Small Business Profit Maximizer!

When Should You File an Amended Return?

What should you do if you discover a mistake in your 2012 tax return that you already filed?  You have three years to file an amended return.  But the question is, should you?

Meet with your tax advisor and weigh the advantages and disadvantages of filing an extension.  The answer usually depends on whether you owe the IRS or they owe you.

If you owe, you should file an amended return as soon as possible.  You’re not required to, and you are not going to face criminal charges if you don’t.  But it is best to file an amended return since the IRS can often take months, and even years, to send you a correction notice.  But penalties and interest are adding up while you wait for them to catch the error.  If you file the amended return within a few weeks of the error and pay the tax, the IRS often doesn’t assess penalties.  Of course, they will always charge interest.  (You should file an amended return even if you can’t pay the balance due.  Just set up a payment plan.)

If the IRS owes you, the answer is much more difficult.  You may think it is easy since they owe you money, but there are two reasons why you may not want to file an amended return.  First, if the refund will be minor, the cost of hiring a tax preparer may not be worth the effort.  Second, you may be drawing more attention to your return by submitting an amended return.  I have personally seen many instances where an audit followed an amended return requesting a refund.  Of course, the IRS will not admit that amended returns increase your chances of audit.

Readers’ Questions

 

I Started a Home Repair Business.  Can I Deduct My Personal Tools and Pickup Truck That I Am Now Using For Business?

 

Yes.  You can claim a depreciation deduction for personal assets that are converted to business use.  Your basis for depreciation (the amount that can be written off over its useful life) is the lower of either the equipment’s fair market value when the asset is converted into a business asset or its original cost.

Example:  If you purchased your truck for $30,000 and it is worth $20,000 when you start using it for business, your basis for depreciation is the lower amount of $20,000.

Be sure to check with your tax advisor.  Your deduction for vehicles may be limited by the “luxury car” rules.

 

When I Sell My Home, How Much Should I Reinvest in a New Home

to Avoid Paying Income Tax on the Gain?

 

It’s amazing how many people remember an old law that was in place for many years.  The old law, which was replaced in the late 90s, required that the taxpayer reinvest all of the proceeds in order to avoid paying income taxes.

Current law allows an exclusion from tax of up to $250,000 of gain for single filers and $500,000 for joint filers.  There is no longer a requirement that you buy a new home.  To qualify, you must have owned and used the home as your principal residence for at least two out of the five years preceding the sale.  Any excess is taxed as a capital gain.

In English, this means that if you purchased a $250,000 home, you would have to sell it for $500,000 if single or $750,000 if married before you would have to worry about paying any tax on the gain.

Increase Profits by Doing an Employee Staffing Review

 

Labor costs are usually the biggest cost item for a service business, and the second biggest cost for a business that sells products.  But rarely does the owner make a serious attempt at controlling it.  They may work at controlling overtime and insurance costs, but they seldom do a staffing review to ensure they are not overstaffed.

 

The business owner should be doing a review at least once a year.

• Scrutinize every job in your company to determine how it fits into the entire operation in accordance with your company’s long-term objectives.  Probe all aspects of each job—its basic function, the level of work being performed, its relationship to other jobs, and so on.

 

• Decide if any job should be eliminated and those responsibilities shifted to someone else in the department.  Can this job be outsourced?  Has anyone been performing work that lies well outside of his or her assigned responsibilities?  Do all positions require full-time workers or can one or more be filled with part-timers?

 

• See if you need to hire additional employees so that critical jobs are being staffed properly.

Don’t get lazy and don’t dodge the tough decisions.  The key to running a profitable business is keeping your costs under control.

2013 Is a Great Year to Max Out the Section 179 Deduction

The Section 179 deduction was extended by the American Taxpayer Relief Act of 2012 (ATRA) and increased to $500,000 for 2013.  Without further legislation, the maximum deduction is scheduled to drop to $25,000 for 2014.

