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November 2012

Don't let December pass you by

SnowmanIt's officially here. The holiday season. It's an odd 30 days. On the one hand, you're busy wrapping up the year. On the other, your head and heart are thinking family, shopping, spiked egg nog, snowflakes and the company party.

It's easy to get so distracted by the holidays that in a blink -- it's January 2nd and the last 30 days was just a blur of less than productive efforts.

Don't let December get the best of you. No matter how busy the last month of the year is your for business, you can get some big marketing projects both started and finished before the big ball drops in Time Square.

I wrote a post about the 5 Marketing To Dos to get done before 2013 and I want to elaborate on one of them here.

The 3rd item on that To Do list was:

Call it quits: Look back over the past 12-24 months. What’s the one marketing tactic that you have really dedicated yourself to but it just hasn’t caught on fire. This has to be something that you feel you really implemented well, thoroughly and can’t imagine what you could have done better. If you can say that and it’s not delivering results — it’s time to let it go. Make December 2012 the last time you invest in it.

It's so easy to keep doing something. Especially if you think it should work but it isn't yet. Or you've been doing it long enough that it's just habit. But that doesn't mean it's a good use of your resources. 

December is a great time to really be honest with yourself and your team. Be brutal as you go through your 2012 marketing efforts and prune those efforts that haven't panned out. But here's the criteria you should use to decide if it's time to shuttle the effort.

  1. You've been doing it for at least 12 months
  2. You're confident that you've done it well (best practices and all that)
  3. There is no change in your business, industry trend etc. that suggests this tactic would be significantly more successful in 2013
  4. It's not tied to other tactics that are working (you're not pulling the proverbial thread that unravels the sweater)

I hope you'll check out the 5 To Dos post and tackle all 5. But if you can only make time for one -- it's time to call it quits.

~ Drew

 

Plug Load = Bad!

Plug load bad 2Homes are using less and less electricity for conventional purposes such as heating, cooling, and water heating due to better insulation and appliance efficiencies. However, the plug load is increasing greatly; those TV’s, DVR’s, chargers, and small transformers or anything with the little green light. Some estimates say vampire power accounts for 40% of home power.

If 40% seems like a lot, think of those nice spring days when most of the lights are off and the furnace is not running. All those devices are still sucking electricity. You just cannot see it! 

Plug load bad 1MODLET to the rescue. The device plugs into any outlet and controls whatever you plug into the modlet. The great thing about the device is, through a local WIFI, information is sent to your computer where you can monitor the electrical consumption at any modlet. You can even program each device to cut off the flow of electricity to your energy-stealing appliances. Chances are you won’t be turning your TV on at 3 a.m., so why not cut the power from 11 p.m. to 8 a.m.?

At $55, each you may think the cost sounds pretty crazy. I did some analysis on what it could do for my house. My 2,700 square foot house used 8,400 kilowatt hours of electricity per year, costing $850. If we are average, then 40% of the cost ($340) was for all those things that are always using electricity.  I could buy 5 Modlets for my TV’s (3), computer and printer (1), and charger location (1) at the cost of $275.

After one year I would recoup my investment and save money from then on.

What the fiscal cliff looks like from the back side of the election

20121116-1iabizThe election results have cleared away some of the fog from the tax planning scene for year end, but visibility is still poor. 

What we know  

There will be a tax increase on "investment income" and wage and self-employment income starting next year. Investment income for taxpayers with adjusted gross income over $200,000 (single filers) or $250,000 (joint filers) face a new 3.8% Obamacare surcharge on their investment income. "Investment income" is broadly defined and includes taxable interest, dividends, capital gains, rental and royalty income, and "passive" income from K-1s. 

Taxpayers with wage and self-employment income face a new .9% Medicare surtax for wages or self-employment income exceeding $200,000 (single filers) or $250,000 (joint filers). This is the first time a Medicare tax rate has depended on joint income. Because employers can't know what a spouse makes, this will require many taxpayers to pay additional Medicare tax when they file their 2013 returns. Employers will withhold the .9% tax on wages over $200,000.

