Accounting & Finance

Valuation of Closely Held Businesses: Part I

A successful small business enterprise may be the culmination of a life’s work for a small business owner. A small business may even have successfully transitioned to the second or third generation of a family. Inevitably, the question often arises, “What is my business worth?” It is the role of the business valuation specialist to […]

A successful small business enterprise may be the culmination of a life’s work for a small business owner. A small business may even have successfully transitioned to the second or third generation of a family. Inevitably, the question often arises, “What is my business worth?” It is the role of the business valuation specialist to assist the client in helping to understand the approximate value of their closely held business. The need to value the business may arise from a buyout of a current owner, a family gifting strategy, estate settlement resulting from the death of an owner, marital dissolution, or a first step toward the eventual sale of the company in accordance with a succession plan. In this first of a two-part introduction to business valuation, we will take a look at the primary approaches utilized by business valuation experts to estimate the value of a small closely-held business.

Business valuation principles rely upon a number of recognized techniques widely accepted by experts in the field. The methods utilized to evaluate business enterprises are broken down into three distinct approaches; asset based, income based, and market-based. This article is intended to examine the three separate approaches briefly, but the reader should keep in mind that there are numerous methodologies contained within each approach that go well beyond the scope of this article.

The first, and probably best-understood approach, is the asset based approach. Included in the asset based approach are both going concern and liquidation methods; whereby the going concern value is predicated on the market value of the net assets and assumes the company continues as a going concern, whereas the liquidation method considers the market value of the net assets in contemplation of liquidation of the enterprise. These methods often require an independent third party to appraise the market value of specific assets.

The market-based approaches incorporate a number of methodologies as well. Among those is the company guideline method. The market-based approaches to valuation assume that if you can ascertain the value of a company with similar attributes to the one being valued, then you should be able to apply those same metrics to the subject company. For example, an analysis of closely held businesses recently sold with the same standard industrial classification code as the subject company and of similar size may yield important ratios that can be applied to the subject company including multiples of revenue, price to company earnings, price to seller’s discretionary earnings, etc. Those metrics can then be applied to the subject company to approximate value.

There are limitations in using market-based methods. Many closely held businesses are quite unique and are very difficult to compare to other companies. Some of the comparisons may result from transactions that are significantly older and less relevant.

Transactions may have taken place in other parts of the country that experience different market conditions than that of the subject company. Finally, it may be that the availability of companies that are comparable in many of the commercially available databases are quite limited, and therefore although seemingly a worthwhile tool, market-based methods can have a very limited application.

The third and most common approach to valuing a small business enterprise falls under the category of income based approaches. Income based approaches are based on the theory that a company is worth an amount that will yield the expected return on investment given an interest rate that allows for risk. By way of example, an investment of $100,000 at 5% will earn $5,000. Therefore, it holds that if you anticipate earning $5,000 with an expected 5% yield on the investment, you would need to invest $100,000, i.e., the business value. That is the underlying rationale behind an income based approach. Of course, the challenge in utilizing an income based approach is twofold. The first is to determine the appropriate risk-based return on investment. Second, the valuation analyst needs to understand the potential income and cash flow that the company will yield in the future.

In a future edition of this publication, we will look more in depth at the process by which the income based approaches to business valuation are utilized by business valuation specialists.

*Part 2 Coming Soon in the next edition of Network Magazine*

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Health Is Your True Wealth

Why would someone who does Financial Planning be so concerned with their client’s health?  Beyond the obvious reason, that we deeply care about our clients and want them to live a long and healthy life, health care costs can have a dramatic effect on a person’s finances.  They present a particular challenge for retirees.   Not […]

Why would someone who does Financial Planning be so concerned with their client’s health?  Beyond the obvious reason, that we deeply care about our clients and want them to live a long and healthy life, health care costs can have a dramatic effect on a person’s finances.  They present a particular challenge for retirees.   Not retiring yet?  This still applies to you, since the more time you have to prepare, the better off you’ll be!

Missed Opportunities and “Fun Facts”

Young Professionals

  • Not having a power of attorney, medical directives, and a will. Should something happen to you, even if temporary, you’ll want someone to be able to take care of your expenses, and receive the information on your illness.  If married, perhaps your spouse.  If single, maybe one of your parents.
  • If there are people dependent on your income, you need to have your income insured.  You’ll want it to be a multiple of your annual salary.  Term insurance is the most cost effective solution for this purpose.
  • Take advantage of your employer offered benefits such as disability, long term care, and additional life insurance.  They’re usually cost effective but may not transfer with you if you leave.
  • If your health plan offers an HSA (health savings account), this may be very beneficial for you, particularly if you’re in reasonably good health.  Your contributions are tax deductible, and if you don’t use the money before you retire, you can withdraw from it like an IRA.

