News On The Tax Front--The latest tax news.
Jobs and Growth Tax Relief Reconciliation Act of 2003--Part I--Part I of a 3-part review of the new tax law.
In Brief:--Tax, business, and personal finance tips.
Previously Reported In Daily Update
In Fact Sheet FS-2003-13 the IRS provided information on the increased Child Tax Credit and details on the advance payments to be made to eligible taxpayers. The first payments will be mailed July 25 with the last series going out August 8. Taxpayers who have received filing extensions will still get the advance payment checks if they are eligible. They should have their advance payment checks about four to six weeks after the IRS receives their 2002 tax return. Taxpayers must have claimed the child tax credit on their 2002 return. There are other criteria.
The IRS has posted new tables for employers to use in figuring how much federal income tax to withhold from employee's wages. The tables are for use by computer programmers. The wage bracket method tables should be on the IRS web site by May 30. The Service expects to mail printed copies of Publication 15-T, containing all the tables, to employers nationwide by the third week of June. Except in unusual circumstances, employers should implement the new tables no later than July 1, 2003. (IR-2003-69)
President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 into law on May 28, 2003. We've begun our report on the new law. Look for Special Reports, starting today, May 29.
In IR-2003-68 the IRS announced it will issue refund checks for the additional $400 child tax credit under the new law, beginning on July 25, Aug. 1 and Aug. 8. Taxpayers who filed returns after April 15 will receive their advance payments after the IRS processes their returns. They should not make any change to their 2002 returns or remittances based on an expectation of an advance payment check. The IRS will send notices to taxpayers on July 23, July 30 and Aug. 6, informing them of their advance payment amount. The IRS urges taxpayers to hold on to these notices for their 2003 tax returns. They will need to take the advance payment into account when determining the amount of their child tax credit on the 2003 tax return. Taxpayers who are not eligible for the advance payment may still qualify for the increased child tax credit of up to $1,000 when they file the 2003 tax return next year.
In Corona Pathology Services, Inc. (T.C. Memo. 2003-120) the Tax Court granted the IRS's motion for summary judgment, allowing the IRS to proceed with the collection of the taxpayer's corporate tax liability. The Court found the taxpayer had failed to file corporate returns and for the years at issue and employment tax returns for two quarters. While the taxpayer requested an installment agreement, the IRS found the taxpayer used corporate funds to pay shareholder's expenses.
You can't avoid a tax notice by simply refusing delivery. In Carter B. Tatum, Jr., and Barbara B. Tatum (T.C. Memo. 2003-115) the Court noted that the avoidance exception to actual receipt was not applicable. The Court found the taxpayers' testimony that they had not received notice of a certified letter was credible and that only one delivery attempt was made. The Court held the taxpayers had not received the notice of deficiency and could contest their tax liability in Tax Court.
The IRS doesn't have to allow you to pay your taxes using an installment agreement. In Dudley's Commercial and Industrial Coating, Inc. (2003-1 USTC 50,397; U.S. District Court, Mid. Dist. Tenn., Nashville Div.) the Court found the IRS did not abuse its discretion in not allowing a proposed installment agreement. In rejecting the agreement, the Appeals officer considered the financial condition of the company and its noncompliance in the past.
You may not be able to avoid a tax lien on an inheritance by simply disclaiming it. In Nancy Choate (2003-1 USTC 50,402; U.S. District Court, West Dist. Tenn., East. Div.) the taxpayer had a beneficial interest in her father's annuity proceeds. The taxpayer disclaimed her interest in the property. The Court held that the liens attached to the value of the annuity at the time of death of her father.
In James E. Anderson and Cheryl J. Latos (T.C. Memo. 2003-112) the taxpayer argued that he was not liable for income tax on wages received as a fisherman because the boat owners were responsible for withholding such taxes. The taxpayers concluded that the boat owners' failure to withhold relieves them from the liability for the income tax. The Court noted that's not the case. An individual is responsible for the taxes, whether or not the employer withholds.
