Summary of 2011 Tax Hikes

Where are tax rates going in 2011? If you guessed “up”, you’re absolutely correct. If Congress doesn’t do anything about the Bush tax cuts which are slated to expire in 2011 here’s what happens.

The estate tax, 0% this year, will go to 55% on assets above a million dollars. Now, your estate has already been taxed. You’ve paid income taxes, property taxes, dividend taxes, capital gains taxes and you’re sitting on what’s left over and the government still wants over half of what you own when you die.

George Steinbrenner’s heirs saved $500 million dollars – that’s $500 million they wouldn’t have if George had died 6 months later.

The income tax rates, which Democrats keep insisting are “tax breaks for the wealthiest Americans” will change as follows:

• 10% goes to 15% – If you pay a 10% tax rate you are not one the “wealthiest Americans” and your tax rate is going up 50%!
• 25% goes to 28% – a 12% increase
• 28% goes to 31% – a 10.7% increase
• 33% goes to 36% – a 9% increase
• 35% goes to 39.6% – a 13% increase

Because most small business owners in America pay personal income tax rates on their business profits, this affects your bottom line. And that’s just for starters… Read more.
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Obamacare Adds A Flood Of 1099′s

This got my attention. In a column by Deroy Murdoch he explained one of the many consequences of Obamacare. More paperwork for us small business owners.

Specifically, ANY vendor you spend more than $600 a year on will require an IRS form 1099 starting in 2012. Whether it’s a graphics artist or Best Buy, it doesn’t matter.

According to Rep. Dan Lungren (R, Calif.)

They will have additional accounting costs that will consume time and money,” Lungren tells [Murdoch]. “They will be required to keep a running tab with every vendor, all the way from restaurants to anything they buy — a piece of equipment, an airline ticket, or a hotel room. And when they reach the $600 threshold, they will be required to file 1099s for each of those vendors.

What is Home Depot going to do with the million 1099′s it receives from all those contractors out there?

Lungren also points out that small business owners will likely do more business with big box stores rather than local businesses to alleviate the paperwork.

My question is what the hell does this have to do with health care? Now we’re starting to find out what was in those 2600 pages.

You know what else is in there?

Atop this, the Galen Institute’s Grace-Marie Turner reports that Obamacare will require employers to evaluate their health plans’ affordability by calculating each employee’s household income, not just that worker’s individual wages. This likely will involve, at a minimum, collecting income declarations from every staff member.

You’ll also have to find out whether they have an 18-26 year old at home and whether they need health care from your company.

Can the government be a bigger pain in the ass of small businesses?

“YES, WE CAN”.
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Starting An Online Business – Incorporation

We’re approaching the start of a new year and many of you are looking into starting an online business. One of the steps is deciding whether or not to incorporate your business.

As a small or home office business, you have four main choices for your business as a legal entity in the United States (for those of you in other countries you will have to check on your own business tax laws):

* Sole Proprietor
* General Partnership
* Limited Liability Company (LLC)
* Subchapter S Corporation

Of the other possible options, a “C” corporation is generally for large businesses and Limited Partnerships can be complicated, so I won’t get into them here.

Also, don’t forget your local business licenses. You may have to register your business in the city, county and/or state where you live. You should also set up a separate bank account for your business.

In general, your main considerations are going to be liability, taxes and how you intend to finance your business. Read more.
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Make Money Or Create Wealth?

As a small business owner or entrepreneur is your objective to make money or to create wealth? There’s a difference.

Bernie Madoff made money. The investment bankers on Wall Street made money. A construction worker who built a road paid for with government stimulus money made money. The Federal Reserve printing 2 trillion dollars out of thin air literally made money. They didn’t create wealth.

Capitalism is starting to get a bad name. But, if you are a small business owner you are a capitalist. Whether it’s a bread slicer, an ebook or a wedding cake, you are creating a product. You are adding value.

Steve Forbes wrote a recent editorial called Capitalism: A True Love Story. He decries the theory that

capitalism is fundamentally based on greed and is immoral; that it enables the rich to get richer at the expense of the poor; that free markets are Darwinian places where the most ruthless operators unfairly crush smaller competitors and where the cost of vital products and services, such as health care and energy, are almost beyond the reach of those who need them; and that capitalism unchecked breeds corruption à la Bernie Madoff and Enron and encourages obscene bonuses, excessive pay packages and unwarranted golden parachutes. Capitalism is also being blamed with renewed vigor for a range of social ills, from air pollution to obesity.

He goes on to say that if it weren’t for capitalism there would be no personal computers, no cell phones, no Internet. People of all income levels have benefited from capitalism. Read more.
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Cut Costs With Technology

Most of the Wall Street earnings reports coming out these days show a decrease in revenue, but an increase in profits. How is this possible?

By cutting costs. By lowering company expenses, lower income still generates a profit.

We always try to instill cost savings measures when dealing with small businesses. Why spend $400 for Microsoft Office when you can use the free OpenOffice? Why travel on a business meeting when you can teleconference? Why pay long distance phone charges when you can use VOIP?

Several cost cutting measures using technology are outlined in a PCWorld post. They cover things like online phone services, freelancer web sites and offsite file storage and backup.

One tool they cover is ClearApps Network Inventory Advisor. It’s one of those time-saving tools you come across every so often.

Let’s say you have a small business with up to 25 computers and no IT department – how do you keep track of all those computers? For $89 (higher for more than 25 computers), ClearApps will survey all of them, showing you all of the hardware and software (including version!) on each computer, plus give you alerts, like anti-virus not installed or turned off, low hard drive space, etc.

