Andrew Rogerson's Blog, page 69

How do I know the performance of a franchise?

How do I know the performance of a franchise? It’s been reported that a new franchise opens every 8 minutes every business day according to a quote on the International Franchise Association website. There are other facts and these include:

The franchise industry accounts for 40 per cent of all retail sales in the United States
One out of every 12 businesses is a franchise
Franchises generated more than $1.2 trillion dollars in sales in 2007 per the US Census Bureau
Franchises account for 8% of service businesses but they claim 40% of all service-related revenue
Franchises provided 9,125,700 jobs or 6.2% of the US private nonfarm workforce in the US in 2007 per the US Census Bureau
And so it goes on.

It would therefore seem logical that buying and operating a franchise guarantees you will be successful.

Unfortunately, that is not the case.



Franchises can fail for many reasons. These include taking the concept to market too early, the concept takes off quickly but the industry the franchise is in is only a fad and customer demand dies and so does the concept, poor management by the franchisor and other reasons.

Knowing if a franchise is successful helps a franchise buyer manage their risk. A valid and extremely useful bit of information comes from looking at how a franchise performs or more specifically, how a franchisee performs if they obtain an SBA loan.

The SBA put together a report over a ten year period, from October 01, 2000 to September 30, 2010 and included all SBA loans approved to franchise buyers, that is, both 7A and 504 loans. They broke includes the number of SBA loans that were approved, the per cent of franchisee failure rate and the average loan amount.

How do I know the performance of a franchise?

If you are considering buying a franchise and would like to know the rate of failure of the franchise, you are welcome to view the following report. It was made available with the help of Bob Porter at Plumas Bank in Auburn, CA. To see the report, simply click the following link – Performance of a franchise

If you have an interest to buy a franchise and are not sure where to start, please give me a call on 916 570-2674. If you would like some more information, buy a copy of my book “Successfully buy your franchise” then give me a call so I can help you make sure the right franchise is available in the area where you live.

How does escrow work when selling or buying a business

How does escrow work when selling or buying a business? The process of buying or selling a business has many steps. These can include negotiating with the landlord, arranging third party finance, the buyer conducting due diligence to verify the representations of the seller, the buyer taking over the franchise agreement, the buyer using their 401k money as a down payment to make the purchase of the business and many more.

As the parties resolve each of these steps in the transaction, it moves to a point where local, state and federal laws need to be met for the transaction to legally close, different parties need to provide and sign legal documents and the transfer of money needs to take place. To help all the parties in the transaction, not just the buyer and seller with these processes, the need for the services of an independent party is necessary and the escrow company is the party that offers this service.

So what is the critical service that a good escrow company provides? The answer is simple and that is being a neutral third party. On Tuesday March 05, 2013 Lisa Decker from Fidelity National Title was my guest on my radio show, Money 2.0 on 105.5FM and was able to provide some great information about her role as an Escrow Officer and the work she does for Fidelity National Title. Here are some of the questions and answers Lisa shared with me.

Is the escrow for a business different to the escrow for a house?

The primary purpose of escrow for a business transaction is the same as the primary purpose for buying or selling a business which is to provide a neutral third party to handle the money and paperwork. However, a business transaction has a different set of laws to follow and generally involves many more parties.

What do you handle in escrow?

Some of the items to handle in an escrow for a business include getting State agency releases. For example, for an escrow to close the escrow officer will contact the Franchise Tax Board, Employment Development Department and State Board of Equalization. The escrow officer also coordinates the publication of notices of the sale to meet local and state laws, legal papers such as a sellers note, covenant not to compete and Bill of Sale.

What do you not handle in escrow?

Because the escrow officer is a neutral third party they do not negotiate or try to settle any disputes with the parties in the transaction. This includes providing legal advice or resolving a disagreement which is the role of the attorney or business broker in the transaction. The escrow officer also does not notify the sale to the landlord, utilities or insurance companies.

What is the bulk sale process and why is it used?

The bulk sale process or Business Opportunity Escrow or Business Asset Sale comes into play when the owner of a business is transferring more than 50% of their assets including inventory. This is a legal requirement and is in place to protect any creditors that may be owed money by the seller of the business by letting them know the current owner of the assets is selling the business and if the creditor is owed money, to get this from the seller before the sale closes as the creditor cannot make a claim against the buyer.