If your IRS refund is transferred to an agency to satisfy another obligation, such as child supportfiling a claim in Tax Court won't help if the state acts in accordance with the requirements of the Social Security Act. That's what the Court held in Ella Louise Wooten (T.C. Memo. 2003-113).
In Lisa A. Boulerice (2003-1 USTC 50,392; U.S. Court of Appeals, 1st Circuit) the Court upheld a District Court decision that the taxpayer willfully filed false returns for two tax years. The taxpayer reported amounts received from her father's corporations as wages, when, in fact, she did no work for the two companies.
In Frank W. Smith, Janice M. Smith (2003-1 USTC 50,396; U.S. Court of Appeals, 5th Circuit) the taxpayers signed Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. Form 870 states: I consent to the immediate assessment and collection of any deficiencies (increases in tax and penalties) and accept any overassessment (decrease in tax and penalties) shown above, plus any interest provided by law. I understand that by signing this waiver, I will not be able to contest these years in the United States Tax Court, unless additional deficiencies are determined for these years. By signing the form, the taxpayers agreed to waive the restrictions on assessment and collection relative to the proposed penalty under Sec. 6659 on the understanding that by entering into this waiver, the Internal Revenue Service will not issue a notice of deficiency for additional penalties. The IRS argued that, among other things, the taxpayers waived the statute of limitations and had reached an informal settlement with the IRS. The Court noted that Form 870 also says: "Your consent will not prevent you from filing a claim for refund (after you have paid the tax) if you later believe you are so entitled. If you later file a claim and the Service disallows it, you may file suit for refund in a district court or in the United States Claims Court, but you may not file a petition with the United States Tax Court". The Court held the taxpayers were not estopped from filing a refund suit.
Congress has moved much faster than anticipated on the tax bill. The Joint Committee on Taxation has published a summary of the conference agreement on the Jobs and Growth Tax Relief Reconciliation Act of 2003. Here are the highlights:
Please note that a number of these provisions are phased out and, in some cases, the rules under the 2001 tax act become effective following the phase out.
In Victor A. Prieto, et al. (2003-1 USTC 50,376; U.S. Court of Appeals, 9th Circuit) the Court affirmed a Tax Court decision (T.C. Memo. 2001-266) holding that the taxpayer's horse activity did not have a profit motive. The Court found the Tax Court's determination was not clearly erroneous. The minor factual errors did not alter the decision. The Court also noted that, while the Tax Court did not address each of the nine factors listed in the regulations (1.183-2(b)) in its written decision, the regulations do not require it to mechanically do so.
A settlement award received as a result of personal injury or sickness (such as an auto accident, on the job injury, etc.) is generally excludable from gross income. Amounts received for other reasons such as age discrimination, etc. is generally taxable. In Norman L. and Catherine J. Forste (T.C. Memo. 2003-103) the Court sided with the taxpayers in finding that part of the award he received from his employer was attributable to personal injuries incurred because he was required to travel by airplane as a part of his employment. The Court noted the taxpayer was a credible witness and the drafts of the agreement indicated a portion of the damages were for personal injury. However, the Court found that the remainder of the award was for a breach of contract issue.
You may be able to have any interest on your tax deficiency abated if you can show that the interest accrued as a result of the Service's delay due to a ministerial act. However, in Robert L. Stewart (T.C. Memo. 2003-106) the taxpayer was unable to convince the Court the accrual of interest was the result of IRS errors. Indeed, the Court noted a significant portion of the interest resulted from the taxpayer's actions.
Single or married? The answer, even for tax purposes, is usually pretty obvious. However, in the case of Dale A. Rinehart and Jeana L. Yeager (T.C. Memo. 2003-109) the husband got an annulment in an attempt to protect his assets from his spouse's creditors. The IRS claimed the couple were still married. The Court sided with the IRS, noting that the taxpayer committed a fraud on the court that granted the annulment by representing her prior divorce was not final at the time of their marriage. Moreover, the couple continued to be known by others as married and she was still the beneficiary of his retirement benefits.
