Business License Fees Punish Success

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Like most other responsible business owners in Chesapeake, VA I renewed my business license before March 1st of this year.  One of the things that has always seemed odd to me is how the license fee is calculated.  If you make less than $100,000, your business license is $50.  But, if you make $100,000 or more, you pay a percentage of gross revenue.  For accountants it is 58 cents per $100, or 0.58%.  In other words, if you have $99,999.99 in revenue your business license is $50, but if your revenue is $100,000.00 your business license is $580.

Of course, a third grader could see why this isn’t fair.  That one extra penny costs you $530 in extra license fees.

Whoever set this up was either too incompetent to implement a gradual system or simply didn’t care.

From a political standpoint, I can see why this would be hard to change.  It would be practically impossible to keep business license fees revenue neutral without raising taxes on someone.  For example, if you lowered the $50 cutoff to $75,000 and then said that business license fees are $50 for the first $75,000 and a percentage of revenue for everything above that then you would be raising fees on businesses that bring in between $75,000 – $100,000 but lowering fees on those that bring in above $100,000.  On the flip side if you had a partially graduated scale where the first $99,999.99 was still $50 but $100,000 – $125,000 was $50 plus a percentage of the amount over $100,000 and then increased taxes on the amounts above $125,000 to make up for the loss of license fees on the amounts lower than $100,000 then you would be increasing fees on those businesses with more than $125,000 in revenue.  Business license fees are already high enough and shouldn’t be raised on anyone.

The only fair solution is to charge $50 for the first $100,000 and then a percentage on everything above that.  Of course, doing this will lower tax revenue to the city (which is not necessarily a bad thing).  And, “fair” is a relative term.  It would be “fair” to make everyone pay a percentage of sales, regardless of how much those sales are.  If you bring in

$90,000, for example, instead of $50, you would pay a percentage.  But, of course, making it “fair” would cause an increase in license fees for those businesses with revenues of less than $100,000, and I would never be for increasing taxes or fees on small businesses.

Another solution is to implement a graduated scale from $100,000 – $125,000 (for example) and not raise rates on those above $125,000.  This would fix the “one penny costing $530 problem”.  This would also cause a loss of revenue to the city.

Thus, the only way to fix this improper business license calculation without raising taxes on anyone is for the city to take a cut in tax revenue.  But, worse things have happened.  If doing the right thing means less revenue to the city then so be it.

Use the Same Tax Professional for Personal and Business

Many taxpayers will hire a professional to prepare their business return, and then will prepare their personal return themselves.  I do not recommend this if you own an S-Corporation or a closely held Partnership.

The primary reason you should not do this is because of the way Bonus Depreciation and the Section 179 deduction is handled.  If you take more Bonus Depreciation or Section 179 than you need, it is lost forever.  When I prepare an S-Corporation return that is closely held and the owner’s personal return(s) I toggle back and forth between the personal and business returns.  This ensures that the taxpayer(s) pay the least amount of tax possible without forfeiting Section 179 or Bonus Depreciation.  Without doing both returns at the same time you really don’t know for sure if you are maximizing your tax savings.

I’ve had business owners tell me to “just take the max” of Section 179.  They say this without really understanding it.  Then they prepare their personal return.  It is possible that they could be forfeiting thousands of dollars of future deductions by taking more Section 179 than they really need for that year.  The future deductions would more than pay for the extra preparation fee.

Of course, one could always file amended returns going back three years.  But, how would you know if you needed to file amended returns unless you hired a professional to take a look.  Also, if you did realize that you took too much Section 179 or depreciation in prior years and went back and filed amended returns, you would have to amend both business and personal, which would result in more preparation fees.  The best option is to simply have your tax professional prepare both your business and personal returns from the beginning.

Change Things Up In 2012

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My family and I just got back from a fun and relaxing trip to Snowshoe Mountain, WV.  There is something special about being on the ski slopes high up in the mountains that is unlike any other vacation.  The freedom and excitement of choosing your own route down the mountain.  The coziness you feel in front of the fireplace at night with your family.  The removal of all of the daily distractions that we all experience.  The memories you create with your family make it well worth it.

Taking vacations also helps you to re-focus on your business with a new energy.  I think one of the reasons that vacations help you to re-focus and dive back into your business with excitement and energy is because you have changed up your routine.  For me this is especially important to do right before tax season.  The next few months are going to be very busy so getting renewed and refreshed is a great way to start off the year.

One of the worst things you can do in your business is the same thing – over and over.   Successful businesses are constantly changing and adapting.*

We all fall into the trap of redundancy.  We’re just wired that way.  Most of us do the exact same things, the exact same way, day in and day out.  The problem is, doing this causes us to create blind spots which makes it hard for us to improve.

Take your web-site for example.  How many times have you looked at your web-site/blog?  Hundreds, thousands?  At some point, you can’t tell anymore if it looks good.  You’ve looked at it too many times and you can no longer be objective.