How much time does escrow take?

If the escrow includes a Bulk Sale this time frame is about 25 to 30 days. If the escrow includes the bulk sale and transfer of the ABC Liquor License it can increase the time from 45 to 60 days.

Can the same escrow include a business and real property?

If the transaction includes a business and real property it is not necessary to have a separate purchase agreement. However, it will be necessary to have two separate escrows; one for the business and one for the real estate.

The reason for the separate escrow is that they are governed under different requirements to transfer. Both escrows do not need to close concurrently but it’s necessary to take care as each scenario is different.

What are the costs of an escrow service?

The costs of an escrow vary according to the purchase price of the transaction and the different fees that apply. Each transaction is unique but before the escrow process starts, the escrow officer can provide a price.

There were many other questions in my conversation with Lisa. If you would like to get more information about the escrow process by listening to our conversation, please click the following link – Lisa Decker from Fidelity National Title

How do I apply for an SBA loan?

How do I apply for an SBA loan? Since the Great Financial Crisis started in the third quarter of 2008, small business owners have been squeezed with the performance of their business as they have been starved of access to credit. This starvation for credit would have been much greater were it not the lending of the SBA through their different loan programs and the banks they support.

The SBA first came into being in 1953 or 60 years ago and according to its website, has delivered millions of loans, loan guarantee, contracts, counselling sessions and other forms of assistance.

On Tuesday February 12, 2013 Kelley Cheney from Plumas Bank was the guest on my radio show, Money 2.0 on 105.5FM. Kelley spent about 50 minutes with me providing some great information about the SBA, the different SBA loan programs and his role as an SBA Business Development Officer at Plumas Bank.

Here are some of the questions and answers Kelley shared with me.

Very briefly, what’s Plumas Bank and the role you play there?

Plumas Bank is a community bank founded in 1980 and has about $450 million in assets. Its headquarters are in Quincy, CA which is in Plumas County, hence our name. Plumas Bank has 11 bank locations in Northern California including locations such as Redding, Truckee, Portola and Alturas. The bank has a commercial loan center in Reno, NV and a Small Business Lending Division in Auburn, CA.

My role at Plumas Bank as a Business Development Officer is to work with clients who are looking for an SBA loan. This includes those that want to know if the business they are selling or buying would qualify for an SBA loan.

What is SBA financing and how does it help small business?

The SBA is an independent agency of the Federal Government. Its main role is to help small businesses throughout the US obtain financing for various operational needs. The SBA does not actually lend money but rather provide guarantees to the banks that do the lending.

If a bank wishes to participate in the SBA guarantee they are required to follow a rigorous set of instructions the SBA outlines in a document called the Standard Operating Procedures or SOP. To give you an idea of the size of the SOP, it’s about two telephone pages thick so and comes with incredible rules and details.

The SBA portion of the loan guarantee to the bank is 75% so it helps a business reduce a large amount of their lending risk. For example, without the SBA guarantee a bank will probably be unwilling to lend if there is a high Loan to Value, lack of collateral or the down payment is not high enough

How is SBA financing different from any other financing?

The guidelines for SBA finance are quite different from conventional finance. The business borrowing the money must be organized for profit, located in the US, meet the SBA small business definition which is less than $7 million in revenue if it’s in retail or less than 500 employees if it is in manufacturing.

Some examples of eligible businesses include restaurants, gas stations, hotels, professional practices such as doctors, dentists, CPA’s and other retail based and manufacturing businesses.

Ineligible businesses include a business that passively invests in real estate such as real estate developers, landlords or apartment complexes.

What types of SBA lending programs does Plumas Bank participate in?

Plumas Bank provides SBA loans in two programs. The first is the SBA 7(A) program and provides lending for fixtures, furniture and equipment, inventory, debt refinance and for tangible and intangible assets. The second is the SBA 504 program and this is lending for the borrower to purchase commercial real estate or heavy equipment.

Plumas Bank is a Preferred Lender or a Certified Lender which means it underwrites its own loans and does not take them to the SBA for processing. This gives Plumas Bank more loan underwriting autonomy and a much quicker response to loan requests and processing.

What is a typical deal structure?

If the loan is for a business acquisition, the average loan amount is about $500,000 with the average down payment 20% which means Plumas Bank would lend on average 80% of the loan amount.

If the loan is for commercial real estate, the maximum loan amount is $5 million with the borrower bringing a down payment of 10% to 15% and the maximum term of the loan of 25 years.

There were many other questions in my conversation with Kelley. If you would like to get more information about the SBA loan process by listening to our conversation, please click the following link – Kelley Cheney from Plumas Bank. If you are ready to make an application or find out more about the loan application process, give Kelley a call on (530) 870-1333.

How do I turnaround my business?

How do I turnaround my business? The Great Financial Crisis has been particularly brutal on some businesses, especially some businesses in some industries. The manufacturing industry has been suffering for the last ten years or so due to government policies that almost provide an incentive for manufacturers to send jobs offshore. In addition, the drastic fall in the value of real estate be it residential or commercial properties has made a very negative impact on the construction industry.

When a business struggles the owner moves into the cross hairs of lenders wanting their money, employees wondering if they have a job in the future, competitors watching closely for any missteps so they can move in and steal new customers and market share and so the concerns go on.

Bob Greeley has been the principal of Greeley Lindsay Consultant Group for the last 30 years. On Tuesday March 12, 2013, Bob was the guest on my radio show, Money 2.0 on 105.5FM and came to talk about seriously distressed businesses which has been the focus of his business as a consultant, a court receiver, and a Bankruptcy trustee. Here are some of the questions and answers Bob shared with me.

How did you start working with distressed businesses?

My first project was working with Made Rite Meat in Sacramento. I helped them find a $3.2 million refinance when their original lender asked them to leave. Ninety days later the new lender called me one afternoon and said, “Bob, there are two ways you can darken our doorway again…with our money or never.” It was clear the new lender thought they would not get their money back. We went to work for the owners and in 90 days had the business sold to a strong competitor and the bank paid back, the 204 employees with a job and a future and just as importantly, happy owners who were now able to go and do something else.

Is your preference to liquidate a business?

My preference is to get a business that’s in trouble back on track, that is, we enjoy operating a business. For example, one of the projects we took on was the Howe ‘Bout Arden Shopping Center. We were able to manage the business for 3 years and then eventually allow new management to take over and continue the successful path we had created.

There is a misconception that the only type of businesses to either save or close are those that are performing poorly. However, that is not the case. If a business grows too fast that business can also have problems. If they are not managed quickly and carefully then it can move into a distress and so the goal is to avoid that happening.

Where do you start when the owner calls to say their business is in distress?

The starting point is cash. Cash is king. How much cash does the business have to continue trading and for how long? Does the business have enough cash for the next 7 days? If so, is it a viable company? Does the company add value and provide service to all the stakeholders which includes not only the customers but also the employees, suppliers, owners and of course, the taxman. If so, can it make a profit with its present business model or does that need to change and if so, how much and how quickly?

The economy seems to be picking up so will we see more turnarounds?

First, this is a unique California business cycle. In Silicon Valley the tech industry is doing very well. In Sacramento however, houses are selling to investors and pushing up the value of residential properties but between 2008 and 2013 we lost over 400,000 construction jobs. So that’s the old and bad news as 300,000 of those jobs have now been replaced but instead of paying $60,000 to $80,000 in the construction industry they are paying about $30,000 or less in personal services. If you do the math, that’s about a $3 billion hit. When you look at the economic impact that takes between $12 and $15 billion buying power out of the local economy and gives you one of the reasons the Sacramento Kings are struggling because there are still 100,000 fans without jobs and those that have jobs are now making less than half of what they used to make in 2008.

How do you see the next few years?

The economy is slowly getting better. Ten percent of businesses will not be saved as the growth is too slow so it is a long road ahead for many business owners. There are more ways to go out of business than just bankruptcy. Selling the business as a going concern is usually best while an orderly liquidation can be done but the owner generally requires some assistance. If this is new territory for an owner then finding the right person with the knowledge and experience to help them evaluate their options is the best way to go.

There were many other questions in my conversation with Bob. If you would like to get more information about the steps to turnaround a business by listening to our conversation, please click the following link – Bob Greeley of Greeley Lindsay Consultant Group.

Which banks are approving SBA loans in Norcal?

Which banks are approving SBA loans in Norcal? The purpose of the SBA is to aid, counsel, assist and protect the interests of small business concerns, and advocates on their behalf within the Government. The SBA was created in 1953 by President Eisenhower and part of its charter includes helping victims of disasters, financial assistance, contractual assistance and business development assistance.

The regional offices of the SBA provide different services but it includes providing support to the lenders in their region. One of the reports they release is loans being approved in their region and I think it’s helpful as it shows which banks are lending which is especially helpful if you are looking to get a loan for your business.

The Small Business Administration or SBA has a regional office in Citrus Heights, CA. Citrus Heights is located in Sacramento County.

Please click the following links to see which banks are actually approving SBA loans in Northern California per the information from the Citrus Heights office of the SBA.



Please click the following links to see which banks are actually approving SBA loans in Northern California.

SBA lending final quarter 2012 in Norcal

SBA 504 2013 lending in Norcal

Getting an SBA loan approved is a formal process as the SBA program is underwritten by the US Taxpayer. There are forms to complete and you will need to have a good credit score, a good credit history and a downpayment of about 20% of the amount you wish to borrow. If the funds are to buy an existing business, the lender will want to see management experience in that industry.

Selling a business from a position of strength

The economy continues to heal. Many business owners were holding off selling their business while the economy was performing poorly and finance hard to get as they had the belief they would not get the best price for the business.

Part of what I do includes getting calls from business buyers who are frustrated that they are motivated to buy a particular business but they cannot get the answers they need and wonder if I can help.

When I bring the two perspectives together and how I work best as a business broker with the seller and/or buyer is to allow both parties to do things from a position of strength. At the end of the day, the seller will only sell and the buyer will only buy if all parties have the information they need to make an informed decision and at the very minimum feel that what they are doing makes sense to them.

If you plan to sell your business and want to do things from a position of strength, here are the steps I use to make sure I assist you.



If you plan to sell your business you are making a major change to your life. By definition, owning and operating a business forces disciplines and this often includes doing things you would prefer not to do. If you therefore sell your business and incur this major change, what do you plan to do? Be clear with the new world and options that will open up to you so if and when your business sells, you can easily make the transition. It’s not unusual for a business owner to get to the close of escrow and change their mind as they are not sure what they would do if they now sell the business. It’s also not unusual for a business owner to sell the business and want to buy another business after a period of down time because they are bored. While you own and operate your current business, look after your health, play some golf or do things you want to do so it has balance and you do not burn out. Burn out is the number one reason owners sell their business.

If it’s time to sell the business the first place to start is with a business valuation. There is no need to spend thousands of dollars on a valuation as it does not need to be complex. If the business has partners and they are in a dispute, the owner is going through a divorce or some other complex legal matter then a certified appraisal may be necessary. I put together an opinion of value for around $750 that looks at the last three years tax returns and current profit and loss and balance sheet. All this information is then rolled into a 19 page report that includes comparable sales data from sales in the same industry to arrive at a price the business will sell. Looking at the tax returns and profit and loss statements are critical as too many sellers offer financial statements that are inaccurate or would not be accepted by a buyer or lender. Just recently I was asked by a buyer to appraise a small business from cash flow projections the seller had put together and convinced the buyer his business was worth. After finally getting meaningful documents and information my value was less than half of the sellers as there were errors in his projections.

Once the seller knows the value of his business and still wants to proceed, one of the steps I take is to see what third party finance is available. Most sellers don’t want to sell the business and carry any finance. At the moment, the main form of lending to buy a small business is SBA lenders. These banks will look at writing an SBA loan but they do not lend for all businesses in all industries. It’s not unusual for me to approach many banks before getting a business pre-qualified. Knowing finance is available though really helps the seller with their planning and speeds up the process should a qualified buyer come along.

With these details in place the next most important step is to put a comprehensive confidential report together on the business. The confidential report can be as long and detailed as necessary. A rule of thumb would be the higher the purchase price the longer the confidential report. Buyers have questions. If there are many buyers you can expect a lot of the questions to be the same. Why not have this information ready to go? It makes the seller, their business and me look very professional to request a buyer to complete a non disclosure agreement and then in my case, provide them with a username and password where I have this confidential report as well as supporting documents such as a copy of the lease, franchise agreement, sample marketing material, financial statements and other relevant information.

All the above items take time and planning. If you are selling a business and want qualified buyers to respond in a businesslike manner, take the time to do the work and get it right. A buyer has options. If they don’t feel your business is the right option because of the way their questions are asked or how the answers to their questions are given then they will look for alternatives and there are alternatives out there including doing nothing.

Stephanie Chandler says: Own Your Niche

My guest for my radio show last Tuesday at 10.00am on 105.5 FM was Stephanie Chandler. Stephanie is an author having written 9 books around the topic of business and specifically on the topic of sales and marketing be it online or offline.

Stephanie and I first met at a Sacramento Metro Chamber of Commerce trade show in April 2006. Stephanie was setting up a booth she had taken at the trade show where she was promoting her latest book and offering her sales and marketing suggestions. I too was an exhibitor and didn’t have too much time to speak with her during the trade show but from a quick conversation we had before the trade show opened, she agreed to meet with me at my office later the following week. The reason I met with Stephanie was during our quick conversation she made a suggestion and that was to write a book explaining to my potential customers how to sell their business.

This one suggestion from Stephanie stayed with me and so was the topic of our first meeting. Stephanie explained that writing a book was more intimidating than it looked but that its benefits were huge. It made you research your subject so this knowledge was always helpful, it allows you to stand out from your competitors who have not written a book, it’s the entrée to the next step which is to do public speaking and again, position yourself as an expert in your field. Stephanie explained that if the process to write a book was too daunting, she could write it as a ghost writer and provide the final manuscript.



After chewing on Stephanie’s suggestion for a few months I jumped in and wrote my first book, Successfully sell your business. After writing about the sell side it made sense to write about becoming a business owner. When I looked at this there were three options that each led to a book, Successfully start your business, Successfully buy your business and Successfully buy your franchise.

After the books there became an obvious need to have a website to not only promote and make the books available but also the business services I provide. To complement the website, the next step was to do a blog with original content so the search engines could bring those looking for help and the answers I were able to provide. Next steps were some videos on You Tube and being active in the main Social media sites.

The hard costs to put all the above marketing together are not large. I have not tracked the total costs but am comfortable saying it would be no more than $500 per year once my website was built as it allows me to post my own blog articles and I chose to self publish my books.

Where’s all this going? From meeting Stephanie at a trade show event and her one suggestion for me to write a book about selling a business it has kicked off a tremendous “pull” marketing strategy where I present what I know and if it’s of interest to those that can use my help, they give me a call. Cold calling and direct mail are not part of my marketing burden. From my perspective, the costs and randomness of these marketing options are neither appealing nor productive. With my own website I have backend information that shows me lots of information including my daily number of visitors. Each month as I see these numbers rise as well as the calls and emails I get, I am able to track its success.

This single suggestion from Stephanie to write a book and its surrounding strategies led to a call from radio station 105.5 FM to host my own radio show. They found my website and thought it was very well put together and would I have an interest to host a one hour show each week. What an incredible opportunity.

A business owner needs to wear many hats – owner, manager, operations manager, book-keeper, lender/financier, tech expert and just as important as any of these skills, a sales and marketing guru.

There were many other questions in my conversation with Stephanie. If you would like more information about “owning your niche” by listening to our conversation, please click the following link – Stephanie Chandler from Authority Publishing

If you are looking for some sales and marketing ideas visit Stephanie’s websites. She has a few of them and here are a couple – Stephanie Chandler and Business Info Guide. If you want help with writing or publishing a book you will find her at Authority Publishing

Alternative Norcal small business lenders

Finance can be vital to many small businesses. The perception is that finance is hard for small businesses to obtain. There are, however, alternative sources of finance for small businesses than the traditional banks. If your business is in Northern California, here are some lenders who may be able to help you and they are only a phone call or web click away.

Some of the financial institutions are not commonly known. Some of their programs are also unusual with the type of lending they offer. Be prepared to explain your finance need and then restate it so it qualifies for their lending criteria. Getting funding sometimes needs to be creative and it always needs to be persistent. Don’t give up.

These financial institutions and what they do are as follows:

California Capital Financial Development Corporation

California Capital Financial Development Corporation is a regional direct lender to small business for amounts up to $5 million. For more information go to California Capital Financial Development Corporation

Calrecycle

Calrecycle is a direct lender of up to $2 million to businesses or non-profit organizations in a Recycling Market Development Zone. For more information go to Calrecycle

Grow America Fund (GAF)

GAF is a nationwide direct lender offering repayment schedules up to 25 years for loans from $100,000 to $2 million under flexible loan structures. For more information go to Grow America Fund

Opening Doors

Opening Doors offer micro loans to small businesses of up to $50,000 that are in the greater Sacramento area. They also offer loans for up to $10,000 for small businesses of refugees. For more information go to Opening Doors

SAFE-BIDCO

SAFE-BIDCO offers state and federal loan as well as energy efficiency loans, rural counties loans, Farm Service Agency and Community Facility loans to small businesses whose financing needs are underserved by traditional lending institutions. For more information go to Safe-Bidco

Sierra Economic Development Corporation – SEDCorp – SBA Micro Loans

SEDCorp is a direct lender to small businesses and start-ups including the SBA Micro loan program and a rural revolving loan program in the counties of Sacramento, Yolo, El Dorado, Placer, Nevada, Sierra, Plumas, Lassen or Modoc Counties. For more information go to SEDCorp

Rural Development at the US Department of Agriculture

The Rural Development at the US Department of Agriculture is a direct lender and loan guarantee provider to small businesses in rural areas of up to $25 million. Rural areas are defined as being outside urbanized areas of a city with a population of 50,000. For more information go to US Department of Agriculture

Valley Economic Development Center, Inc

The Valley Economic Development Center, Inc is a statewide direct lender and loan guarantee program to small businesses for up to $5 million. For more information go to Valley Economic Development Center, Inc

Join me at 105.5 FM on the Money 2.0

Ever had something so unusual happen to you that you weren’t sure how to respond? Well it happened to me on January 24 when I received a call from Hannah Brantingham at radio station 105.5 FM.

Hannah introduced herself as the Marketing Director for the station and wanted to know if I had an interest to host a weekly radio show for one hour on 105.5 FM each Tuesday at 10.00am.

After a lot of thought and deciding if I had the time and willingness to move out of my comfort zone, I said yes. So please join me each Tuesday at 10.00 am on radio station 105.5 FM.

The show will feature what I have been writing about for 4 years; anything that affects a small business owner and helping them be successful whether to start their own business, buy an existing business or buy the rights to a franchise. Of course it also includes helping them to successfully sell their business including a business valuation, SBA lending, legal, accounting, financial planning and other topics.



The show has already gone to air with its first two programs. The first guest for my first program was Mon Hart – The Marketing Coach. Mon spoke about marketing techniques and specifically about how to get more customers and referrals, the importance not only of a business plan but also a marketing plan and using the SWOT method on the marketing research to support and strengthen the plan.

For more information about Mon you can visit her website at The Marketing Coach

My second guest was Kelley Cheney from Plumas Bank and he spoke about SBA lending. Kelley spoke about the different SBA loan programs, which businesses would qualify for each type of loan and how the banks work within the rules defined by the SBA. Certain banks that met certain criteria are approved to make loans without submitting the loan documents to the SBA so this makes their approval process and turnaround time much quicker.

The good news is that Kelley said Plumas Bank is lending and the lending environment is definitely getting stronger. If you have a question about getting an SBA loan you can contact Kelley on his cell phone at (530) 870-1333 or send him an email to Kelley.cheney@plumasbank.com.

My next guest was supposed to be Bob Greeley but unfortunately I became sick the night before the show and was unable to go on air. Bob is the Sacramento President of the Turn Around Management Association. This organization is geared to help a small business owner who is floundering as a result of the recession. The owner’s options may include shutting the doors, reorganizing the business by cutting the unprofitable parts to focus on the profitable parts, obtaining new sources of finance, merging, a combination of these options or other creative solutions. Alternatively, some owners may decide its time they sold or exited their business and this is the focus of what Bob does as well.