You may be able to secure a deduction for expenses even if you don't have adequate records, but it's an uphill fight. Under the Cohan rule the court may estimate certain expenses, but the taxpayer must present credible evidence that provides a rational basis for the estimate. In Charles Shaw (T.C. Memo. 2003-111) the taxpayer was not able to do so. He offered only vague estimates of his costs. In addition, since the taxpayer lacked adequate records, the IRS was allowed to reconstruct his income. Finally, since the taxpayer omitted more than 25% of his gross income for the year at issue, the statute of limitations was extended to 6 years.
The House and Senate committees are attempting to settle the differences on their respective versions of the tax bill before the Memorial Day recess. The critical difference at this point is the dividend exclusion provision. The current Senate plan contains loopholes and could be much more costly than anticipated.
The IRS has issued proposed regulations (REG-157302-02) that provide guidance regarding accounts or annuities added to qualified employer plans where such accounts or annuities are to be treated as individual retirement plans (deemed IRAs). These regulations reflect changes made to the law by the Economic Growth and Tax Relief Reconciliation Act of 2001 and by the Job Creation and Worker Assistance Act of 2002. The regulations would be applicable as of August 18, 2003 and would amend the regulations under Section 408(q). Section 408(q) provides that, if a qualified employer plan allows employees to make voluntary employee contributions to a separate account or annuity established under the plan and under the terms of the qualified employer plan such account or annuity meets the applicable requirements of section 408 or section 408A for an individual retirement account or annuity, then such account or annuity shall be treated for purposes of the Code in the same manner as an individual retirement plan rather than as a qualified employer plan. In addition, it provides that contributions to such a deemed IRA shall be treated as contributions to the deemed IRA rather than to the qualified employer plan. Section 408(q) also expressly provides that the prohibition of commingling IRA assets with other property except in a common trust fund or common investment fund shall not apply to deemed IRAs.
The IRS has issued a Fact Sheet (FS-2003-12) on scams and tax schemes involving the medical profession. The IRS noted that during the current fiscal year, 18 persons in the medical community have been convicted of various crimes ranging from failure to file personal income tax returns to Medicare/Medicaid fraud to money laundering. Close to 80% of the cases have resulting in some incarceration (that could include actual prison time, a halfway house, home confinement or a combination).
The full Senate has passed an amended version of the Finance Committee "Jobs and Growth" tax bill. The next step is a conference committee of the House and Senate versions. Completion is anticipated by the Memorial Day recess. The significant provisions include a $100,000 limit on the Section 179 expense option; increased penalties for tax fraud; a $23 billion reduction in the amount of tax relief for married couples; acceleration of the tax cuts scheduled under the Economic Growth and Tax Relief Reconciliation Act of 2001; a 5% tax rate on repatriated foreign earnings for one year; a cut in the tax on dividends by half for 2003 and a 100% exclusion for dividends from 2004 through 2006. The bill would also provide relief from the alternative minimum tax for middle-income taxpayers.
The IRS reported it is considering publishing a notice of proposed rulemaking proposing rules regarding the amount of a liability a transferee of property is treated as assuming in connection with a transfer of property and certain tax consequences that result from the transferee's assumption of such a liability. This document describes and explains the issues that the IRS and Treasury are considering addressing in the notice of proposed rulemaking and the rules that the IRS and Treasury might propose to address some of these issues. (REG-100818-01)
Were it not for Sec. 355, the division of a corporation into two or more corporations would be a taxable transaction. In Rev. Rul. 2003-52 (IRB 2003-22) the IRS held that the division of a family farm corporation into two entities so that two children could each pursue their own interests in the farm met the business requirement of Reg. Sec. 1.355-2, despite the fact that the distribution was also designed to enhance the estate planning goals of the family and to foster family harmony.