This is a great tool for office managers or computer servicing companies.

Another interesting tool they came up with is called Egnyte. It’s an online file storage/backup service with an interesting twist. For an extra $10/month, you set up an old computer or a hard drive as a file server for your office. By adding Egnyte’s software, it continually backs up all of the files to their server.

That way you have ready access to large files locally, but they’re all backed up offsite. If you lose your Internet connection, no problem. The file server will reconnect and synchronize whenever the connection is restored.

If you just have a single computer, you can opt out of this service and just map a virtual drive to Egnyte’s server for file storage and offsite backups. It’s a little more expensive than, say, Mozy, but it’s worth investigating..
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SBA Offers Loans, Banks Won’t Participate

As part of the 2009 Recovery Act the Small Business Administration (SBA) “designed a deferred-payment loan program to help small businesses make payments on existing debt”.

Called the America’s Recovery Capital (ARC) Loan Program, it’s a Federally guaranteed, deferred-payment loan of up to $35,000, no-interest, no payments for 12-18 months, then paid off over the following 5 years.

The program was funded with $255 million but only $65 million has been spent.

Why? Banks are just not signing up for the program, that’s why.

Small business owners in Florida are complaining, according to the St. Petersburg Times. Commenters on the article complain that they can’t get a new loan.

First, let’s read the fine print – a must with any government program. The ARC says it’s for “existing debt”. There may be other programs for new small business loans, but the ARC is for alleviating already incurred debt.

Others ask why should the banks participate when they don’t make any money on a no-interest loan?

While the loans may be no-interest, they are guaranteed and the banks still make money because the “SBA will pay monthly interest to the lender at reasonable rates throughout the term of the loan”. In other words, the taxpayer pays the interest.

So, again, why aren’t the banks signing up? One reason it put forward by Jim Parrish of the University of South Florida’s Small Business Development Center in Tampa.

Parrish said he understands banks’ reluctance, citing a report from the U.S. Governmental Accountability Office that estimated 56 percent of the borrowers may not repay the loans.

“The banks don’t want to fool with these loans that, truthfully, they don’t make any money on,” he said. “Because of all the handling costs, it’s not profitable … and they might turn around and half of them could go bad.”

(St. Petersburg Times)

So the interest paid to the banks barely covers the cost of the paperwork administering the loans, and doesn’t cover the added paperwork of getting reimbursed when half the loans go bad.

Still, according to SBA stats more loans are going to less populated states than places like Florida, New York and California.

If you are a small business owner and are interested, check out the specifics at the SBA’s American’s Recovery Capital Loan page..
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Getting Paid Through Online Advertising

The most common way of getting income through advertising is with Google Adsense, but it’s not one we recommend. A couple of years ago Google split its advertising fees (Google Adwords) between ‘search’ and ‘content’ advertising, the first for Google’s search page and the second for sites with Adsense.

The fees Google charges for Adsense ads have gone way down, meaning you have to have tons of traffic that click on Adsense ads to make any money – and I mean TONS of traffic. You would do better to charge fees to advertisers directly for space on your site or blog.

For example, let’s say you have a site on dog training with Google Adsense. Someone selling dog food can use content ads, even picking your specific site for their ads, and be charged 10 or 15 cents per click. Of that, you get less than a nickel per click.

That means to make $1000 you need 20,000 click-throughs, which at a relatively high click-throughs rate of 3% means you would make $1000 for every 666,666 visitors. A more realistic CTR of 2% means $1000 for every MILLION visitors.

As I said, we don’t recommend Google Adsense.

Another option is to solicit paid ads directly from online sellers. You can have them pay per ad or pay per lead (click-throughs). So, let’s say you charge $40/month for an ad on your site/blog and another $20/month for an ad in your weekly newsletter and you find 7 advertisers. That’s $420/month or around $5000/year from one site. It beats trying to get 5 million visitors a year through Google Adsense.

As your number of site visitors and mail list recipients increases you can charge more for advertising, and/or create more sites.

Advertising can work as a sideline to products, even affiliate products, on your site, but I’ve found that after all the work to get a visitor to one of my sites, I don’t want them clicking away from it unless I make more than a nickel..
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The Need For Retirement Planning

A recent study commissioned by the Principle Financial Group showed that the majority of small and medium business owners have no plans in place for retirement.

Among those surveyed, nearly seven out of 10 owners (66%) report they do not have an exit plan to transition their business in the event of death, disability or retirement.

The study also goes into detail about owner benefits vs. employee benefits and the lack of life insurance for owners and key employees.

I realize that in ‘the heat of battle’ of running a small business that you may put off thinking about retirement but, come on, are you going to work til you drop dead?

The longer you contribute to a retirement plan the better off you will be. There are tons of options, at least in the U.S., like IRA’s, 401-(k)’s, SIMPLE and SEP’s. Talk to an accountant or retirement specialist to find out what your options are.

Since you will be declaring all of your profits as personal income it makes sense to find a tax-deferred program for your retirement.

You also need an exit strategy from your business. Most small business owners should progress from working their business to running their business to supervising the managers that are running your business.

That will eventually put you in a position to sell your small business or at least take a less active role in the day-to-day operations.

Two of the best books I’ve read on this progression are The E-Myth Revisited by Michael Gerber and The 4-Hour Workweek, Expanded and Updated by Tim Ferriss..
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