Pre-Retirees

  • Don’t wait until you retire to think about getting long-term-care insurance.  The longer you wait, the more expensive it may be, and as we age, some health problems start to arrive, and we may no longer be eligible to purchase this coverage.
  • Life insurance that was purchased when we were younger may no longer be needed.  In many cases, the premiums rise significantly, and those funds may be put to better use for long term care insurance.
  • Educate yourself on all of the rules of COBRA.  This is the law that allows you to purchase medical insurance from an employer under certain circumstances.  These may include a layoff, divorce, death, or a child being over the age of 26.
  • Understand the difference between Medicare and Medicaid.  One of the main differences is that if your income is at poverty level, Medicaid could pay for your long-term care needs.  Know all of your options before there is a medical emergency.

Retirees

  • Out of pocket healthcare cost for a 65-year-old couple is $259,000 to $395,000.  This does not include long-term care costs over 100 days, such as assisted living or nursing home care.  This also assumes you’re on Medicare. 1
  • The Medicare Part B premium is based on your retirement income.  Keep in mind that withdrawals from your IRA or 401K increase your taxable income.
  • Medicare covers about 60% of retiree healthcare costs.  The consumer is still responsible for co-pays, premiums, and deductibles.  Also, Medicare doesn’t cover dental, vision, hearing or long-term care costs. 2
  • Healthcare has historically increased at a higher inflation rate than most other expenses, so you should plan for that. 3
  • A person at age 65 has a 70% chance of needing some type of long-term care during retirement. 4
  • If you are still working or covered by a group plan past the age of 65, you can delay paying for Medicare part B, but you will need to maintain continuous coverage to avoid a penalty.

I would love to tell you that there are easy solutions to this challenge, but there aren’t.  This doesn’t mean there’s nothing you can do. Here are some steps to take:
If you haven’t already, talk with your financial advisor to:

  • Estimate your health care costs
  • Develop a retirement income plan to help cover the health care costs
  • Evaluate long-term care funding options
  • Revisit your plan regularly, and make necessary changes

If you have a financial advisor that does full financial planning, they can help you with all of this.  If not, you can do the research on your own.   Some useful sites for information would be:

  • Official Medicare Site
    www.Medicare.gov
  • Employee Benefit Research Institute
    www.ebri.org
  • Affordable Care Act
    www.healthcare.gov
  • Retirement Planning Calculator find one at
    www.raymondjames.com/wealth-management

As a word of caution, don’t spend your health to make money, and then spend your money to try to buy your health back.

FOOTNOTES:
1. Savings Needed for Medigap Premiums, Medicare Part B Premiums, Medicare Part D Premiums and Out-of-Pocket Drug Expenses for Retirement at Age 65 in 2015. Assuming a 90% chance of having enough savings. “Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Unlike the Last Few Years, the News Is Not Good,” by Paul Fronstin, Dallas Salisbury, and Jack VanDerhei, EBRI. October 2015.
2. Employee Benefit Research Institute
3. Bureau of Labor Statistics, June 16, 2016. The annual inflation rate for the United States was 1.0% through May 2016.  PwC Health Research Institute, “Behind the Numbers,” 2016.
4. “Medicare & You 2016,” Centers for Medicare & Medicaid Services.
Mary Evans, CERTIFIED FINANCIAL PLANNER™
Evans Wealth Strategies 902 Chestnut Street Emmaus, PA 18049
“Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Evans Wealth Strategies is Independent from Raymond James Financial Services.”
The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Mary Evans and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. These policies have exclusions and/or limitations. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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Finding the Best Financial Institution for Your Small Business

There are numerous options when looking for commercial financing. Large national and regional banks can certainly fit the bill if you’re looking for large amounts of capital and a wide array of services. But do the large banks want your business bad enough to be responsive? If your business is like the vast majority of […]

There are numerous options when looking for commercial financing. Large national and regional banks can certainly fit the bill if you’re looking for large amounts of capital and a wide array of services. But do the large banks want your business bad enough to be responsive? If your business is like the vast majority of small businesses that drive the US economy, you will likely do best with a local community bank or credit union that is responsive to your needs without crushing you with fees and red tape.

