Tyler R. Martin, CPA Newsletter

Tyler R. Martin, CPA
1080 Minnesota Ave., Suite 1
San Jose, CA 95125
408-293-8880
www.TylerMartinCPA.com

Special New Year's Edition: The Small Business Times

How to Make 2005 a Successful Year

The great thing about being a CPA is that I get a bird's eye view of numerous businesses - the good, bad and ugly.

The other night I started to think about the traits that my most successful clients have. I decided to write an article sharing the most common traits my successful business clients demonstrate.

A Passion for Their Business. When I think about my successful clients, they have a passion for their business. They convey confidence and a level of expertise with their business that flows out of them naturally.

Being Different. Successful clients differentiate their product or service. In a society with a million businesses doing the same thing, it is dramatically important you carve your own feel to your business.

Over Deliver, Under Sell. The bad news is you have a lot of competition out there. The good news is that most of your competition is not very good at what they do. When you consistently exceed your customers expectations, in most cases, you will have a customer for life.

Proper Business Planning and Goal Setting. With the start of 2005, now is a great time to start. The clients that do well are the ones that lay out a plan. A good plan should be broken down by week, month and year so you can keep on track. A good resource for doing this can be found at www.onepagebusinessplan.com.

Understanding the Financial Side of Your Business. You don't need to be a CPA but you should understand the numbers of your business. I had a potential client call me recently and after we spent some time talking about his lack of profit, it became apparent he was actually pricing his product at a loss.

In closing, it is my belief that if a business has these traits, it will dramatically increase its odds of success.

My best wishes for a successful 2005.

Newsletter Spotlight

Successful Businesses

5 Ways to Lower Your Taxes

4 QuickBooks Tips

Questions and Answers

Guest Interview, Jon Brooks

Reading Corner

Helpful books for the business owner:

The E-Myth Revisited

Jump Start Your Business Brain

2005 Important Tax Dates

Jan 15 - 2004 Q4 Tax Estimates
Jan 31 - 1099s and W-2s
Mar 15 - Corporate Returns
Apr 15 - Personal Returns
Apr 15 - Partnership Returns
Apr 15 - LLC Returns
Apr 15 - 2005 Q1 Estimates

5 Ways to Lower Your Taxes for 2004 and 2005

Please make sure you fully understand the following concepts before applying them to your tax situation. These are common strategies business owners can use to lower their taxes:

Defer Income. If you are in a high tax bracket in 2004, it may make sense to defer the receipt or billing of income until next year. This is not a one size fits all strategy though. Obviously, if your cash flow is tight the last thing you would want to do is disrupt your income stream. Conversely, if you are in a low bracket this year and expect to be in a higher bracket next year, you may want to accelerate income this year and enjoy the benefits of being in a lower tax bracket.
Accelerate Business Expenses. You may want to maximize your business expenses by either paying the bills or recording the invoices in your accounting system before the end of the year. On the other hand, if you are in a low tax bracket and expect to be in a higher bracket next year, it could make sense to "save" these deductions for next year when you will receive a greater benefit.
Buy Equipment. If you need equipment for your business, you can purchase or finance the equipment and in most cases fully deduct it this year. This is a great way to dramatically reduce your taxable income.
Contribute To Your Retirement Account. Depending on your type of entity and income it is possible that you can contribute and deduct up to $41,000 for your retirement plan. This can dramatically reduce the tax you would otherwise owe.
Pay Your State Taxes. In some cases, it can make sense to pay your California taxes before the end of the year. If you can deduct your California taxes on your tax return when you pay them, this will result in a lower amount of Federal tax due this year.

Before applying any of these ideas, make sure you understand the details in full or consider hiring a professional to help you decide whether you can take advantage of these tax saving ideas.

4 QuickBooks Tips

QuickBooks is an inexpensive and powerful accounting software. Most business owners hate bookkeeping, rarely keep it up to date and normally don't fully utilize the financial information to manage their business better.

Here are four QuickBooks tips that can help you manage your business better:

Reconcile Bank Accounts Routinely. By using a combination of online banking and entering data frequently, you can routinely reconcile your bank accounts. This will allow you to know how much cash you have in your accounts at all times. This will also ensure you are recording the vast majority of your accounting transactions. With this up to date information, you can review your profit and loss reports and have access to other critical information discussed in this article .
Review Your Sales and Accounts Receivable Reports. Sales reports can tell you who are your largest customers, seasonality in your business and important trends. An accounts receivable report can tell you who owes you money and if any is delinquent. In addition, it can help you help you project your cash for the next 30-90 days. This is critical information for managing your business.
Quantify Your Burden Rates. Experience has shown me time and again most business owners get wrapped up in what they are really good at and tend to ignore things they don't understand or desire to understand. Understanding your burden rates will empower you and allow you to make powerful business decisions faster. The type of burden rates will vary between different businesses. An example of one, is the sales that your business creates per employee. If you had a trend of creating $10,000 in sales per employee per month and realized the figure was dropping to $8,000 it would give you a starting point to evaluate the reasons for the decline and make the corrections as needed. Developing the right burden rates for your company can help make a dramatic improvement in your business.
Using your data in QuickBooks to create a "Financial Snapshot" report. This report will be a daily or weekly report telling you the important diagnostics in your business. A typical report would consist of cash in bank, receivables due in 30 days, payables due in 30 days, updated burden rates and any other key diagnostics that will allow you to further manage your business better.

These steps may seem overwhelming but I promise you they are not. If you are trying to keep your own books or are having someone do this for you, are you getting the information you need? If not, feel free to contact me and we can discuss the ways to improve your system.

Your Questions -- My Answers

Q: Do I need to incorporate?