Section 2702(a) provides special rules for the valuation for gift tax purposes of a transfer of an interest in a trust to or for the benefit of a member of the transferor's family if the transferor (or an applicable family member) retains an interest in the trust. Under Sec. 2702(a)(2)(A), the value of any retained interest that is not a qualified interest (as defined in § 2702(b)) is treated as zero unless the transfer is described in Sec. 2702(a)(3). Section 2702(a)(3)(A) and Sec. 25.2702-5(a)(1) provide that Sec. 2702(a) does not apply to a transfer to a personal residence trust; that is, a transfer of an interest in trust all the property of which consists of a residence to be used as a personal residence by persons holding term interests in the trust. Rev. Proc. 2003-42 (IRB 2003-23) contains an annotated sample declaration of trust and alternate provisions that meet the requirements under Sec. 2702(a)(3)(A) and Sec. 25.2702- 5(c) of the gift tax regulations for a qualified personal residence trust (QPRT) with one term holder.
Rev. Proc. 2003-43 (2003-23) provides a simplified method for taxpayers to request relief for late S corporation elections, Electing Small Business Trust (ESBT) elections, Qualified Subchapter S Trust (QSST) elections and Qualified Subchapter S Subsidiary (QSub) elections. Generally, this revenue procedure provides that certain eligible entities may be granted relief for failing to file these elections in a timely manner if the request for relief is filed within 24 months of the due date of the election.
In Rev. Rul. 2003-56 (2003-23) the IRS offered guidance on the consequences of a deferred like-kind exchange under Sec. 1031 by a partnership where property subject to a liability is transferred in one taxable year of the partnership and property subject to a liability is received in the following taxable year. The IRS held that the liabilities are netted for purposes of Sec. 752. Any net decrease in a partner's share of partnership liability is taken into account for purposes of Sec. 752(b) in the first taxable year of the partnership, and any net increase in a partner's share of partnership liability is taken into account for purposes of Sec. 752(a) in the second taxable year of the partnership.
It's difficult to win an argument with the IRS on procedural issues. In Annie W. Nebres (T.C. Memo. 2003-102) the IRS conceded the taxpayer did not receive a deficiency notice. The IRS issued a final notice of intent to levy. The taxpayer requested a collection due process hearing. The Court noted the Appeals officer did not prevent petitioner from disputing the amount or existence of her underlying tax liability, but the taxpayer raised on frivolous arguments. The Service's refusal to consider the taxpayer's frivolous arguments does not constitute a refusal to permit her to contest her underlying tax liability.
Jobs and Growth Tax Relief Reconciliation Act of 2003--Part I
In General
The new law can be broken down into three sections. The first provides tax relief for individuals, including reduction of the marriage penalty, a reduction in individual income tax rates, and minimum tax relief. The second provides growth incentives for business in the form of an increase in the bonus depreciation from 30% to 50% and increased expensing of assets. The third section generally lowers the tax rate on dividends and capital gains to 5% (from 10%) for taxpayers in the 15% bracket and to 15% (from 20%) for those taxpayers in higher brackets.
Acceleration of Previously Enacted Tax Reductions
Introduction
The new law accelerates a number of provisions enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 that were designed to reduce the tax burden of individuals. Many of the provisions in the new law expire, some at the end of two years. While many of these changes could be extended, at the present time you've got to assume they won't be.
Increase in Child Tax Credit
The child tax credit was scheduled to increase from $600 to $1,000 beginning in 2005. (The child tax credit applies to each child under the age of 17 at the end of the taxable year for which the credit is claimed. The credit is phased out for taxpayers with AGI above $110,000 (married filing joint; $75,000 for single individuals). The new law increases the credit to $1,000 for taxable years 2003 and 2004. In addition, the increased portion of the credit ($400) is to be refunded in advance (similar to the tax reduction in 2001) based on a taxpayer's 2002 return. The refund is to be made as soon as possible, but in no event will checks be mailed after December 31, 2003. The IRS has just announced that it will begin mailing refund checks at the end of July.