The Lehigh Valley Market

The latest U.S. Census Bureau statistics state that there were 5.73 million employer firms with less than 500 employees in the nation. Businesses with less than 20 workers accounted for 89 percent of the small business workforce category. Locally, research done by the Lehigh Valley Economic Development Corporation indicates that the Lehigh Valley Region has 14,645 businesses and that just 114 of those businesses have more than 250 employees. In addition, data from the U.S. Small Business Administration shows that 99% of the people employed in the Lehigh Valley work for small businesses. Eighty-four percent of employee locations in the region have less than 20 workers. The economic impact that small businesses have upon the region is large and undeniable.

Need For Capital

What do all these businesses have in common? They all need capital to survive and grow. For businesses large and small, access to capital is the engine of growth. In today’s financial markets, there are numerous sources of funding. The most common sources are commercial banks. Since the easy money days of the Great Recession, commercial banks have been under new regulations designed to prevent another needless downturn like the one we recently faced. At the same time, many of these new regulations have put undue strain on the banking system, especially on the larger banks with over $10 billion in assets. As a result, the relative cost of serving the small business community has presented a challenge for larger banks.

The small business customer will likely find a better home with smaller community institutions that have a vested interest in the communities they serve.  After all, these institutions live and die by the financial health of these communities.

Credit Unions

One of the often overlooked sources of business capital is the Credit Union. Credit Unions are unique in that they are not-for-profit entities. They do not issue stock and have no investors other than their members. Credit Unions are the quintessential community bank, literally owned by the community. As such, they are relationship driven as opposed to profit driven.  The member is the focus of the institution, not the need to provide higher dividends to the stockholders.

Credit Unions are regulated and insured by the National Credit Union Administration of the US government. Being member owned and federally insured translates to higher interest rates for savings and lower interest rates on debt. The organizations typically operate with less red tape, lower fees, and quicker decisions. It is not unusual to get a commercial loan decision in a matter of days.

In order to do business with a credit union, you will need to become a member. The easiest to join are those that have a Community Charter. In this case, the organization accepts members who live, work, or worship in a given geography. Other credit unions accept members based on their affiliation with a specific employer or group, or for members of a given trade, industry or profession. There are two major credit unions in the Lehigh Valley offering commercial loans; People First Federal Credit Union is one of them. People First is a Community Chartered credit union and accepts members who live, work, or worship in Lehigh and Northampton Counties. People First currently has 66,000 members or roughly 10% of the population of the Lehigh Valley! There’s nothing better than banking where you own the place.

For more information, contact John Orsini, Business Loan Officer at People First Federal Credit Union 610-797-7440 x 120, or orsinij@peoplefirstcu.org

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Using Single-Member LLCs to Own Real Estate

Single-member LLCs (SMLLCs) are LLCs with only one member (owner). Thanks to the taxpayer-friendly “check-the-box” entity classification regulations, SMLLCs have become a popular entity choice for various business and investment activities. Because of its unique attributes, SMLLCs are also ideal for real estate holdings. Why, Because they provide liability protection along with tax simplification, while […]

Single-member LLCs (SMLLCs) are LLCs with only one member (owner). Thanks to the taxpayer-friendly “check-the-box” entity classification regulations, SMLLCs have become a popular entity choice for various business and investment activities.

Because of its unique attributes, SMLLCs are also ideal for real estate holdings. Why, Because they provide liability protection along with tax simplification, while also setting the table for tax-deferred transactions under both the Section 1031 like-kind exchange rules.

Under the check-the-box regulations, the existence of an SMLLC is generally ignored for federal tax purposes (the exception is when the member treats the SMLLC as a corporation, which is relatively unusual). This disregarded entity status means that the business or investment activity carried on by the SMLLC is considered to be conducted directly by the SMLLC’s member for federal tax purposes. When an individual uses an SMLLC to operate a business, the tax results are reported on the individual’s Schedule C, just as if the business were a sole proprietorship. No additional federal tax forms need be filed. When an individual’s SMLLC is used to own and operate rental real estate, the tax results show up on the member’s Schedule E. When a corporation owns an SMLLC; the SMLLC is considered to be an unincorporated branch or division. When an SMLLC is owned by an entity treated as a partnership, the SMLLC’s activities are directly reflected on the member’s Form 1065 with no additional federal tax forms required.

Real estate investors are rightly concerned about exposure to all the various and sundry liabilities that property ownership can entail. These can range from environmental liabilities to personal injury claims when tenants slip and fall on the sidewalk. Setting up an SMLLC to own real estate addresses the liability exposure problem without adding tax complexity since no additional federal tax forms are required. Of course, the SMLLC’s member will often be required to guarantee any mortgages against the SMLLC’s property personally, but that’s par for the course.