Or, if you own a restaurant or a salon, you’ve walked through it hundreds, maybe thousands of times.  You are there so much that you can no longer see what the customer sees when they walk in.  You are blind from overexposure.

Change Things Up 

In 2012 one of my resolution is to Change Things Up.  I’m going to start doing things differently.  My goal is to do one thing differently each day.  Maybe I’ll take a different route to my office.  Maybe I’ll start off my day differently.  By doing this, we train out brains to think differently.

Another way to change things up is to ask for objective opinions from independent parties about your web-site, business cards, marketing materials, store image, etc.  And, the more people you ask the better.  For example, let’s say you own a restaurant and you are wondering what your customers think and feel when they walk in.  Find at least 5 – 10 people who would be willing to help you by coming in to your business and writing down everything that they notice, good and bad.  Then compare the results and you might be surprised by what you find out.  Make sure that you tell them that you are open to constructive criticism.  You could also offer them a gift card for $25 or something like that for their help.

These are some things I plan to do in my business in 2012 and I hope you do to.  Have a Happy and Prosperous New Year!

*This seems to work even with successful products, like whenever Coke changed to New Coke.  At first, the people at Coke looked like complete idiots.  But, when they changed back to Coca-Cola Classic their sales increased dramatically.  It was as if the whole thing was just a marketing ploy.

New Year’s Resolutions

Happy New Year everyone!

The “In Thing” right now is to not do resolutions.  Instead we hear things like “goals”, “words for the year”, etc.  That is fine.  Whatever works for you.  Personally, I think the problem with most New Year’s resolutions is that they set you up for failure.  For example, if you say, “I’m going to go to the gym at least twice a week in 2012″, that is great.  The problem is, the first week that you don’t make it twice, you feel like a failure.  Once you feel like you’ve failed the “resolution” seems pointless from that point forward.  I think a better idea for your resolution would be something like, “I’m going to make it to the gym 100 times in 2012.”  That way you have all year to do it and the average will still be about 2 times per week.

One of my resolutions for my business is to talk to 250 business owners this year, in person, about using my firms services.  That may sound like a lot but in reality it is only 5 per week.  In the second half of 2011 I spoke to nearly 100 business owners in person about using my firms services so I know I can speak with 250 in a full year.

Another resolution for my business this year is to “Change Things Up.”  I’ll be sharing more specifically what that means in the coming days.

Stay safe and God bless!

Should You Borrow Money To Increase Year-End Expenses?

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If you’ve read Santa’s Year-End Tax Tips you know that spending money in your business at year-end is a great time to reduce your tax liability.  But, what if you don’t have the money?  Should you use a credit card or a line of credit?

Let’s look at the numbers.  Let’s say that you spend $5,000 using a credit card or a line of credit in order to increase your year-end expenses.  And, let’s say that you are in the 25% tax bracket.  The $5,000 in expenses will reduce your tax liability by $1,250.

Now, how much will it cost to borrow the $5,000?  Well, let’s say that your business line of credit charges 10% annually.  If you borrowed the $5,000 for one month it would cost you $41.67 in interest.  If you had to borrow it for 1 year it would cost you $500.  Since you would get the tax deduction the following year anyway I don’t think it would be worth it to finance the purchases for an entire year.  Of course, you’ll need to crunch the numbers to see exactly how you would come out.

As you can see, it could be worth it to borrow the money to increase your year-end expenses for your business on a short term basis.  If it ends up being a long term debt it could end up costing you more money in interest in the long run than the short term tax savings.  And, you should only do it if the items you purchase are necessary items for your business and you plan on purchasing them anyway.

Steps To Starting A New Business

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Starting a new business is exciting, however, there are a lot of administrative items to take care of.  Here is a general guide on what to do.

How To Really Stimulate the Economy

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What motivates people?  Well, money, for one thing.  If you’re familiar with the book “Carrots and Sticks”, or the web-site StickK.com, you’ve probably noticed that money motivates people to do something more than just about anything else.  So, how do you stimulate the $14 Trillion mammoth economy of the United States?

Do You Need A Business Plan?

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Business plans are overrated.  In fact, most people that take the time to actually write one never really use it for anything.  So, should you write one at all?

Decrease Your Chances of Being Audited

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According to IRS statistics your chances of being audited as a Schedule C Sole-Proprietorship are 3-4%, compared to an S-Corporation of 0.3-0.4%.  So, your chances of being audited are about 10 times greater as a sole-proprietor.  That sounds like a great reason to set your business up as an S-Corp!

Other ways to reduce your chances of being audited are:

Why should people buy your product or your service?

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When you are trying to sell your product/service to someone, remember there is really only one reason that people buy something from you.  It is “You can solve a problem for them”.  I’ve broken this down even further into these 3 categories: