Keys to getting a small business loan

January 2012

Keys to getting a small business loan
Before a start-up company can begin producing revenue, it often needs an infusion of cash that exceeds owner contributions. Even long-established firms sometimes must borrow to purchase inventory, buy real estate, expand operations, meet payroll, or keep the lights on. When business owners turn to banks and other financial institutions for help, some are offered loans; others walk away empty handed.

Why the difference? If you've read the financial press in recent years, you know that many banks have been burned. Some with lax underwriting practices extended credit to companies that went bankrupt. Even some strong institutions failed when large loans weren't repaid. Those that survived may be licking their wounds and rethinking their lending practices. As a result, your bank may be reticent to extend credit to a company that lacks a proven track record or that's otherwise perceived as a bad risk.

But even if your bank is willing to extend credit, don't sabotage your efforts by failing to prepare adequately. Increase your chances of getting a business loan by following these suggestions:

Show that you have a detailed business plan. Putting your ideas, projections, and assumptions on paper can uncover gaps in your logic and flaws in your research. Your business plan should lay out market research, financial projections, start-up costs (if applicable), and assumptions. Show how you're going to spend every dollar of the loan proceeds to generate revenue. Consider the plan from the other side of the table. Would you lend money to a company that lacks a credible strategy?

Show that you're capable. Lenders must have confidence in you. Convince them. Show that the combination of your management team's education, skills, and work ethic will lead to success. To demonstrate your ability to repay the loan, you may be asked to share your credit report and tax returns. If you've struggled to meet prior obligations, be ready with explanations, including evidence of extenuating circumstances.

Show that you're invested. Lenders often look kindly on business partners who have pumped a substantial amount of their own savings into a company. Before applying for a business loan, plan to document that at least 25% of the firm's equity has come from the personal assets of its owners and investors. From a lender's perspective, such an investment demonstrates a commitment to see the company through hard times — and to pay back the loan.

Please call us at (949) 453-1521 or email us at taxalert@maxwellcompany.com if you have any questions$$

Are you an Active Participant?

January 16, 2012

Are you an active participant in your employer's retirement plan?

A "yes" answer can affect your federal income tax deduction for contributions to your traditional IRA.

For 2011 and 2012, the maximum contribution to a traditional IRA is $5,000 (plus an additional $1,000 when you're over age 50). When you're an active participant in your employer's plan, how much of that you can deduct may be limited.

Not sure of your status?

Look at the middle box on line 13 of Form W-2 — the one labeled "Retirement plan." When the box is checked, you're considered an active participant.

The next question — should the box be checked? — can cause confusion for both employers who prepare Form W-2 and employees who use Form W-2 to file tax returns.

That's because the rules differ for different types of plans. For example, when you're eligible to participate in a defined benefit plan, you're an active participant even if you choose to not take part. Your eligibility is enough to trigger "active" status.

For 401(k) plans, you're an active participant when you elect to make contributions. If you decide not to contribute, you may still be considered an active participant, depending on what other amounts were allocated to your account during the year.

Please call us at (949) 453-1521 or email us at taxinfo@maxwellcompany.com if you need more information about the meaning of active participation. We're ready to help$$

Tips for building wealth

September 2011

Some wealthy folks hail from a long line of aristocrats and industrial magnates. A lucky few win the lottery. But about 80% of the millionaires in America are "first generation" rich. They're the first in their families to have attained a high net worth through traditional means. How did they do it? Many of these folks developed small businesses over decades; others earned advanced degrees in demanding fields. Most followed simple principles that the rest of us can apply, including the following.

Avoid debt. If you can pay cash for an item, do so. Only take out loans for items that will likely generate a return on investment, like a house or an education. Paying interest leaves less money in your pocket for building wealth.
Invest in equities. With the volatility of the stock market in recent months, many people are pumping their money into bank accounts, certificates of deposit, and Treasury notes. If you have a long term horizon (say, five years or more until you'll need the funds), a well-diversified portfolio of stock mutual funds is still likely to be a wise choice.
Value education. Especially in certain professional fields (such as business, engineering, healthcare, and law), you can expect a college degree to pay off over time.
Live within your means. As the old saying goes, "You can't get ahead if you're always behind." Curbing your spending habits requires discipline. Watching your neighbor park his latest toy in the driveway (often purchased on the installment plan) may be irritating. But building long-term wealth isn't about keeping up with the Joneses.
Pay yourself first. If your company offers a 401(k) plan, contribute as much as possible directly from your paycheck. If you're in business for yourself or work for a company that doesn't offer a retirement plan, investigate other retirement plan options and make annual contributions.
Work hard. Never underestimate the value of your own labor. Life isn't always fair, and some lazy people have risen to the top. But most folks who have developed profitable businesses or found success in their professions have earned that position by focusing their energies over long periods.
Don't give up. Along the way, you're certain to encounter obstacles — unanticipated expenses, job losses, market setbacks, unappreciative bosses. Don't let them sidetrack you from your financial goals.

Please call us at (949 453-1521 or email us at taxalert@maxwellcompany.com if you would like further information$

Buying A Business Creates Tax Issues

August 15, 2011

Since there are no federal income taxes imposed on the purchase of a business, as the buyer of an existing company your focus may be on other areas, such as obtaining credit or valuing inventory.

Yet tax issues can impact your to-buy-or-not decision. Here are two examples.

Outstanding tax liabilities. It's generally true that when you buy the assets of a business (as opposed to the capital stock), you're not liable for prior debts. However, depending on the laws of your state, you could be responsible for unpaid sales, excise, or payroll tax.

Steps to protect yourself include a signed statement by the seller about pending or ongoing tax disputes, notifying the appropriate state office of the purchase, and requesting a certificate or other verification from the state regarding investigations or delinquencies.

You can also ask the seller to provide Form 8821, "Tax Information Authorization," so you can check tax records with the IRS.
Allocating the cost of assets. When you buy the assets of a business, you may be required to file Form 8594, "Asset Acquisition Statement," in the year of the purchase. Form 8594 shows how the sales price is split up between various types of assets.

Why does it matter? Because different assets are treated differently on your new business's tax return. For instance, inventory can be written off as you sell goods, while noncompete agreements have a longer life.
Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com before you finalize that business purchase. We can help you structure the deal to your best advantage$

Add to your retirement plan vocabulary

Add to your retirement plan vocabulary
The definition of retirement may be in flux, but the vocabulary describing your retirement plans remains the same. Here are three common terms.

Catch-up contributions. When you're age 50 or older, you can choose to make additional contributions to your retirement plans above the usual annual limits.

For 2011, maximum catch-up contributions are:
$5,500 when you participate in a 401k, 403b, 457b or SARSEP.
$2,500 for your SIMPLE IRA or SIMPLE 401(k).
$1,000 for traditional or Roth IRAs.
Hardship withdrawals. The IRS defines a hardship as an immediate and heavy financial need such as medical or funeral expenses, and your retirement plan spells out if and when you can take hardship withdrawals.

Remember, the amount you withdraw is not a loan, so you won't be able to pay the money back into your account. Instead, hardship distributions are income to you, and can be subject to a 10% early withdrawal penalty. In addition, you may be barred from making contributions to your account for six months after taking a hardship distribution.
Rollover. A rollover is a transfer of assets from one retirement plan to another. To keep the transaction tax-free, you generally must deposit the assets into the second plan within 60 days.

Note that not all withdrawals are eligible for a rollover. Hardship withdrawals are an example of rollover-ineligible funds.
Are you uncertain of the meaning of some of the terms in your retirement plan documents? Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com We're here to answer your questions with plain-English explanations$

Should I buy or rent a house?

August, 2011
From articles in respected financial journals to spots on late-night television, real estate hawkers and investment gurus have touted the benefits of homeownership. "Don't throw your money away on rent," they admonish. "Interest rates are headed up. Now's the time to buy." "After all," they suggest, "buying a house is a surefire way to build wealth."

Unfortunately, millions of Americans whose homes are now in foreclosure have learned — the hard way — that in the real world, nothing is surefire. While it's true that buying a house has been a great way to build wealth for many people, homeownership isn't for everyone. For some folks, continuing to rent an apartment or house may be the wiser choice. Renting isn't always a bad idea.

Here are three questions to consider when evaluating whether to rent or to buy a home.

How long will I live there? If flexibility is an important consideration, think twice before taking on a mortgage. As a rule of thumb, expect to live in a home for at least five years to break even. Of course that calculation depends on the term of the mortgage, closing costs, and the size of your down payment. But if your short-term plans include moving — even across town — renting may be a better option.
How much can I offer as a down payment? If at all possible, you want to avoid the requirement for private mortgage insurance or PMI. To get that break, you'll need a down payment of at least 20% of the purchase price. If that percentage isn't feasible for you, shoot for a down payment of at least 10%. The higher the down payment, the smaller the mortgage, the faster you build equity.
Can I afford the monthly payments? Some lenders, especially prior to the housing meltdown of 2008, were notorious for offering mortgages at the very limits (and sometimes beyond) of a family's ability to pay. If you're considering homeownership, take a hard look at whether you can cover the costs — month in and month out — of mortgage principal and interest, utilities, maintenance, taxes, insurance, and all the other costs for which you'll be responsible. In general, expect about 80% of your monthly payments to cover interest alone in the first five years of a 30-year fixed rate mortgage. That's money you'll never see again, like rent.
Contact our office at (949) 453-1521 or taxalert@maxwellcompany.com if you'd like more details about this or other financial planning matters$

Charitable contribution reminders

December 20, 2010

Are thoughts of charitable contributions dancing in your head this holiday season?

If you itemize, you may also be thinking of tax deductions. Here are tips to make the most of your generosity.

Choose a qualified charity. To be eligible for a deduction, the organization you contribute to must be qualified. In general, that means charities established for religious, charitable, scientific, literary, or educational purposes. For example, nonprofit hospitals and volunteer fire departments are qualified organizations, while your homeowner's association generally is not.
Decide what to give. You can donate cash (including checks and charges to your credit cards), stocks, and other financial assets. Noncash contributions such as vehicles, real estate, or artwork are also deductible.
Keep records. When you make cash contributions of any amount, a bank record, pay stub, or written acknowledgement from the charity is required to support your tax deduction. If you donate via text message, keep a copy of your phone bill showing the amount you gave, the organization you gave it to, and the date of your donation.

The greater your contribution, the more paperwork you need. As an example, for noncash donations over $500, you'll need to file Form 8283, and for donations of $5,000 and up, a qualified appraisal is required.
Contact our office at (949) 453-1521 or taxalert@maxwellcompany.com if you'd like more details about charitable giving tax rules.