Here’s where it gets interesting. As explained earlier, the SMLLC’s member is considered to directly own, for federal tax purposes, any real estate that is owned by the SMLLC. Therefore, an exchange of property owned by the SMLLC will be treated as an exchange by the member for purposes of the Section 1031 like-kind exchange rules. Meanwhile, the relinquished property given up in the exchange and the replacement property received in the exchange can at all times be held within the liability-limiting confines of the SMLLC.

If the property to be relinquished in an upcoming Section 1031 exchange is currently owned directly by an individual, he or she can set up a new SMLLC to receive the replacement property. The exchange will still qualify for Section 1031 tax-deferred treatment because both the relinquished and replacement properties will be considered owned directly by the individual for federal tax purposes. However, under applicable state law, the SMLLC will protect the individual from liabilities associated with the replacement property because he or she will never appear in the chain of title.
Single member LLCs are excellent entities to own real estate.

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financial-advisor

10 Reasons You Should Talk to a Financial Advisor

Throughout this journey we call life, so many things happen.  Think about it – you start grade school and in 13 years you’re graduating high school, regarded as an adult and making life long decisions that will impact you and your future family forever.   Most of us will spend a lifetime working on the career […]

Throughout this journey we call life, so many things happen.  Think about it – you start grade school and in 13 years you’re graduating high school, regarded as an adult and making life long decisions that will impact you and your future family forever.   Most of us will spend a lifetime working on the career we choose, buying a house, getting married, having a family, sending kids to college, retirement, weddings, funerals and all of the stuff in between.

It’s a lot.  It’s life. Some of us are prepared more than others and some sooner than most and some not at all.  All our hard work and decisions we make throughout life somehow end up typically dealing with finances, budget or money in some aspect.  Finding a trusted advisor is one of the first steps to being able to develop and create a plan to deal with all the situations that life will throw at you.  Here is a list of reasons why it’s important to communicate with your advisor and weigh their advice to help make educated decisions on your money.

#1 Graduating college – lots of debt with college loans – seek the advice of an advisor to help determine what’s the best way to pay it back, protect my parents from being responsible should something happen to you and save money for other things in life.

#2 Starting a family – if something happens to me how will my loved ones continue life without me financially; tax deduction?  That’s a good thing, right?  Saving for their college expenses. An advisor can help give you options and show you strategies that will have you protecting and saving for your new bundle(s).

#3 Buying a house – what’s a good interest rate?  How much house can I afford?  Another tax deduction, right?  An advisor can review what the expenses associated with buying versus renting can do to your budget.

#4 Saving for retirement – where are the best places to put my money for the future?  Contribute to an employer retirement plan or start my own retirement account?  An advisor can show you how investing in your retirement can solidify your future years.

#5 Insurance – should I have it, what kind and how much?  Starting a protection plan in your life is a good thing and imperative if people are depending on you for any reason.  An advisor can work with your budget and create a plan that will protect your family and change as needed with your journey.

#6 Death – a parent or other family member passes that will impact you financially in some way is a good time to connect with an advisor.  They can help you get through the estate options available to you and be a good sounding board at an emotional time.  Helping you make good decisions that can affect future life.

#7 Retirement – when to take social security?  What do I do with my employer retirement plan?  How will my budget be impacted in the transition into retirement?  This is a critical stage in life where an advisor can be a huge help to determine the best options in these questions and a hundred others you will have.

#8 Budgeting – it’s a good foundational start to all financial planning.  An advisor can help determine where your money is going and if costs are higher in some aspects of your budget than others like car insurance or interest rates.  Paying off debt can be a great time to connect with an advisor as well ensuring to pay off the higher interest rate debt first and then snowball the payments into other lower interest debt.

#9 Winning the lottery or an inheritance – if we were so fortunate to have this happen to us in our journey it can be full of endless ideas of what to do with the mullah.  An advisor can help plan the best attack on debt, savings and discretionary dollars to ensure you don’t run out of money in the first week.

#10 Starting a business – you have a great idea that you can transition into a business or it’s time to fly solo and make the jump to business ownership.  An advisor can explain the different options, discuss budgets, employees, salary and other important business decisions necessary to help you be successful in this new endeavor.

Wherever life takes you on this journey, it’s important to find that trusted advisor that you can lean on to help you move through life in the happiest parts and the saddest parts. Relying on a trusted advisor can assure you and your family, the decisions you make, will turn out better than just okay.

