buy, the cheaper the food. But be careful. Though there’s no legal definition of “premium” in terms of pet food nutritional quality, think twice before grabbing the cheapest bag off the shelf. Long-term health problems may result from routinely feeding non-nutritional meals — food that’s mostly filler — to your dog or cat.

• An ounce of prevention… Regular exercise and routine veterinary visits often reduce long-term health care costs. And don’t forget their teeth. Severe gingivitis may lead to serious health problems in your pet, including kidney and lung disease. If you don’t want to brush your dog’s ivories, consider dental chews that release teeth-cleaning enzymes.

• Go cheap on toys. Shopping at your local dollar store can save lots on balls, chew bones and all those other baubles your pet adores.

• Go slow on pet insurance. Budgeting and contributing to your own “pet emergency fund” may be cheaper than paying insurance premiums. Do the math before buying.

Foreclosure may require more tax forms

If you went through a foreclosure or had home mortgage debt forgiven last year, you might have income to report on your federal tax return — and you might see forms that are new to you.

• Forms from the lender. You may receive Form 1099-A, Acquisition or Abandonment of Secured Property, when your lender forecloses on your home or you give the lender a deed-in-lieu of foreclosure. Form 1099-A shows your outstanding debt and the fair market value of the property when the lender took it back.

  You use Form 1099-A to determine the amount of gain or loss from relinquishing your home.

  Did your lender forgive all or part of your mortgage? In that case, you’ll also get Form 1099-C, Cancellation of Debt, which reports the amount you no longer have to repay.

  Note: When foreclosure occurs in the same year as debt is forgiven, lenders are only required to send Form 1099-C.

• Forms filed with your federal income tax return. While cancelled debt is generally taxable, debt forgiven on your principal residence can be excluded from income on your federal return. Form 982 tells the IRS you qualify for the exclusion.

  In addition to income from cancellation of debt, a foreclosure is considered a sale of your home and can result in a capital gain or loss.

  As you know, you can generally exclude gain from the sale of your principal residence (up to $500,000 when you’re married filing jointly). However, to report the foreclosure you may need to file a form that’s new for 2011: “Form 8949, Sales and Other Dispositions of Capital Assets.”

Foreclosures of property other than your home and cancellation of income from debts such as credit cards require additional reporting. Please give us a call here at Dye & Whitcomb, LLC, Fort Collins Colorado CPA’s We’ll help you work through the tax issues.  970.207.9724

The temporary reduction in the FICA tax rate that began in January 2011 as a replacement for the “Making Work Pay Credit” has been extended through December 2012. The 2% rate cut applies to wages, salaries and self-employment income of up to $110,100.

• If you’re an employee, your portion of FICA wages — the part deducted from your paycheck — will remain at 4.2% for the rest of the year. There’s no effect on your future social security benefits, and no need to change your withholding allowance certificate (Form W-4).

• If you’re self-employed, the combined rate for your 2012 self-employment taxes will continue to be 10.4%. In addition, you may have noticed the federal tax deduction you claim as an adjustment to income was revised on your 2011 income tax return to reflect the new self-employment tax rate. That revision applies to 2012 as well.

• If you’re an employer, your portion of the FICA tax has not changed. You’ll continue to pay the 6.2% “match” on your employees’ wages.

• One change to note: The recapture provision affecting high income earners that took effect in January 2012 was repealed.

Got payroll tax questions? Give us a call. We’re ready to help.

New foreign investment filing is required.

 New form alert! If you own foreign investments, you may have an additional federal tax filing requirement this year. Form 8938, “Statement of Specified Foreign Financial Assets,” is due April 17, 2012, and is filed as part of your individual tax return. You’ll use Form 8938 to disclose interests in certain foreign financial accounts when your ownership exceeds the reporting requirements. What are the reporting requirements? They vary depending on where you live and your filing status.

For example, say you’re married and live in the United States, and you’ll file a joint tax return for 2011. You’ll include Form 8938 with your tax return when the total value of your reportable assets on the last day of 2011 is more than $100,000, or if the value exceeds $150,000 at any time during the year.

 Tip: In some cases, you may also need to file Form 8938 for tax year 2010. Reportable assets include investment accounts you own that are held in foreign financial institutions, interests in foreign entities, and stocks or securities issued by foreign individuals or companies. You’ve probably noticed the reporting requirements are similar to the “Report of Foreign Bank and Financial Accounts” (FBAR), a separate return you may already be filing. Be aware the new Form 8938 does not replace the FBAR, which you’ll still need to complete by June 30. Penalties for failure to file Form 8938 start at $10,000. We urge you to contact us here at Dye and Whitcomb LLC so we can help you evaluate your filing requirements for foreign investments.

Income tax rules affect your Web business

Did you start an online business in 2011? If so, you might have income and expenses that affect your federal income tax return.

Here are three items to consider.

• Home office deduction. Do you use part of your home or apartment on a regular or exclusive basis for conducting your web business? Do you have a separate studio or other freestanding building where you work exclusively in your business? Do you store your business inventory in a specific place in your home?
  Answer yes to any of those questions and you may be able to deduct part of the cost of utilities, insurance, and repairs made to your home.

• Payments to independent contractors. Paying a vendor to create your web site or handle administrative tasks means you may need to file information returns — generally Form 1099  — to support your deduction.
  You’re required to send copies to the vendor as well as to the IRS.

• Documentation of expenses. Though your business is online, you probably use your vehicle for work-related errands or sales calls. Track your mileage to determine whether you should calculate a deduction based on actual expenses or the standard mileage rate.
  For 2011, the standard rate for business miles was 51¢ from January 1 through June 30. The rate increased to 55.5¢ from July 1 through December 31.
  Another expense to document: Telephone use. For a land line, you can deduct the cost of long distance business calls. The regular monthly charge is not deductible unless you have a dedicated business line.
  For your cell phone, keep records of business usage so you can deduct that portion of your bill or plan.

Give us a call for rules on claiming other expenses related to your online business, including merchant fees, start up costs, and website development