Nerd's Eye View blog

Using Tiller Money For Cash Flow Tracking And Budgeting With Clients

December 19, 2018 07:33 am 0 Comments CATEGORY: Technology & Advisor FinTech

Cash flow is the financial lifeblood of the household. As no matter how effectively one plans for the future, with savvy tax strategies and well-diversified investment portfolios… if there’s more cash leaving the household than there is coming in every month, eventually the plan (and the money) will run out.

Unfortunately, though, remarkably few individuals have a clear understanding of where their cash is actually going from week to week and month to month throughout the year. At best, most households are aware if their available cash balance (e.g., the bank account) is rising or falling… but without knowing where exactly the money is going, there’s no way to make adjustments. Yet in practice, tracking spending to figure out where the cash is going can be so time-consuming and laborious that many households would rather stay in the dark than take the time to do the extra work.

The good news, though, is that technology tools – when combined with the ongoing shift towards “cashless” digital transactions – is making it easier than ever to track a household’s cash flow. In this guest post, Lindsay Bourkoff, Director of Financial Planning at Shrier Wealth Management, highlights the software tool that she’s found works best in planning with clients: Tiller Money.

Discovered in her process of trying to find a cash flow tracking tool for her own household, Lindsay shares how Tiller Money finds a balance between automating the download of transaction data, easy viewing and output by aggregating the data into a custom Google Sheet (rather than a proprietary software app that cannot be adapted for individual client needs), and categorization (which can be done semi-automatically, though Lindsay notes that, in practice, having clients play at least a small role in manually categorizing irregular expenses can actually help to put them in better touch with where their money is really going).

Ultimately, some advisors (and their clients) may prefer a more automated solution to fully track and categorize expenses, while others may prefer an entirely hands-on approach. But in a world where there are still remarkably few cash flow tracking and budgeting tools for financial advisors themselves, Tiller Money provides an interesting consumer-based alternative (that can still be easily adapted for financial advisors in our own practice with clients).

#FASuccess Ep 103: Finding Success As A Great Financial Planner Without The Need For Business Development Or Partnership, With Kathleen Kenealy

December 18, 2018 07:14 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 103rd episode of Financial Advisor Success Podcast.

This week's guest is Kathleen Kenealy. Kathleen is the managing director and senior wealth advisor for Boston Private Wealth, a private bank and trust company in the Boston area that oversees nearly $8 billion of assets under management, of which Kathleen manages more than $300 million for 75 client households.

What's unique about Kathleen and her role at Boston Private, though, is that she wasn't responsible for doing the business development to get those 75 client households over the past 3 years, which was handled by the business development officers for the private bank instead, allowing her to spend all of her time simply focused on really doing financial planning for her affluent clients, and also improving the financial planning processes of the entire firm, for which she was recently recognized as an InvestmentNews 40 Under 40 Honoree.

In this episode, we talk in depth about what it's like to work within a larger advisory firm that has separated out the prospecting and business development from the financial planning work that its wealth managers are responsible for. How the firm does still involve its wealth advisors towards the end of the business development process to ensure that prospective clients are connected with the right advisor, what it's like to come into existing planning relationships with existing clients who may not actually be happy about being transitioned to a new advisor in the first place, and why it's never bothered Kathleen nor hindered her career as an advisor to not have her own clients, and instead be focused solely on working with clients of the firm instead.

We also talk about what it's like to be a financial planner in a large firm whose roots are in the standalone investment management business, the steps that Kathleen has taken to expand adoption of financial planning by all advisors in the firm, why the company decided to switch from eMoney Advisor to MoneyGuidePro for their financial planning work with clients, and how the firm looks at the capacity of a wealth advisor to service a certain number of clients, and why that number must vary between investment-only and financial planning clients.

And be certain to listen to the end, where Kathleen shares her path on building a career of working with advisory firms and their clients rather than going out on her own. The upside career aspiration she sees for herself, even if partnership happens to not be an opportunity at her currently publicly traded firm, how she's been able to find job opportunities with firms that won't require her to do business development but will reward her for being a great financial planner to clients, and her interview tips on how to show well as a financial advisor trying to get one of those job opportunities in the first place.

So whether you want to learn how Kathleen has been able to consistently find unique career opportunities as a financial planner, how the bank she works for separates out the responsibility of finding new clients from the actual financial planning process, and ways in which she's working towards standardizing the financial planning process at her bank, then we hope you enjoy this episode of Financial Advisor Success.

13 Concerns About FPA’s OneFPA Network Proposal: Does FPA Need “The New Chapters” Or “The New National” Instead?

December 17, 2018 07:01 am 0 Comments CATEGORY: Planning Profession

The FPA has trumpeted its recent OneFPA Network proposal as a vital “transformational change” for the organization, going so far as to say that the FPA will not be able to withstand the rapidly intensifying challenges in the landscape of membership associations without it, and that the organization simply won’t have the resources to survive and thrive at the current level of organizational separation between National and its (86 independent) chapters.