Tax Tip:  Consider borrowing money if you are planning on purchasing large equipment in the next year or so.  The tax law allows you to write off the full amount of the purchase in 2013, even if you financed the purchase.

Be sure you keep the Section 179 limits in mind:

1. The Section 179 deduction can’t exceed your taxable income from the business before the deduction, and
2. It phases out dollar-for-dollar for any amount of an equipment purchase that is over $2 million.  In 2014 the phase-out threshold is reduced to $200,000.

As usual, it is important to meet with your tax advisor to calculate your savings and make sure you meet all the requirements.

Readers’ Questions

 

I forgot to take my required IRA distributions for 2012.

Is it too late?

 

Better late than never.  The excise tax penalty for not taking a required minimum distribution (RMD) is 50 percent of the amount due.  You can pay the tax penalty by attaching Form 5329 to your tax return, or by filing it separately.

Tip:  If you missed the deadline and have a reasonable excuse, make the withdrawal as soon as you realize you missed it and ask the IRS to waive the penalty due.  Include an explanation with Form 5329, but don’t pay the tax.  My experience is that the IRS very often forgives the penalty.  Just don’t forget again!

 

Can I claim the child care credit if the caregiver is a relative

who lives in our home?

 

It depends.  Generally, you can claim a dependent care credit (commonly called the child care credit) for qualified expenses paid to a relative.  But you cannot if it’s to your spouse, a dependent child under 19, the child’s parent, or a person whom you or your spouse can claim as a dependent.  It doesn’t matter whether or not the caregiver lives with you.  The maximum credit is $600 for one child under 13, $1,200 for two or more children.

The Importance of “Fire-and-Quit Autopsies”

 

Autopsies aren’t just for dead bodies.  Your company’s hiring record will improve dramatically once you institute fire-and-quit autopsies.  Doing an autopsy means taking the time to figure out what went wrong with your hiring and employment process and how you could have prevented it.

 

Hiring good, long-term employees is one of the best things you can do for your company, and losing an employee can be one of the most expensive things that can happen.  So it’s crucial to understand why some employees didn't work out.

 

Employees usually quit for one of two reasons.  The first is that you made a bad hire.  The second is that you made a good hire, but the person left anyway.  Maybe the employee decided to change careers, move away from the area, or just didn’t fit in, and there was no way you could have predicted or prevented it.

 

There is little you can do about the second possibility, but what you learn about hiring the wrong person for a position is crucial.  You can usually determine what went wrong by doing an autopsy and making sure you don’t repeat the error in the future.

Why SIMPLEs Are a Great Business Retirement Plan Choice

A SIMPLE is basically a 401(k) for small businesses with much simpler documentation requirements.  One reason they have become popular is that the employer must make a contribution on behalf of those employees who choose to participate.  Experience has shown that not all employees choose to participate, and thus the amount the employer has to contribute for non-owners is often much less than what is required under other retirement plan options.

Eligibility:  An employer can set up a SIMPLE only if the business has 100 or fewer employees.  Any employee who was paid at least $5,000 for any two previous years at your company and expects to receive at least that amount in the current year is eligible to participate.

Contribution limit:  For 2013, participating employees may elect to contribute up to $12,000 to the plan.  If you are 50 or older, this amount increases to $14,500.  Generally, employers must provide matching elective contributions of up to 3 percent of compensation (but no less than 1 percent in no more than two out of five years) or a non-elective contribution of 2 percent of each eligible employee’s compensation.  The matching contributions are deductible by the business.

Vesting rules:  Contributions to SIMPLEs vest immediately.  This means that the employee owns the money contributed by them and the company as soon as it is contributed, and can be moved to their own IRA when they leave the company.

Distributions:  The RMD (Required Minimum Distribution) rules also apply to SIMPLEs.  Note that the usual 10 percent penalty tax for pre-age 59.5 distributions increases to 25 percent in the first two years of participation.  Be sure to make this clear to all participating employees.