A: Incorporation can create some tax benefits but that is not the reason I would typically suggest it to a client. The best reason for incorporating is liability protection. Think of incorporating as cheap liability insurance. My guest interview below discusses incorporation in greater detail.

Q: One of my independent contractors filed an unemployment claim after I stopped working with her. What should I do?

A: Unfortunately, this will likely trigger an audit with the Employment Development Department. Review your relationship with independent contractors and follow the guidelines the state provides to determine independent contractors and employees. This can be a costly mistake if you don't classify your employees correctly so make sure you understand the guidelines and apply them accordingly.

Guest Interview

My guest interview for this newsletter is Jon Brooks. Jon is a small business attorney with a practice in San Jose.

TM: Thanks Jon for taking the time to be part of the guest interview for this issue. To get right into it, what types of mistakes do you frequently see small business owners make?

JB: You know, Tyler, one that comes up often when meeting with small business owners for the first time is a widely held misperception about "Fictitious Business Names" or "D.B.A.s" (that is, "doing business as"). Many small businesses, and here I'm talking about your classic "mom and pop" enterprise start out as just one person, or a husband and wife. Take a small general contractor, for instance. Husband might have a contractors license, and his spouse might manage the books and the sales. They prefer to use a snappy name for their business, we'll call them "Acme Carpentry Works." They go down to the local county recorders office, the same place they got their marriage license, and they register "Acme Carpentry Works" as a "Fictitious Business Name." Now they go and open a bank account in the names of Joe and Sue Smith, d/b/a "Acme Carpentry Works" and they even get a business license from San Jose. And because they registered their Fictitious Business Name, the bank will let them name the account with that."

TM: OK, that all sounds pretty common, so what's the "misperception?" you were talking about?

JB: Well, many small business owners confuse this "doing business as" name for a real legal entity. The fictitious business name filing is just that, "fictitious." It's a way to use a name other than your legal name on your birth certificate when doing business. However, it is still you doing business-entering into contracts, hiring and firing employees, and owning and leasing property.

A legally formed business entity, such as a corporation or a limited liability company (LLC), for example, is according to the law, a separate "person." This is why the owner of that business "entity" can separate his personal assets from the assets of the entity.

TM: And why is that important, Jon?

JB: Because, Tyler, so long as its owners observe some basic rules, if a corporation or LLC incurs some debt or liability, only the entity's assets will be available to satisfy the company's debts-the company's owner's personal assets will not be available to pay such debts.

TM: Kind of like if your adult child is liable for some debt and his creditors can't come after your assets, right.

JB: Yes, it's similar to that.

TM: So just by having a "fictitious business name" doesn't protect you the same way that a corporation or an LLC would?

JB: Exactly. A fictitious business name is not the same thing as forming a corporation or an LLC to run your business. It does not offer any kind of liability protection.

TM: So, if the small business person is looking to protect his or her personal assets from the debts of his business, what is your advice?

JB: See a competent small business lawyer to form a real bona fide corporation or LLC. Although the non-licensed paralegals or web services can be a little cheaper, they often leave the process incomplete. Just get it done right so you can sleep better at night. Many small business attorneys will quote a competitive flat fee for this work and then you'll have a relationship formed with an attorney that can help you with your business when things get a little bit more complex.

TM: What other pitfalls should the small business person be wary of, Jon?

JB: One issue that comes up again and again is buy-outs. That is, any small business with multiple owners-say you and I quit our lawyer and accountant jobs and decide to make ice cream together in Vermont.

TM: I'm not moving to Vermont, Jon.

JB: Bear with me here. Let's say you and I start a small ice cream business, and let's say we form a corporation or an LLC to operate this business.

TM: OK. Ice cream it is. Go on.

JB: We found Tyler's Ice Creamiest, Inc., and you and I are the two equal shareholders of this company.

TM: Fifty-fifty. Half is yours. Half is mine.

JB: Yes, like I was saying. What do we do when one of us is tired of the ice cream business and wants to leave? Say we've done really well in a few short years, and I'm ready to call it quits and move to the Caribbean?

TM: Well, if you're going to be that way about it, why don't you just go?

JB: Because we've got to decide how to split up the business. Half of it is mine.

TM: What do you propose?

JB: Well, this is a buy-out situation. We've got to come to an agreement of how you will buy me out, or if you can't who I can sell my half of the business to. This kind of agreement is known as a "Buy-Sell Agreement." It covers not just to whom and in what order I can offer my share of the company, but how you and I will go about determining the value of my half of the company. This is extraordinarily important to hammer out. I find that the very best time for partner founders of small businesses to consider and agree on the terms of this sort of agreement to be early, when they are still friends.

TM: So, founders of small businesses should sign a Buy-Sell Agreement when everybody still likes each other, right? When is that?

JB: Right after the business is formed. In my opinion, everyone should enter the business with an "exit strategy." The best time to negotiate a buy-sell agreement is right after the corporation or LLC is formed.

TM: That makes sense. Thanks for talking with us today.

JB: It's been a pleasure. Thanks for asking me.

Mr. Brooks practices small business law, estate planning, and bankruptcy law from his Silicon Valley offices. He can be reached at the Law Offices of Jon G. Brooks, 1150 N. 1st St., Suite 160, San Jose, CA 95112 (408) 286-9311 or on the web at www.brooksattorney.com.

Who Is Tyler Martin?

Tyler Martin is a Certified Public Accountant with a practice in the Willow Glen area of San Jose. Tyler helps small business owners and individuals with a variety of tax and accounting services.

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Questions or comments? E-mail us at tyler@4cpa.biz or call us at 408-293-8880.