Expansion of 15% Tax Rate Bracket for Married Taxpayers
In an attempt to reduce the marriage penalty, the Economic Growth and Tax Relief Reconciliation Act of 2001 would change the 15% tax bracket for married taxpayers who file joint returns. It would do so by making the ceiling for the 15% bracket for married taxpayers filing jointly twice that of the 15% bracket for individuals. Thus, for 2003, the 15% rate bracket for married taxpayers will begin at $14,000 and extend to $56,800 (up from the original $47,450).
This change will be effective for calendar tax years 2003 and 2004. In 2005 the upper threshold of the 15% bracket will decline to 180% of that for an individual taxpayer.
Tax Tip--While the tax benefit will depend on your income, this change could save some taxpayers as much as $935 in 2003. While the change was intended to benefit two-earner couples, it will benefit all taxpayers filing married, joint.
Increase in Standard Deduction for Married Taxpayers
The second leg of the marriage penalty reduction was the increase in the standard deduction for married couples filing jointly to twice the amount of the standard deduction for single taxpayers. Again, this provision has been accelerated to 2003 and 2004. Thus, for 2003 the standard deduction will be $9,500 instead of $7,950. The amount will decline to 180% of the standard deduction for single individuals beginning in 2005.
Tax Tip--The additional amount will probably mean that more taxpayers will be taking the standard deduction instead of itemizing. If you anticipate being near the $9,500 amount, or just slightly over in 2003, you might want to consider bunching deductions in 2003 or 2004 to make the most out of the standard and itemized deduction.
Acceleration of 10% Individual Income Tax Rate Bracket Expansion
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 the 10% bracket was to expand from $12,000 for married taxpayers filing jointly and $6,000 for individuals and married taxpayers filing separately to $14,000 and $7,000. The $10,000 ceiling for heads of households is unchanged. The new thresholds will be in effect for years 2003 through 2005. The thresholds are adjusted for inflation beginning in 2004.
Don't call the contractor to start work on the swimming pool. Individual taxpayers will save only $50; those filing married joint will save only $100 in 2003.
Reduction in Individual Income Tax Rates
This is the big one for most taxpayers. The new law accelerates the reduction in the rates that were scheduled to take effect in later years to 2003. The rates for this year were scheduled to be 10%, 15%, 27%, 30%, 35%, and 38.6%. Under the new law the rates for all of 2003 will be 10%, 15%, 25%, 28%, 33%, and 35%. The savings could be substantial. For example, this change alone could result in savings of some $1,300 for married taxpayers filing jointly and $800 for individual taxpayers having income of just $115,000 (married, joint) or $70,000 (single).
We've calculated the new breakpoints and taxes for single individuals, married couples filing jointly, and heads of households and reproduced them at the end of this section.
Tax Tip--You may want to rethink your estimated tax payments and reduce them for the remainder of the year. How much depends on how affected you are by the changes above. Clearly, some taxpayers will benefit more than others. Higher income taxpayers, will see substantial savings. When doing the computations, don't forget to take into account the changes in the rules for dividends and capital gains. Caution. The lowered ordinary income rates mean you stand a greater chance of getting hit with the alternative minimum tax. Don't forget to factor this into your calculations.Tax Tip--The reduction in individual rates without a corresponding drop in corporate rates means doing business as an S corporation, LLC or partnership is more attractive than before. On the other hand, the lower tax rate on capital gains and dividends and certain other law changes (to be discussed in the third part of our review of the new law) makes some of the disadvantages of regular corporations less onerous. It's time to once again evaluate the proper entity to use to do business.
