In 2004, I was part of a team that conducted a pre-published reviewed of Driving Your Company's Value, Strategic Benchmarking for Value, by Mard, Dunne, Osborne, and Rigby. One approach used by these authors was combining the DuPont Model and the Mobley Index to gauge the health of a business.

The DuPont Model was created in 1919 by a finance executive at E.I. du Pont de Nemours & Company. It demonstrated that a company's Return on Equity was actually a summary of the company's profitability, turnover, and leverage.
The Mobley Matrix was created in the fifties by Lou Mobley, who became the founding director of the IBM Executive School. He discovered the relationship between cash flow and financial statements.

This is better shown in ROE-Mobley Example. (See above)

As you can see, there is a correlation between the two tools displaying many metrics that gauge the health of your business. These measures can open your eyes to operating cash problems, excessive debt, and many other hidden ailments.

However, this could be a little overwhelming to the business owner who is an expert in his/her business and did not have time to go to business school. So, we place the model, and matrix, in an interactive graphical format. The measures are presented in a concise format for the owner to utilize. Please click here:

Business owners need to have a complete handle on their operations. Just knowing Sales and whether you have enough cash to make payroll is not enough. In fact, by time a business owner discovers what was obvious from out tools, it is usually too late.

We're here to help.

Be careful how you fund your S-corporations if you expect a loss. You may not be able to take the deduction due to a lack of basis.

An S-corporation owner may unwarily fund their S-corporation in a way that does not give them a tax basis to deduct a loss. A shareholder borrowed money from a partnership to lend to the S-corporation. The S-corporation paid the partnership rent in a circular flow of money. A Tax Court decision stated that that the owner didn't make any economic outlay so the loans did not increase his basis in the company. (Kerzner, TC Memo. 2009-76).

There are other mishaps I have seen over the years. Consult your tax advisor before funding your S-corporation. It could cost you quite a lot in loss deductions if you don't.

If you own an S-corporation and take little or no salary, the proposed tax legislation is aimed at you.

One advantage an S-corporation has over an LLC is that the profits are not treated as self-employment income. This omission in the tax law allows S-corporation owners to escape the extra 15.3% of income up to a base of $106,800. Partnerships, too, have this luxury.

Some S-corporation owners take little of no salary thinking that they will escape the clutches of this extra tax. However, if caught, the IRS imposes the taxes with penalties and interest. The proper strategy is for the owner to pay him/herself a reasonable salary, one that would match what they would receive if they were not the owner.

The proposed tax legislation may abolish this perk by requiring any shareholder of an S-corporation, and limited partner to pay self-employment tax on his/her share of the firm's income that comes from the shareholder's services. This would result in these owners skirting the self-employment tax on draws and dividends.

Consult your tax advisor about the specific challenges that face you as an owner.

When it comes to your finances, are you a Stage 1 or a Stage 4 White Water rafter?

This economic meltdown has many people second-guessing the financial decisions made in the last 8 years. Where do you stand, and what can you do about it?

Last summer we shot the Snake River rapids in the Grand Tetons. Like many rapids, the river offered its “flat” moments (stage 1), and churning moments (stage 4). One time we prepared ourselves for a level 4, and were hit by something unexpected, hail. In the middle of summer we turned a corner and were pelted by hail stones in the face during a storm.

I think many of us can relate to this in the current economic times. But, the extent of damage depended on whether you operate your business (and personal finances) in a stage 1 or stage 4 rapids.

I found there are two main types of business and investment personalities: One type are those who lived during the depression, or learned by it. They are very conservative in what they do, and try not to be too speculative in whatever they do. The other type is the sprinter. Many of these sprinters profited handsomely in the past 8 years riding the leverage train of real estate. In their business, also, they seem to leverage heavily.

When I work with clients’ strategies, I keep these two polar positions in mind. If a client is younger, then they can obviously take more risks. However, when a client approaches middle age, I caution them that the downside is more severe if they do not meet their objectives. So, both in personal and business opportunities I recommend the following:

1. Always have a well thought-out strategy. What do you want to accomplish?
2. Don’t fool yourself with the possible outcomes. Look at worst case scenarios.
3. Plan for both your intended outcome and your worst case scenarios.
4. You may want to reduce your risk, just in case the worst case scenario occurs.
5. Execute the plan and view it objectively. Too many business persons in this position extend their risk because they are looking for the “next big deal.” I find this rose-colored glasses approach a major cause of business failures.
6. If you are hurt by the resent economic melt-down, adjust your strategy towards a stage 1, but don’t circle the wagons. Keep a sharp lookout for business opportunities that may pay handsomely when the economy recovers.

We work with our clients in strategizing and executing their dreams. Let us work with yours.

21st Century Business Communication

Are you including internet technology as part as your business strategy?

I remember when I was a little boy, how I used to marvel at the futuristic gadgets that Walter Cronkite would display in the Sunday night program, The 21st Century. The program was designed around scientific advances that could re-shape our lives in the next century. The 21st Century seemed so far away to a little boy in the 1960s. But here we are.