Due date:  A SIMPLE can be set up at any time before October 1^st.  Unlike a SEP, however, the plan cannot be established after the close of the tax year.

Be sure to check with your tax advisor before you set up a SIMPLE to make sure this is the best retirement plan choice for you.

Why Every Business Should Be Mailing Newsletters

Once the customer gives us their physical mailing address, what do we do with it?  We are going to mail them our monthly customer newsletter.  Why newsletters?  In his book Stick Like Glue, Jim Palmer lists seven secrets about how newsletters will bring in new customers better than almost any other marketing method.

1. Newsletters help you keep customers.
2. Newsletters help you get new customers.
3. Newsletters help your business build credibility.
4. Newsletters help you stand out from your competition.
5. Newsletters are the perfect way to show that you are an expert in your field.
6. Newsletters help you build your brand.
7. Newsletters have a longer shelf life than other forms of marketing.

I would add one more:  Newsletters are great for promoting upselling and cross-selling.  Upselling is the old “Do you want fries with that?” routine.  Cross-selling is selling a completely different product or service then the one your customer has already purchased from you.  A newsletter promotes both by announcing other products you offer and what their benefits are.

If you are not upselling and cross-selling, you are leaving the easiest money you will ever make on the table.  Why walk away from it? Upsell, upsell, upsell!

Some other key points to ensure that your newsletter campaign is successful:

1. It must be consistently mailed out at the same time each month to be effective.
2. It should be about your customer’s needs and wants.  What problems do they have, and how does your service or products solve them?
3. It can’t be boring!  It should be about a 50/50 ratio between articles about your product and then some fun stuff.  A little secret:  The fun stuff is the real secret to a newsletter’s success!  By fun stuff I am talking about short, interesting, and informative articles, factoids, tips, cartoons, humor, and even puzzles.  This is what the customers enjoy reading and look forward to every month.
4. It should tell your customers more about what you do.
5. It can be used to tell them what is new with your business.
6. It should be easy for you to produce, or it will not be done consistently.  There are new tools on the market that make this easier than ever.  I recommend a service by Jim Palmer that you can read about at www.nohasslenewsletters.com.  His service provides the fun stuff and the template.  You can write two or three articles yourself, or you can hire a freelance writer to do them for you.

Best Business Book

 

 

The Fastest Way to Higher Profits by Jim Palmer 

 

This book will help you generate higher profits in your business—fast!  In it he covers 19 proven insider marketing and business tips that will take your business to higher levels of success and profitability, even in a recession.

 

Some of the key points he covers include:

• A great strategy for raising your prices and charging what you are worth
• How having a super strong guarantee increases confidence in your products, boosting sales and profits
• Why you need a coach and how it helps increase your profits
• Why newsletters are one of the best client retention tools available
• How using freelancers allows you to rapidly increase sales and profits
• And many more excellent ideas!

 

Be sure to check out our interview with him back in our September 2012 issue.  It is definitely one of the best interviews we have ever had in our magazine.  The amount of information he gave us is just amazing.  Be sure to listen and definitely buy his book.

Using Auto-Responders to Upsell

Auto-responders are computer programs that automatically send out information to those prospects and customers on your email list.  I use Constant Contact but MailChimp is another great program that I recommend.

The auto-responder allows us to automatically send our customers a series of emails when they provide us their email addresses (see the article in this issue “The Easy Way to Build Your Email List”).  I recently recommended this series of five emails to a retail client that we consulted with:

1. Day 1 – An email welcoming them to our email list that:
   1. Gives them the discount coupon we promised.
   2. Tells them they have been entered into our new email list drawing for that month.
   3. Lets them know they will be receiving weekly email coupons they will want to keep an eye out for.
   4. Announces they will be receiving a digital copy of our monthly customer newsletter.
   5. Requests their physical address.  They can click on a link that will bring them to a page on your website and they can enter it there.  We will then mail them a $25 gift certificate and enter them a second time into our new email list drawing.  They will also receive your latest catalog.

 

1. Day 3 – An email giving a brief description of the items we offer in-store.  We may want to attach a copy of our store catalog, and invite them to visit our website.  Ask for their mailing address a second time.

 

1. Day 7 – An email providing a brief description of your main products and services.  You should continue to ask for their mailing address.

 

1. Day 14 – Introduce them to your frequent buyer program and ask for their mailing address again.  The frequent buyer program (often called a customer loyalty program) is designed to:
   1. Make your customers stick to you like glue rather than switch to a competitor.
   2. Get customers to return more often by rewarding them with greater discounts when they spend more with you.  Statistically, loyalty program customers visit twice as often and spend four times more than customers who don’t participate.

 

Remember, to be effective, the program must be easily understood by both your customers and your employees.

 

You can send a special VIP card to customers who spend the most, and have special sales just for these VIP customers.   They can even be highlighted in your monthly newsletter.

 

The frequent buyer program design should give them something like $10 off for every $100 they spend during a three-month period.  Because it is designed to get customers in more often, it should have an expiration date.  Since not all of them will be redeemed, your cost will not be 10 percent of sales.

 

1. Day 21 – Introduce them to your referral program, and ask for their mailing address one last time.  The best way to get referrals to is provide outstanding, over-the-top, jaw-dropping customer service.  But you can increase referrals even more by adding a structured referral rewards program.  This can be:
   1. A gift certificate for each referral
   2. A big monthly prize, such as a TV or iPad for the customer who refers the most new customers each month.  Some advantages of offering something of high perceived value:

                                               i.     It creates more excitement (and more referrals).

                                             ii.     Every month the winner can be featured in your newsletter.  This creates a heck of a buzz and will give your other customers an incentive to refer new customers.

                                            iii.     Yes, this sounds elaborate!  But small thinking gets you small results.  Think big and get big results!  Compare the cost of an iPad at $500 to the lifetime value of a customer.  Let’s assume that this is $2,500 (probably low) and that you get 20 referrals each month.  This is an additional $50,000 in sales and a gross profit of $25,000 (at 50 percent cost).  Not a bad trade for a $500 investment!

                                            iv.     Remember, your referral reward has got to be a big enough incentive to get your customers to play along.  When the incentive is great enough, your customers will go out of their way to make a referral, rather than just mentioning your name when someone asks them for a recommendation.

The great thing about auto-responders is the consistency of the mailers.  Once they are set up, they go out automatically as soon as someone signs up for your email list.  Every business should be using them.

Auto-responders are computer programs that automatically send out information to those prospects and customers on your email list.  I use Constant Contact but MailChimp is another great program that I recommend.

The auto-responder allows us to automatically send our customers a series of emails when they provide us their email addresses (see the article in this issue “The Easy Way to Build Your Email List”).  I recently recommended this series of five emails to a retail client that we consulted with:

1. Day 1 – An email welcoming them to our email list that:
   1. Gives them the discount coupon we promised.
   2. Tells them they have been entered into our new email list drawing for that month.
   3. Lets them know they will be receiving weekly email coupons they will want to keep an eye out for.
   4. Announces they will be receiving a digital copy of our monthly customer newsletter.
   5. Requests their physical address.  They can click on a link that will bring them to a page on your website and they can enter it there.  We will then mail them a $25 gift certificate and enter them a second time into our new email list drawing.  They will also receive your latest catalog.

 

1. Day 3 – An email giving a brief description of the items we offer in-store.  We may want to attach a copy of our store catalog, and invite them to visit our website.  Ask for their mailing address a second time.

 

1. Day 7 – An email providing a brief description of your main products and services.  You should continue to ask for their mailing address.

 

1. Day 14 – Introduce them to your frequent buyer program and ask for their mailing address again.  The frequent buyer program (often called a customer loyalty program) is designed to:
   1. Make your customers stick to you like glue rather than switch to a competitor.
   2. Get customers to return more often by rewarding them with greater discounts when they spend more with you.  Statistically, loyalty program customers visit twice as often and spend four times more than customers who don’t participate.

 

Remember, to be effective, the program must be easily understood by both your customers and your employees.

 

You can send a special VIP card to customers who spend the most, and have special sales just for these VIP customers.   They can even be highlighted in your monthly newsletter.

 

The frequent buyer program design should give them something like $10 off for every $100 they spend during a three-month period.  Because it is designed to get customers in more often, it should have an expiration date.  Since not all of them will be redeemed, your cost will not be 10 percent of sales.

 

1. Day 21 – Introduce them to your referral program, and ask for their mailing address one last time.  The best way to get referrals to is provide outstanding, over-the-top, jaw-dropping customer service.  But you can increase referrals even more by adding a structured referral rewards program.  This can be:
   1. A gift certificate for each referral
   2. A big monthly prize, such as a TV or iPad for the customer who refers the most new customers each month.  Some advantages of offering something of high perceived value:

                                               i.     It creates more excitement (and more referrals).

                                             ii.     Every month the winner can be featured in your newsletter.  This creates a heck of a buzz and will give your other customers an incentive to refer new customers.

                                            iii.     Yes, this sounds elaborate!  But small thinking gets you small results.  Think big and get big results!  Compare the cost of an iPad at $500 to the lifetime value of a customer.  Let’s assume that this is $2,500 (probably low) and that you get 20 referrals each month.  This is an additional $50,000 in sales and a gross profit of $25,000 (at 50 percent cost).  Not a bad trade for a $500 investment!

                                            iv.     Remember, your referral reward has got to be a big enough incentive to get your customers to play along.  When the incentive is great enough, your customers will go out of their way to make a referral, rather than just mentioning your name when someone asks them for a recommendation.

The great thing about auto-responders is the consistency of the mailers.  Once they are set up, they go out automatically as soon as someone signs up for your email list.  Every business should be using them.

IRS Form 1099-K Notices Assume Business Owners Are Liars!

 

The IRS has started mailing notices to businesses that basically accuse them of underreporting their income.  They are comparing 1099-Ks reporting payments businesses have received from credit card and debit card firms (such as PayPal) to the total income shown on the taxpayers’ returns.  The IRS is mailing the notices to businesses it believes may have underreported cash receipts.

The form (see the attached sample link to PDF of form) includes the following threatening language:

Your Gross Receipts may be underreported.  Your tax return and Form(s) 1099-K, Merchant Card and Third Party Network Transactions, show an unusually high portion of gross receipts from card payments and other Form 1099-K reportable transactions.  Your type of business consistently has a much lower portion of gross receipts from card payments and other Form 1099-K reportable transactions, and a higher portion of gross receipts from other sources (e.g., cash and checks).

It goes on later in the notice to say:

If you believe you filed your tax return correctly, please provide a written explanation telling us why the portion of your gross receipts from card payments and other 1099-K reportable transactions may be higher than expected.

What the heck does this notice mean?  Is the firm being audited?  What does the IRS expect to receive as proof that the business is not underreporting income?  Congress is now pushing the IRS to modify the language of the notices.

A major problem with the 1099-K matching program is that it isn’t precise.  The 1099-K reports receipts for a calendar year, which causes a problem if the business reports on a fiscal year.  Mismatches may be triggered in cases involving employee tips, cash back for customers on debit card transactions, refunds to customers, and more than one business sharing a credit card machine.  These are some of the reasons the IRS had decided not to require firms to separately report amounts shown on 1099-Ks on their income tax returns.

It is obvious that these forms have very limited use as a method of detecting underreporting of income.  They appear to be another waste of business owners’ time and money.