Tax Tip--The lower tax rates mean that there's a better chance of getting hit with the alternative minimum tax. That's because the rates on that tax are 26% and 28%, the same as in prior years. This year, even more than in recent years, you've got to review your tax situation before the end of the year. There are ways to minimize the impact of the alternative minimum tax, but you've got to plan for it. Then, be careful to calculate the tax when preparing your return next year.
Tax Tip--The lower tax rates cut both ways. While you'll pay less tax on any earnings, deductions aren't worth as much. For example, under the old 30% bracket, a $100 deduction would save you $30 in tax. Now, under the 28% bracket, that same deduction is worth only $28.
Tax Tip--Employers will have to change their withholdings on employees to reflect the new law. The IRS has already published new withholding tables for computer use. Tables that allow you to use wage bracket withholding will be published by May 30.
Alternative Minimum Tax Relief
The new law provides only a little relief from the alternative minimum tax. For 2003 and 2004 the exemption amount for married couples filing jointly increases to $58,000 from $49,000. For single taxpayers the exemption goes to $40,250 from $35,750. The increases are small and the exemption is phased out with higher income. On balance, the increase is unlikely to offset the effect of the lower regular income tax rates on the alternative minimum tax.
Tax Rate Schedules for Individuals--2003Single Taxpayers
Taxable income: Tax: Over But not over Tax +% On amount over $ 0 $ 7,000 $ 0.00 10 $ 0 7,000 28,400 700.00 15 7,000 28,400 68,800 3,910.00 25 28,400 68,800 143,500 14,010.00 28 68,800 143,500 311,950 34,926.00 33 143,500 311,950 ....... 90,514.50 35 311,950Married Individuals Filing Joint
Taxable income: Tax: Over But not over Tax +% On amount over $ 0 $ 14,000 $ 0.00 10 $ 0 14,000 56,800 1,400.00 15 12,000 56,800 114,650 7,820.00 25 56,800 114,650 174,700 22,282.50 28 114,650 174,700 311,950 39,096.50 33 174,700 311,950 ....... 84,389.00 35 311,950Heads Of Households
Taxable income: Tax: Over But not over Tax +% On amount over $ 0 $ 10,000 $ 0.00 10 $ 0 10,000 38,050 1,000.00 15 10,000 38,050 98,250 5,207.50 25 38,050 98,250 159,100 20,257.50 28 98,250 159,100 311,950 37,295.50 33 159,100 311,950 ....... 87,736.00 35 311,950
Previously Reported In Daily Update
Trust management fees . . . They can be substantial. Are they worth it? If you're investing in stocks and the trust manager is making money (or at least not losing as much as the market indices), the answer is yes. But if the trust is simply investing in fixed income securities and particularly if it's investing conservatively (government bonds, high quality municipals, etc.) you may be able to do better on your own. The trust fee may be 1% of total assets. Your return may be only a few percentage points more. Discuss this with an independent financial advisor.
Overdue accounts receivable? . . . The statistics indicate that accounts more than 90 days overdue have a poor chance of being collected. But simply playing the odds and forgetting about the account may not be the best approach. Some of the accounts may be collectible, just simply in dispute. For example, the customer ordered $500 worth of merchandise and is disputing $150 of the charge for some reason. Some customers won't pay any part of the bill until the entire charge is resolved. In the worst case you'll have to write off $150. You'd still be able to collect $350. Or maybe you delivered the wrong items and a quick exchange will get you the entire payment and keep the customer happy. While you may not have the time to research all overdue receivables, spending time on the larger ones should pay off.
Limit your sales pitch . . . Your product or service may be light years ahead of the competition, but resist the urge to put in a laundry list of advantages in your sales pitch. Some professionals suggest limiting the list to the top 5. Unless you're addressing professional users (engineers, scientists, etc.) or experts, you'll lose the audience. Even if you're dealing with experts, there's no reason to go past 10 items.