What we don't know

We don't know what the tax rates will be for 2013. If Congress and the President fail to agree on a plan for next year, the tax rates effective in 2000 will return, with a 39.6% top rate for ordinary income. The top rate on capital gains would rise from 15% to 20%, and the top rate on dividends would rise from 15% to 39.6%. Of course the 3.8% tax on investment income would also apply. You can see a state-by-state map of the effects of going off this "fiscal cliff" here.

We don't even know what the Alternative Minimum Tax rules are for this year 

Congress has not yet "patched" the AMT by increasing the annual exemption amount. If they fail to do so, some taxpayers may be surprised by an additional tax bill of more than $8,000 this coming April.

What to do? 

You should consult your tax advisor before you do anything. Some steps advisors will be discussing in the coming weeks with their clients include:

  • Reversing the usual tax planning by accelerating income and deferring deductions. If rates are going up, deductions will be worth more next year, while income taxed this year will be treated more kindly.
  • Examine the timing of capital gain income. For taxpayers who are going to be selling a stock or other capital asset anyway, this year may well be the time to do so. While that's true for taxpayers in top brackets for obvious reasons, it's also possibly true for taxpayers in lower brackets; the zero rate for capital gains for lower bracket taxpayers will expire this year.
  • Consider electing out of installment sales. The tax law lets taxpayers choose to be taxed on 2012 installment sales in 2012, even if the payments on the sales will be made in later years.
  • Dividend distributions. C coporations and S corporations with old C corporation earnings will contemplate whether to distribute earnings to be taxed without the 3.8% Obamacare surtax. If cash is tight, they will consider making distributions in the form of notes to get the income out this year.
  • Fixed asset elections. Taxpayers usually choose to write off fixed assets as fast as possible through "bonus depreciation" and "Section 179" expensing. If rates go up, that may be counterproductive.
  • Family gifting. The current $5 million lifetime gifting and estate tax exclusion will decline, perhaps all the way to $1 million. Advisors will be looking at ways to move wealth to the next generation before year-end.

Above all, stay flexible, be ready to act fast, and stay in touch with your tax advisor. The politicians may or may not change the tax picture in the coming weeks, so flexibiltiy is important.

-Joe Kristan

Leading In ESOP Company

Leadership is critical in all organizations, but when you add the element of employee ownership it elevates the importance. When a company shifts the mindset of its workers from employee to employee owner, the scrutiny of leaders is more pronounced.

When everyone is asked to step up and act like an owner, then the top leaders better be prepared for valid questions and challenges to the status quo. This shift can happen in a very short period of time and many leaders are not prepared to handle this shift in organizational and individual behavior. There are many programs and books that focus on leadership development, but not in an employee owned company context.

The good news is that there is a program that has been around for several years that focuses on leadership in an ESOP company. The program is conducted by the University of Pennsylvania and is called "Leading in Ownership Setting - Program for CEO's". It is a stellar program and I can personally speak to the value of the program as I was member of the planning committee and a participant in the first class.

The program challenges individuals in how they view leadership in multiple ways. More importantly, participants create a peer group that they can stay connected to for ideas and help with future challenges.

If you are looking to implement employee ownership in your company, this program can help you prepare for the challenges and joys of leading a company of employee owners. Make the investment in yourself and you will receive payback for the rest of your career.

-Victor Aspengren

Reuse a Shoe

REUSE A SHOE 1In 1990 Nike wondered what the company could do to be more sustainable. An obvious solution was to keep athletic shoes out of landfills since they may never decompose. Voila, the Reuse-A-Shoe program, was started.

About 1.5 million pairs are recycled at Nike recycling centers each year. Since its beginning nearly 28 million pairs have been recycled into other products rather than going to the landfill.

The only drop off center in Iowa is the Nike Factory Store at the outlet mall in Williamsburg. The store manager says they get about 200 pairs a month placed in the drop off bin. You can also mail shoes directly to a Nike recycling center.

The shoes are separated into three parts. The hard outer sole is ground up and used in sport court tiles, track surfaces, and even new shoes. The midsole or the cushion part is used for outdoor basketball and tennis courts. Finally, the shoe’s upper fabric is used in the cushioning pads under floors made of rubber or wood. Nike even came up with a new product called Nike Grind which is synthetic sport flooring.