Bob’s value is simple. He very quickly looks at the business, scopes out the options and makes a recommendation to the owner and they make a decision very quickly as time is normally the number one enemy. Bob may need help from a court of law to approve the direction he’s going. Bob understands how to do that and more. Bob will be appearing on a future show.

Want to know how I was found? It couldn’t have been easier. The marketing director for the show did a web search for “business broker, Sacramento” and my name and website appeared on the first page. From there she made a phone call to me and the rest is history.

Online marketing continues to grow and mature. You own your time, knowledge and how you present yourself.

Please join me each Tuesday at 10.00am on radio station 105.5 FM and Money 2.0 where my hope is that you learn something and enjoy…good things.

American Taxpayer Relief Act of 2012 passes Congress

American Taxpayer Relief Act of 2012 passes Congress – the following article is reprinted courtesy of Walker Advisory Services, Wichita Falls, TX, 76301.

During the early morning hours of Tuesday January 1, 2013, the Senate passed a bill that had been heralded and, in some quarters, groused about throughout the preceding day. By a vote of 89 to 8, the chamber approved the American Taxpayer Relief Act, H.R. 8, which embodied an agreement that had been hammered out on Sunday and Monday between Vice President Joe Biden and Senate Minority Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved the bill by a vote of 257-167 late on Tuesday evening, after plans to amend the bill to include spending cuts were abandoned. The bill now goes to President Barack Obama for his signature.

With some modifications targeting the wealthiest Americans with higher taxes, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s perennial job of “patching” the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier.



Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.

Here of some of the act’s key features impacting businesses:

General:
Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Capital gains and dividends

A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

Business Specific Provisions
Reduction in S Corporation Recognition Period Built-in Gain – Code Section 1374(d)

An S corporation generally is subject to the built-in gains tax during its “recognition period.” The recognition period is defined as the 10-year period beginning with the first day of the first tax year for which the corporation is an S corporation. For years 2012 and 2013, this recognition periodic reduced from 10 years to 5 years. Thus, no built-in gain tax will be due if an S corporation is 5 years into its built-in gain period by the beginning of Years 2012 or 2013.

100 percent gain exclusion on certain small business stock – Code Section 1202

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) increased the capital gain exclusion from the sale of Qualifying Small Business Stock “QSBS” held more than five years to 100% for qualified stock acquired after September 27, 2010, and before January 1, 2012. This 100% gain exclusion has been extended to included stock acquired before January 1, 2014. Thus, qualified stock acquired in Year 2012 and Year 2013, if held for a period of at least 5 years, will be subject to a 100% gain exclusion when sold.

Expensing limit for section 179 property set at $500,000 – Code Section 179

For tax years beginning in 2012 and 2013, the maximum amount a taxpayer can expense is $500,000 and the phase-out threshold amount is $2 million.

Treatment of certain real property as section 179 property – Code Section 179(f)

For tax years beginning in 2012 and 2013, up to $250,000 of qualified real property costs may be included as a part of the section 179 deduction limit. Qualified real property includes, (I) Qualified leasehold improvement property costs as defined by IRC Sec. 168(e)(6), (II) Qualified restaurant property costs as defined by IRC Sec. 168(e)(7), and (III) Qualified retail improvement costs as defined by IRC Sec. 168(e)(8).

Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements – Code Section 168(e)

For tax years beginning in 2012 and 2013 (I) Qualified leasehold improvement property as defined by IRC Section 168(e)(3)(E)(iv), (II) Qualified restaurant property as defined by IRC Section 168(e)(3)(E)(v), and (III) Qualified retail improvement property as defined by IRC Section 168(e)(3)(E)(ix), will be depreciated over a 15 year recovery period as opposed to a 39 year recovery period.

New Taxes

In addition to the various provisions discussed above, some new taxes also took effect January 1 as a result of 2010′s health care reform legislation.

Additional hospital insurance tax on high-income taxpayers.

The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

Medicare tax on investment income.

Code Section 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.

For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.

Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

Medical care itemized deduction threshold.

The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013-2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.