Need a Copy of Your Tax Return Info? . . . You may need a copy or transcript of your tax return for a variety of reasons; for example, to give to their mortgage lender or educational institution. More information on options, how to get copies, and the request form (Form 4506) is available at www.irs.gov/newsroom/article/0,,id=105370,00.html. Tax professionals requesting transcripts of their clients' tax return info can call the Practitioner Priority Service toll free at 866-860-4259 or fill out Form 4506. To get the transcripts, they either must have their client's authorization on file with the IRS, attach the authorization document to Form 4506, or have their client sign Form 4506.
Exit strategy as important as acquisition approach . . . Many books have been written on the right way to buy a business, real estate, etc. The literature concentrates on valuing the property, negotiating strategy, etc. But little thought is given to selling out. That can be critical. What happens if the business doesn't prosper as anticipated? Will it be hard to sell? The selling price of a service business can often depend on the reputation of the owner, manager, or a key employee. That's especially true with restaurants, repair shops, etc. Is there a broad market? A dress shop can be sold to anyone and running the store doesn't take much training. On the other hand, a plumbing business may only be saleable to a licensed plumber. Similarly, purchasing an unattractive rental property at a bargain price may make sense if you intend to hold it for the rental income and spruce it up, but may be a bad move if you might have to sell before you've realized your goals.
Split-up of S corporation tax free . . . The split-up of a corporation into two separate entities could have significant tax consequences. However, in a recent letter ruling (LR 200320013) an S corporation was engaged in two separate businesses. Because of state restrictions on one of the businesses, the sole shareholder of an S corporation wanted to set up another S corporation as a subsidiary and put one of the businesses in the new entity. Subject to a number of conditions, the IRS held that the transaction would qualify as a tax-free reorganization under Section 368(a)(1)(F).
Comparison shop and negotiate . . . Competition is getting tougher in many markets. That's bad if you're a seller, but presents opportunities if you're a buyer. The first way to take advantage of the situation is to comparison shop. Many vendors are looking to boost sales at the expense of margins. Second, don't hesitate to try to negotiate a better deal. You may or may not get it, but you won't know until you try. And vendors who wouldn't budge on price in the past may be more willing to do so now. But price often isn't the only criteria. If you're switching suppliers or anticipate warranty, service or parts issues down the road, make sure the supplier will be around.
No closing cost mortgages . . . Read the fine print. You may not pay any closing costs up front, but some loans require you to pay for the closing costs if you ask for a release of the security interest within a certain period of time, often 2 years. The agreement will specify the total closing costs (appraisal fee, mortgage tax, title insurance, etc.). While the closing costs are based on many factors, they could easily run several thousand dollars.
Cheap parts and expensive service . . . Many service businesses provide parts as well as service. The garage or dealer that services cars, the contractor that installs windows and doors, etc. What's the common denominator? Often the parts are relatively cheap; it's the labor that makes the price jump. In many cases the contractor has the choice of parts and, to keep prices low, goes with the cheaper option. For example, the cost of installing a new starter in a particular car may be $300 for labor and $85 for the starter. If the starter fails not long after any warranty wears off, you'll have created one irate customer. That's particularly true if you could have opted for a better quality starter for $100. If there are options, explain them to the customer. The higher the labor cost, and the more prone the part is to failure, the more important this becomes. It's not worth losing a customer.
Buying a business? . . . Ever wonder why a business that's been around for a long time is such a cash cow? It may could be the business is very profitable, or it could be that the owner isn't making any capital outlays. That could be especially true if he's ready to sell. A buyer could be faced with many expenditures, not to mention the cash outlays for the purchase price, whether that's a one-time expenditure or a monthly payout. Make accurate cash-flow projections early in the negotiations. You don't want any surprises after you're the new owner.
What fringe benefits do employees want? . . . Based on several surveys, the benefit most desired by employees of small businesses is health insurance. Disability insurance, life insurance, a 401(k) plan, and a company funded retirement plan are the second most mentioned benefit, but the order varies among surveys, and they're all a distant second to health insurance.
Copyright 2003 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536