REUSE A SHOE 3Maybe the day will come when no new shoes will be made with virgin materials; instead all our athletic shoes will be in a never ending loop of use and rebirth.

-Rob Smith

Raising Capital for an Acquisition

When raising capital to acquire a business, or expand an existing business, you’ll need to view the investment from the perspective of the investor. To do so, you will need to know about investment risk vs. return, as every investment has risk. Federally insured certificates of deposits and interest-bearing bank savings accounts have risk.  Not necessarily principal or interest payment risk, but inflationary risk. If you are receiving 3% on your money in a two-year CD at the bank and you are in a combined state and federal marginal tax bracket of 33%, then you are netting out about 2% after tax. If inflation were to rise to 5%, you would actually be losing 3% on your money in the form of purchasing power.

Conversely, one may view lower-priced publicly traded stocks on the Over the Counter Bulletin Board as a high-risk, high-return investment. These investments generally have a higher principal risk but also have higher return potential. In general, risk and potential return go hand-in-hand. The higher the risk one takes on an investment the higher the potential return should be.

Any new company or venture will generally be viewed as very high risk by most savvy investors; therefore, a very high return potential must accompany that risk, but not too high, otherwise it becomes unbelievable if a "too good to be true" scenario. The trick to attracting capital for start-up and early-stage companies is using different deal structures to reduce the risk components of the securities being offered for the investor while maintaining the high return potential.

One attractive deal structure is to use a security such as a note, which is convertible to a participating preferred stock. This changes the risk return continuum for the benefit of the investor. A "marketable" deal structure allows for maximum upside while minimizing the downside... by utilizing creative financing structures buyers can create an attractive investment which can effectively compete for funding from individuals.

Simply think of yourself as an investor. How would you like to invest $100,000 in a new company or venture in the following manner: You purchase a $100,000 first mortgage note, with a 10% interest rate, and a first lien position on 100% of the assets of the company? Once the notes are ready to mature, you roll over the $100,000 into a participating-preferred stock being offered by the company that returns 10% in stated dividends and participates in 20% of the net profits of the company. By selecting this combination as your company deal structure, you would have reduced risk while maintaining a high potential return.

Good Luck,

Steve Sink

CBI, M&AMI

ss@phxaffiliates.com

Tax stakes for entrepreneurs next Tuesday

When entrepreneurs cast their votes next Tuesday, they will be choosing between presidential candidates with very different approaches to tax policy. 

President Obama has made increasing taxes on incomes over $200,000 the centerpiece of his tax policy. He would allow the Bush-era tax cuts, which he has extended though his first term, to finally expire. This would raise the top rate of income tax to 39.6%. The 3.8% "Obamacare" tax on investment income and other provisions he supports would increase the top marginal tax rate to more than 44%. The 3.8% tax, scheduled to take effect for 2013, would also apply to interest, dividends, and many capital gains. It would not apply to business income when the taxpayer "materially participates" in the business.

Mitt Romney's tax plan is built around a 20% across-the-board individual tax rate cut, to be paid for by a eliminated deductions and tax breaks. He would also repeal the 3.8% investment income tax. 

These individual rates are important to entrepreneurs because most business are now organized as "pass-throughs" -- typically as S corporations or LLCs taxed as partnerships. Income of pass-through businesses is taxed on their owners' 1040s, so the top individual rate is also the top rate on business income. The Romney approach, with its 28% top rate, takes the tax law in a very different direction than the Obama 44%+ top rate.

How much does the top rate matter?  Quite a bit. A lot of business income is taxed on 1040s showing over $200,000 in business income, as this chart from the Tax Foundation shows:

20121019-1

The two candidates are closer in their approach to corporate income taxes. Both support a reduction in the top corporation rate -- Romney to 25% and Obama to 28%. 

The Tax Policy Center has posted excellent summaries of the two candidates tax plans:

What is Mitt Romney’s Tax Plan?

What Is Barack Obama’s Tax Plan?

Happy voting!

-Joe Kristan

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