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security

Data Security: A Constant Threat (Part 2)

Threats of a Fraudulent Loss Creep into our Daily Business Identity theft by Social Engineering is arguably the fastest growing crime – globally, and affects all of us. Social engineering fraud is a broad term that refers to scams used to compromise data by cyber-hackers. It refers to the manipulation of people into performing actions […]

Threats of a Fraudulent Loss Creep into our Daily Business

Identity theft by Social Engineering is arguably the fastest growing crime – globally, and affects all of us. Social engineering fraud is a broad term that refers to scams used to compromise data by cyber-hackers. It refers to the manipulation of people into performing actions or divulging confidential information. Think in terms of, people being “tricked” for the purpose of information gathering, fraud, or system access.

Telecom Fraud is most common by imposters pretending to be government or some other official demanding payments for family members in financial need. Two well-known scams are IRS payment demands or family members traveling abroad and needing money for transportation home.

Others are email scams. Imposters create a scenario which seems to come from a legitimate source, and their stories are often plausible. We know these as phishing attempts. The emails often contain a link or an attachment that runs an executable file. Once opened, or clicked on, it secretly downloads malware and keystroke memory programs, for example.

Data Security Can Be A Science Project For Business

Businesses that have a well-communicated guide for handling sensitive information tend to have stronger security. They use such a guide to train their staff to recognize different types of fraud. For IT and Technology, for example, update network security and comply with the PCI DSS standards to identify vulnerabilities. Consider dual and even triple authenticity [user name, password, and image] for VPN and remote access. Require updates and changes to passwords at prescribed times and use secondary authentication for password resets. IT should require firewall settings, strength of passwords and failed attempts before granting network access. Develop a clearly defined policy on Bring Your Own Device [BYOD] and the use of personal computers. The policies should also define appropriate access points in areas with free Wi-Fi.

Safeguards for Business and Individuals

We have all received emails or phone calls with an offer that seems just too good to be true. Be sure to check the sender’s email and the URL to any links. Be vigilant and take time before opening any email and answering questions with personal information – even if it comes from someone you know! There are a lot of “don’ts” to protect your information.

If you receive an email message you weren’t expecting, or it is from an unknown source:

  • Assess domain names, subject lines, and content
  • Do not click on unrecognizable links or reply to emails from unknown people
  • Do not open any attachments
  • Do not reply or forward
  • Do not send money
  • Do not disclose personal information
  • Do not release business data
  • Do not send Identification Documents
  • Do not release details of bank accounts
  • Do not give out your credit card

What We Believe

Risks to your data and data security are real, and they are in real-time. Cyber-attacks are sophisticated and far-reaching. Breaches can and do occur and, more so, new threats occur before business are even aware of the risk [e.g., dwell time and zero-day attack.]
Yes! We have become complacent with our information. True! Businesses underestimate the scope of compliance. The three big things remain the three big things in exposed data:

  • Credit and payment card information
  • Medical and Personal Health Information
  • Employment and Personally Identifiable Information

You can reduce the risk of data loss. There is a greater need for diligence and compliance since Cyber-attacks have become so sophisticated. Strict regulations, such as HIPAA and HiTECH, and performance standards including PCI-DSS and Business Process Management, will remain complex.

While this article provides some practical advice and awareness, it is intended to explain the importance of protecting data and illustrate just some of the consequences when it is not. While we discussed safeguards, these are not all-inclusive or complete. The level of protection needed may be determined by your CIO and IT department and may include other operational safeguards such as Policies and Procedures, Training, Access Control and Enforcement, Assessing Network Hardware and Software, Securing Data Transmission and Encryption, and Auditing of events such as inappropriate and unauthorized access to information.

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home-construction

Choosing the Ideal Financing Option for Home Construction Projects

With spring arriving early in the Lehigh Valley, we’ve noticed an early uptick in inquiries on how to best finance home construction projects. Finding a knowledgeable and experienced construction mortgage lender is as important as working with a reputable builder. Consumers need a partner who is familiar with the process and can talk through the […]

With spring arriving early in the Lehigh Valley, we’ve noticed an early uptick in inquiries on how to best finance home construction projects.

Finding a knowledgeable and experienced construction mortgage lender is as important as working with a reputable builder. Consumers need a partner who is familiar with the process and can talk through the nuances of available programs, allowing homeowners to focus on choosing their dream fixtures and finishes without worrying about the financing.

As consumers shop their options, it’s helpful to understand some construction financing basics. The most common forms of construction financing are One-Close and Two-Close loans. These loan programs vary among banks, credit unions, and mortgage companies. Additionally, the size and scope of the project may limit the options.

One-Close Loans

One-Close construction loans involve one settlement prior to construction. The rate is established at closing and applies throughout the construction period and during the permanent financing period.

During the construction period, interest is paid monthly based on the total draws advanced to-date. Upon completion of the project – typically when the occupancy permit is issued – the financing converts from construction to permanent, and principal and interest payments begin based upon the amortization set at closing.
Since the permanent financing rate is established before construction begins, the worry about a rising rate environment is eliminated. The process is easier and can save money, and borrowers do not need to be reapproved, and they only pay closings costs once.

Two-Close Loans

With a Two-Close construction loan, there is one settlement before construction commences that funds for the new home and a second after completion to secure permanent financing that will pay off the construction loan.

The loan rate applicable during the construction period is typically adjustable and requires monthly interest-only payments. Construction loan terms are similar One-Close loans, although longer periods are more common. After construction is completed, the borrower must secure permanent financing and be reapproved, and the property must be reappraised. Under the Two-Close scenario, the borrower typically arranges to have the permanent financing in place and has to pay closings costs a second time.

In a potentially decreasing interest rate environment, there’s an opportunity to capture a lower rate for the permanent financing when the home is completed. Upgrades resulting in cost overruns from the initial plans may be able to be financed into the permanent mortgage.

How to Choose?

So, if you’re considering residential construction financing, which option is best? As you’ve probably guessed, the choice hinges on a number of factors. Let’s look at some complications for each loan type.

One-Close rates can typically be higher than market rates at the time of closing since the lender is establishing the rate for the construction and permanent periods. Any upgrades or cost-overruns that occur after the loan closes will need to be covered by the borrower out of pocket. Hence, it is advisable to make upgrades/changes before finalizing the construction contract with the builder so the costs can then be included in the financing.

Two-Close loans do not provide interest rate protection on permanent financing until the project is completed; there are typically additional expenses due to the permanent loan closing. Also, if a borrower’s circumstances change during construction, there could be difficulties getting reapproved. The property would likely have to be reappraised, which could play a factor in the permanent loan approval.

An important consideration when choosing between the two options is where interest rates are heading. If rates increase by the completion of the project, One-Close saves money by locking you in to the preferential, lower rate prior to the commencement of construction. If rates decrease, the Two-Close option is preferable.

Ultimately, a number of factors will come into play when considering financing for home construction projects. The best way to make an informed decision is by speaking with an experienced construction mortgage lender to explore your ideal personal options.

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CFO

CFO Services for Hire

A growing trend in the business world today – and something to consider if you have the need – is the use of temporary CFO services. If you think CFO services are a bit high-end for temp help, think again. Let’s say on some random Monday morning the CFO comes into your office and announces […]

A growing trend in the business world today – and something to consider if you have the need – is the use of temporary CFO services. If you think CFO services are a bit high-end for temp help, think again.

Let’s say on some random Monday morning the CFO comes into your office and announces he is leaving in two weeks. You, as the CEO, know that the quarterly filing is due in a few weeks, the payroll department needs to be supervised to get the payroll processed on time, and the external auditors will be knocking at the door in a matter of months. You have to replace your CFO, but you don’t want to rush a hire before you mull over your needs: what level of expertise should you look for, do you require someone full-time or part-time, what are the plans for your company going forward, what can you afford?

There is an answer, and it may be as close as your CPA firm.

When you need someone with experience and expertise that can fill the CFO’s spot almost immediately, many CPA firms have the professional staff who can serve in a CFO capacity until the company finds the right person for their organization. In fact, Mark Zinman, a member of the PICPA, wrote in an August 2016 CPA Now blog — CFO Services (and More) for Companies That Can’t Afford One — that “smaller businesses can benefit from the entire CPA knowledge base encompassed in that firm. So, a business would not only be hiring a ‘CFO, ‘ but it would also be tapping into the company’s broad collective knowledge.”

You never know why or when an executive may leave. Employees, including CFOs, depart for any number of reasons: – a spouse’s job is relocating, the CFO has decided to return to school, or this person is moving into another type of work altogether. Departures like this may not happen frequently, but they do happen. In fact, this situation transpired for one of our clients, and our firm was ready to step in and assist with the CFO duties so the business could continue its daily operations.

This particular business is a not-for-profit, and as such, it is required to file monthly, quarterly, and annual compliance reports. Because it is a small not-for-profit, the CFO wore many hats, including human resources. Our firm-provided an “interim CFO.” and in the beginning, she spent several weeks becoming familiar with the accounting system and the reports that were due. She spent time sitting with employees to understand how they contributed to the company. She also invested time reviewing checks and balances, preparing grant requests, and providing feedback to the CEO and COO.

After some time, it was determined that one or two days a week was sufficient for the week. The CEO decided that the temporary hire would continue until the organization was able to find the right person for the job. The CEO was pleased that he had a seasoned professional to fill the position and the time to make a decision based on the needs for the organization going forward.

A temporary CFO from a CPA firm is an additional benefit because the knowledge and experience of CPAs can be invaluable assets to a business. Some potential advantages include having the CPA assist with preparing financial statements for the outside auditors, preparing quarterly and annual tax filings, dealing with regulatory agencies if the need arises, conducting management presentations, interviewing full-time replacement candidates, and making recommendations for operational changes.

If you or someone you know is in the difficult position of losing your top finance officer, interim CFO services from a trusted CPA firm can be a win-win for all involved.

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irs

IRS Tax Penalty Removal: Ask and You Could Receive

With the tax filing season upon us, many small business owners take responsibility for the timely filing and payment of their business and personal tax obligations. Income tax return filings for state and local governments are not to be ignored but specifically concerning the IRS. Many of us dread receiving that official letter in the […]

With the tax filing season upon us, many small business owners take responsibility for the timely filing and payment of their business and personal tax obligations. Income tax return filings for state and local governments are not to be ignored but specifically concerning the IRS. Many of us dread receiving that official letter in the mail notifying us that something may be amiss. And as much as we plan, it is sometimes impossible to not overlook a tax filing or payment deadline, even with the best of intentions.

The IRS’s first-time abatement penalty waiver (FTA), although introduced 12 years ago, is a tool all too infrequently used by taxpayers who would otherwise qualify. An FTA, however, can only be obtained for three types of penalties: failure-to-file, failure-to-pay, or failure-to-deposit. The first two of these penalties are self-explanatory while failure-to-deposit penalties can occur when a business taxpayer fails to make their payroll tax deposit timely.

To qualify for the FTA, taxpayers must not have been assessed any other penalties of a “significant amount” on the same type of tax return within the past three years and must be in compliance with all filing and payment requirements. As previously mentioned, the FTA is not available for all types of penalties. The most commonly assessed penalties that are not eligible are known as accuracy-related penalties, also referred to as “substantial understatement” and “negligence” penalties. In most situations, taxpayers can request that these penalties be abated based on a reasonable cause standard.

For example, the IRS considers you to have understated your tax if the tax shown on your return is less than the correct tax, after adjustments. The understatement is substantial if it is more than the larger of 10 percent of the correct tax or $5,000 for individuals. For corporations, the understatement is considered substantial if the tax shown on your return exceeds the lesser of 10 percent (or if greater, $10,000) or $10,000,000.

Substantial understatement penalties are calculated as a flat 20 percent of the net understatement of tax. You will not have to pay an accuracy-related penalty if there was a reasonable cause for a position you took and you acted in good faith.
Estimated tax penalties occur in situations where taxpayers have income that is not subject to withholding and would be required to make estimated tax payments during the year. Unlike with other types of penalties, there is no reasonable cause exception for the estimated tax penalty nor is there a first-time-abatement waiver available. Therefore, it is often harder to get this penalty removed, but it is not impossible.

Consult with your CPA or tax professional to determine whether an IRS penalty you have been assessed is best suited for the FTA or a reasonable cause abatement request. Also, penalties and interest are usually assessed together. There is no first-time abatement of IRS interest nor can it be abated for reasonable cause.
Every year, people in the United States who don’t file a return, underpay their taxes and underreport their income cost the government almost $500 billion, according to IRS estimates. This difference between the amount of taxes that taxpayers owe and the amount of taxes that the IRS collects is called the tax gap. To put this number in perspective, last year’s budget deficit was $587 billion. Based on the most recent IRS study, taxpayers comply with their filing and payment responsibilities about 82% of the time. This is known as the voluntary compliance rate. Encouraging compliance is one of the IRS’s major goals as it focuses on closing the annual tax gap. The proper use of penalties helps deter noncompliance, and it is clear that the IRS has been using penalties to that end. In a recent 11-year period, the number of penalties assessed increased by 34%, from 28.3 million to 37.9 million.

Lastly, in almost no situation should a taxpayer not attempt to use the first-time abatement penalty waiver or an explanation based on reasonable cause to avoid the assessment of an IRS penalty. Think of the FTA as your “get out of jail free” card. But, only in a figurative sense, not literally.

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Data-Security

Data Security: Part 1

Today’s High-Risk Reality There is good reason to be invested in the security of credit card data and personal information. Whether inside the storefront or online, data breaches at major retailers, financial centers, and health care establishments are notable and more commonplace.  To avoid the potential fraud liability, some have upgraded to chip & pin, […]

Today’s High-Risk Reality

There is good reason to be invested in the security of credit card data and personal information. Whether inside the storefront or online, data breaches at major retailers, financial centers, and health care establishments are notable and more commonplace.  To avoid the potential fraud liability, some have upgraded to chip & pin, and chip & sign to their point of sale networks–and banks have issued credit and check cards with the latest embedded smart chip.  Retail adoption of EMV compliance, is slow – arguably due to the cost and a lengthy “certification” process for equipment.  To avoid the shift in fraud liability, merchants must upgrade to EMV technology.  Despite a move to a more secure transaction environment, it does not reduce the exposure to fraud for online and card-not-present sales.  Despite these efforts, there is still a level of complacency among small businesses and consumers alike.

Data breaches continue to increase in frequency, and cyber hackers are targeting not just the big box retailers, but now small businesses and even health care providers.  Identity theft and medical fraud by identity theft have arguably become an epidemic. As an owner or executive, there is a growing trend recognizing cyber security a strategic risk to their business.  Technology companies and manufacturers fear that proprietary processes, product specifications, and even client histories could be lost.  Others, such as retailers, banks and financial institutions and health care dread the release of identifiable information of their customers and patients.

According to the Identity Theft Resource Center [www.idtheftcenter.org 11/29/2016], there were nearly 1,000 data breaches reported in 2016.  Over 34 million individual records were potentially compromised.

Segment # of Breaches # of Records
Bank/Financial Institutions 42 71,912
Business 409 5,529,046
Education 79 1,033,863
Medical/Health Care 337 14,653,156

The losses from cyber-attacks are expected to quadruple by 2019.  Insured losses and uninsured costs to US businesses were a staggering $100 billion according to a 2013 report by the Wall Street Journal [WSJ Online 7/22/2016 Sioban Gorin.]  The British insurance company Lloyd’s estimated losses in 2015 at $400 billion.  Steve Morgan, a cyber security commentator and contributor to Forbes, believes losses will reach $2 trillion by 2019 [www.forbes.com 1/17/2016.]

Is Data a Cause for Concern or Cause for Alarm?

Merchants have not totally embraced compliance with Payment Card Industry Data Security Standards [PCI DSS.]  These are a minimum set of requirements and widely accepted policies and procedures.  These are intended to optimize the security of credit and payment cards and protect cardholders against misuse or abuse of their personal information.  PCI DSS is commonly discussed but seldom understood.  Businesses have an incentive to comply: increased risk of a data breach; higher processing charges; and penalties for non-compliance.

Retailers all seem to be collecting data on consumer buying habits.  Company loyalty programs track and record our purchases to predict what, when and how much we may buy – and stock their shelves accordingly.

Of course, this leads to BIG DATA and sales analytics for the company.  There is internal accessibility and potential inappropriate access if there are no safeguards.  More so, multi-store data collection is often done in real time so encryption and external vulnerability must be assessed.

Customer Relationship Management [CRM] and Enterprise Resource Planning [ERP] software come in all sizes and applications.  Complex software and simple, smartphone apps are standard tools that can be accessed through website portals and virtual private networks.  Information is often obtained and transferred by remote access or using personal devices [tablets, smartphones.]  Customer, vendor and third party accessibility could lead to unprotected downloads of your sensitive information.

Cybercrime and the frequency of cyber hacks will no doubt continue to rise in frequency, cost and disruption.  Cyber criminals have become so technologically advanced, that it’s hard for law enforcement to follow any electronic footprint and cyber trail.  Traditional methods may be inadequate and time-consuming. Businesses are reluctant to report cybercrimes despite the law that requires disclosure when personal information is breached.  And, of course, most companies will fear the negative publicity and loss of consumer goodwill.   In many cases, unauthorized computer access may go undetected by the business whose data network has been compromised.  More so, legal issues and legislation have challenged the development of public policy since the internet operates internationally.

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