In the 1996, my interest was piqued with Bill Gate’s books, The Road Ahead. In this book, Bill Gates predicted that we were nearing a society where financial transactions, product research, file transfers, and such could be transacted though the internet on a device the size of a checkbook.

How ironic, within the next decade, Steven Jobs would spearhead the invention of the Iphone. Users now bring up all sorts of applications including social networks like Facebook, MySpace, etc. These social networks are becoming the foundation of the new business communication.
But, what about the impact of these social networks on business? Can business take advantage them?

The answer is a guarded “yes.”

The advantages of such networks are communication and visibility. Implemented correctly, vehicles like MySpace, LinkedIn, Twitter, blogging, and others can enhance your company’s visibility, and draw the world to your web site. With increased visibility comes opportunity.
There is a downside to these opportunities, however. Employees can post criticism on blogs that may hurt the firm’s reputation. In addition, the opportunities with any of these networks can be a bottomless pit sapping into employees’ time with no immediate response.

Like any tool, the internet can be the piece of your strategy that increases your market share, if used correctly. If used incorrectly, it could be a wasteful tool.

When we strategize with our clients, we consider such issues and work with professionals who can help execute it.

We’re not your ordinary CPA Firm.

FBI Warns of Jury Duty Scam

So the phone rings and you are threatened with arrest for not showing up for Jury Duty. Don’t buy it.
I remember an episode of an old radio drama, I think it was Box 13 with Alan Ladd, where a person would get an anonymous phone call. The caller would say in a menacing voice, “I know your secret.” The victim, who obviously had some kind of secret , would go crazy promising to pay or do something in return for the secret being concealed; that caller never mentioned the secret he knew.
Well for some who have skipped out on jury duty, this scene could be a reality with a new scam. The FBI is warning people that scam artists are calling identifying themselves as an officer of the court. They explain that a bench warrant is about to be issued for the victim for ignoring the jury duty summons.
Now, many persons would complain that they did not ignore it, but the caller would hear nothing of it. The caller would offer a solution where he would obtain the victim’s social security number, birth date, and maybe a credit card number.
Don’t buy into this. It is a scam. Never give out personal information to an UNSOLICITED caller.
If you would like additional information, go to the FBI website.
http://www.fbi.gov/page2/june06/jury_scams060206.htm
We provide procedures and information that protect our clients and their resources.

You Can Find Your W-2s Online

If you are an actor, you may have trouble getting your W-2s at the end of the year, there is hope.
You worked several jobs last year. Then you’ve moved, and your forwarding address expired. Now you have to file your tax return. You tried calling payroll services to find your W-2s, but you are afraid you missed some. What are you to do?
Go onto the Franchise Tax Board site at or about March 15. There you will find California wage and withholding information as filed by employers. If you go on in January or February, employers may not have filed their information, yet. So, it may be beneficial for you to wait to file your tax return if you are insecure about the information you provide your tax preparer.
This safeguard does not provide wages information filed by other states if your performed your services outside of California.

Surviving Spouse Residence Sale in California

For sales or exchanges occurring after December 31, 2007, the IRS allows an exclusion of up to $500,000 on the sale of a principle residence by a surviving spouse who files as a single taxpayer if the sale occurs not later than 2 years after the spouse’s death, and the ownership and use tests are met.

However, California does no t conform to the Forgiveness Debt Relief Act of 2007. Instead, in order for the surviving spouse to be entitled to the $500,000 exclusion, the residence must be sold in the year the deceased spouse dies, and the surviving spouse qualifies.
This lack of California conformity presents additional hardships on surviving spouses especially in a depressed real estate market. Consult your tax advisor before making any changes.

Mortgage Deductions for those who cannot get a Loan

You tried to get a loan, but did not qualify. So, you look to your parents or children to acquire the loan and real estate in their name. If you pay the mortgage and property taxes, can you get a deduction? Under Tax Court Summary 2008-84, a couple was able to claim the deduction in property owned by their son. Because they had paid all interest and property taxes, the court stated that they were equitable owners of the property.
Please consult your tax advisor before making any decision. We’re here to help: www.ricknorriscpa.com

California Wants their Money Now!

LLC’s can no longer wait to pay their fees with their tax returns.

For taxable years beginning on or after January 1, 2009, LLCs are required to estimate and pay their LLC fee (another work for tax, but politicians hate that word) by the 15th day of the 6th month after the beginning of the taxable year. The fee must be paid with the new Form 3536, Estimated Fee for LLCs.

So, what does this mean for you? Most CPAs will provide you the estimated tax voucher when you file your 2008 tax return. However, what about those of you on extension? Make sure you get the voucher with the extension. You are not relieved in paying your estimated tax because you are on extension.

Always consult your tax advisor when paying tax dollars, especially to the “Governator.” We’re here to help.