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Answer Upon - Don't Let Tax Strategies Ruin Your Business Growth Prospects, Tips From a Banker
One of the prime problems in today’s data centers and offices is that of space. With ever-expanding scales, it is imperative for office areas to be space efficient, economically designed, and yet provide a good working environment. This is where the concept of office workstations comes in. Office workstations allow you to divide your office into semi-private work areas without building permanent structures. Due to their flexibility and modularity, a wide range of layouts are possible while meeting all the workspace requirements of the employees. Well modeled and laid out workstations can often as
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and lower the tax burden. The problems for the bank crop up when the owner decides to:
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in order to reduce net income
3. Not report revenues at year and and carry them over into the following year by not
Recently the Federal Trade Commission put forth a franchise report for possible rule making. In the report is offers possible law changes, which will screw over small business. Isn’t this so typical of the Washington DC bureaucracy with their fingers up everyone’s you know what? The Federal Trade Commission appears to want to revamp the franchise rule and effectively crush small business franchised outlets.The biggest issue now in American Commerce is how can small businesses compete with the larger Box Stores? Well, through economies of scale, small business co-ops and franchising. But
Banks operate in a highly regulated system where they must conform to the standards of the regulatory bodies. These standards require them to assess risk in a pretty standard way, relying on financial statements prepared by the borrower or an accountant. So a bank will create a Loan Grading System or Policy which conforms to those requirements.
The three major factors in assessing loan risk are: Cash Flow, Liquidity and Leverage. Trends in these factors are important as well.
Cash Flow is calculated in a simple way and then there are more complex ways to calculate cash flow. We will only discuss the simple way. A bank will determine "Cash Flow Available for Debt Service" according to this formula. Pretax Net Income, plus Depreciation Expense, Plus Interest Expense, less Federal Income Taxes or in the case of different business types, Owner Withdrawals (required to pay income taxes personally on the business income).
This Cash Flow will then be compared to the Annual Debt Service of the business to calculate a Debt Service Coverage ratio. Normally a bank will want a minimum of 1.2:1. If this is the case and the balance sheet is healthy the loan will be considered a "Pass" and the bank will not be required to set aside additional Capital or Loan Loss Reserves against that loan. If the Debt Service Coverage is less than 1:1 the loan will often be "Classified" and will become a problem for the bank.
In more sophisticated grading systems the better the financial ratios, the better the risk grade even within "Pass" categories. The bank will be able to set aside less capital against these loans and will therefore be able to price them lower and earn the same Return on Equity.
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and lower the tax burden. The problems for the bank crop up when the owner decides to:
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in order to reduce net income
3. Not report revenues at year and and carry them over into the following year by not
You've been in your job for a few years. You get a decent paycheck and your benefits are helpful. But you wonder if something's missing. You try to tell yourself you should be happy you have such a good job, but some days you have to face how unhappy you are at work.Are you settling? Are you making do in a job that really isn't a very good fit for you?Read this list of ten clues to determine how many of these statements reflect how you feel about your work.1) You get depressed every time you think of going back to work after a weekend, a long weekend, or a vacation.The
The three major factors in assessing loan risk are: Cash Flow, Liquidity and Leverage. Trends in these factors are important as well.
Cash Flow is calculated in a simple way and then there are more complex ways to calculate cash flow. We will only discuss the simple way. A bank will determine "Cash Flow Available for Debt Service" according to this formula. Pretax Net Income, plus Depreciation Expense, Plus Interest Expense, less Federal Income Taxes or in the case of different business types, Owner Withdrawals (required to pay income taxes personally on the business income).
This Cash Flow will then be compared to the Annual Debt Service of the business to calculate a Debt Service Coverage ratio. Normally a bank will want a minimum of 1.2:1. If this is the case and the balance sheet is healthy the loan will be considered a "Pass" and the bank will not be required to set aside additional Capital or Loan Loss Reserves against that loan. If the Debt Service Coverage is less than 1:1 the loan will often be "Classified" and will become a problem for the bank.
In more sophisticated grading systems the better the financial ratios, the better the risk grade even within "Pass" categories. The bank will be able to set aside less capital against these loans and will therefore be able to price them lower and earn the same Return on Equity.
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and lower the tax burden. The problems for the bank crop up when the owner decides to:
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in order to reduce net income
3. Not report revenues at year and and carry them over into the following year by not
In the history of architecture there has often been an unseen contradiction between what the architect wants to design and what the client wants built. Sometimes an architect will get so wrapped up in his vision and personal aesthetic values that what the client likes and does not like becomes secondary, or is overlooked completely. When this happens the house or building created may win design awards and look beautiful to a trained architectural eye, but the client or people who have to live in it may dislike it intensely. Often the owners or tenants will go back in and change things a second
This Cash Flow will then be compared to the Annual Debt Service of the business to calculate a Debt Service Coverage ratio. Normally a bank will want a minimum of 1.2:1. If this is the case and the balance sheet is healthy the loan will be considered a "Pass" and the bank will not be required to set aside additional Capital or Loan Loss Reserves against that loan. If the Debt Service Coverage is less than 1:1 the loan will often be "Classified" and will become a problem for the bank.
In more sophisticated grading systems the better the financial ratios, the better the risk grade even within "Pass" categories. The bank will be able to set aside less capital against these loans and will therefore be able to price them lower and earn the same Return on Equity.
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and lower the tax burden. The problems for the bank crop up when the owner decides to:
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in order to reduce net income
3. Not report revenues at year and and carry them over into the following year by not
It all started with Jane Fonda. She started an industry with a simple video tape that included a 30 minute beginners program followed by a 60 minute full workout. For Jane it formed the nucleus of an empire that included books, audio recordings and fitness salons that are still in existence today. More importantly, capitalizing on Jane’s success, her workout tapes were followed quickly by everybody with a cut chiseled physique or a machine to help you work off those extra pounds and bring out those abs which quite unbelievably is bigger today than it was yesterday but not as big as it will be to
In more sophisticated grading systems the better the financial ratios, the better the risk grade even within "Pass" categories. The bank will be able to set aside less capital against these loans and will therefore be able to price them lower and earn the same Return on Equity.
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and lower the tax burden. The problems for the bank crop up when the owner decides to:
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in order to reduce net income
3. Not report revenues at year and and carry them over into the following year by not
Payroll check fraud came calling four days before Christmas. A branch of our main bank called and wanted to verify a check. The young lady who took the call in our office quickly realized that the check was out of sequence and for a person not on the client's payroll. The check was cut on our trust account. I spoke to the bank employee who had called us. They were stalling the person by having then fill out an account application, more about that later. I took the location of the bank and called the local police department. Of course I didn't have the right exact city and had to make an ad
There is no problem when a business owner uses accelerated depreciation to reduce Net Income and lower the tax burden. The problems for the bank crop up when the owner decides to:
1. Pay high salaries or bonuses at year end to reduce net income
2. Write off inventory or accounts receivable that are still collectable in order to reduce net income
3. Not report revenues at year and and carry them over into the following year by not depositing checks that have come in.
4 Prepaying expenses for the following year without accruing them as an asset (Prepaids)
5. Otherwise make accounting entries to reduce Net Income to a level that is not reflective of the true economic performance of the business.
Some of these strategies may create problems with the IRS at some future date as well.
The impact on the bank is that the Cash Flow Available For Debt Service number will drop suddenly (compared to interim statements), the Debt Service Coverage Ratio may go negative, and the Trends will be negative. The borrower may lose access to credit or have to borrow on more restrictive or more expensive terms. This may restrict the growth prospects of the business and create an Opportunity Cost that is greater than the tax savings. It will also impact the relationship with the bank and banker.
These same strategies can have a negative impact on the Balance Sheet and create similar issues. Liquidity can be understated if assets are no reported. Leverage will increase. Collateral values can be under reported and can create problems with a Borrowing Base or a Loan to Value ratio.
Once again these balance sheet impacts may cause a bank to assess higher risk to the credit and reduce the availability of loan funds or increase borrowing costs or restrictions.
My bottom line advice is this, before employing some of these tax strategies determine what their impact will be on your reported cash flow. Talk to your banker in addition to your accountant. Determine what your future borrowing needs might be and how these might impact a loan application. Here is a critical point. The bank will generally use your historical cash flow and will compare it to your future debt service. So when you are going to apply for new debt, the Debt Service used in the denominator of the formula will include that debt. It will be compared to your historical cash flow. So while you may h
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