However, a deeper look at the OneFPA Network initiative reveals that the proposed solution may be about far more than “just” the virtues of centralized functionality to gain greater organizational cost efficiencies and economies of scale. As embedded in the OneFPA Network proposal is a requirement that what has been estimated at nearly $4M of cash in individual chapter reserves must be turned over to National when the chapter affiliation agreements are dissolved at the end of 2019.

And while FPA has maintained that local leaders of The New Chapters (TNCs) that replace the existing independent chapter system will still have control over their local budgets, in reality, the TNC budgets will have to comply with whatever National sets as its strategic framework and initiatives, and have their budgets conform to policies set by a new OneFPA Resource Coordination Committee, whose purpose – as the name literally implies – is to “coordinate” resources between National and its chapters. A committee on which the TNCs themselves will have 50% representation (with the other 50% coming directly from the National Board)… but which will ultimately be controlled by a tiebreaker-voting Chair to be appointed directly by National.

In fact, a deeper look at the new OneFPA committee structure reveals that in the case of every committee that has material financial or other decision-making authority over the new chapters, National has retained the right to appoint a Chair who ultimately sets the agenda of the committee and casts the tiebreaking vote in the event of a National-vs-chapters dispute. In addition, National has also reserved its own right to alter or outright disband any of its committees at any time – effectively neutering any real sharing of power that its “Participatory Governance” structure might have otherwise provided. And raising the question of whether dissenting chapters might try to pre-emptively leave the FPA with any excess operating reserves they have and affiliate themselves with a new/alternative membership association instead, like NAPFA, the Investments & Wealth Institute, or even the CFP Board itself.

Arguably, though, the biggest concern of the new OneFPA Network is not merely that FPA National will gain oversight control of how chapters spend their assets, but that the key aspects of how chapters generate their revenue – from chapter assessment dues, to the all-important sponsor relationships – have not yet even been determined under the new structure, except to recognize that in the future all dues and sponsor relationships will be under the control of National-Board-controlled committees that will then decide whether and how much of that money to share with the chapters (or not).

In point of fact, though, it is perhaps not entirely surprising that the OneFPA Network may be less about cost-saving efficiencies of centralized functionality, and more about the raw money itself – from existing chapter reserves that National will have set their own policies over, to future chapter surpluses (i.e., profits from successful events) that TNCs won’t necessarily have any right to at all, or chapter dues assessments and key sponsorship arrangements – as a deeper look at FPA National’s financial reports to members reveals that, while membership has declined “just” about 15% in the past decade, its revenues are down by nearly 35%, driven by a 45% drop in sponsorship and event revenue and a nearly 90% drop in advertising revenue for the Journal of Financial Planning, collectively blowing a nearly $4.5M per year hole in the FPA’s operating budget since 2008.

In the meantime, the reality is that many or even most of the key initiatives that the FPA states it hopes to accomplish by decentralizing its chapters into the OneFPA Network – from updating its membership database and technology systems, to formulating a National-chapter shared sponsorship arrangement, creating a new Leadership Institute, and implementing more consistent “best practices” across its chapters to provide for a more consistent member experience – could arguably be done already without the OneFPA Network, and should have been done already… except for the fact that, despite many such systems requests from the chapters for nearly 15 years, the National organization and its leadership have failed to execute them successfully enough for the chapters to actually want to implement National’s solutions in the first place.

Which ultimately raises a question about the true elephant in the room: is the real problem of FPA a failure of its chapters to operate efficiently enough to drive membership growth – the blame that FPA National is implicitly placing on the shoulders of the chapters and thus “necessitating” their dissolution into the OneFPA Network as a solution – or is the problem actually that the FPA is still largely operating under the same leadership for more than 20 years (when current CEO Lauren Schadle and Strategic Director/COO David Brand first became leaders in the ICFP), throughout which membership has remained stagnant and revenue has dangerously declined... and that perhaps today’s leadership simply isn’t able to figure out what it takes to successfully execute a financially viable growth plan for the FPA in the current environment (especially in light of the fact that every other financial planning membership association has increased its membership by more-than-50% since their pre-financial-crisis highs)? Or stated more simply: perhaps the FPA National Board needs to take a hard look at whether the best path forward for the FPA is to create The New Chapters, or to revisit whether and how it holds its own staff leadership accountable for failing to align and grow the organization, and whether it’s time for a leadership change to create The New National, instead?

Weekend Reading for Financial Planners (Dec 15-16)

December 14, 2018 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry news that asset manager Blackrock is partnering with Microsoft to create a new digital financial planning and retirement platform for consumers, aiming to leverage both Microsoft's tech prowess and workplace reach to insert Blackrock-created digital advice tools directly into the employer marketplace... for which the software's recommended solutions will include new Blackrock retirement income products, as Blackrock increasingly focuses on technology, not just as an effective tool to manage portfolios, but literally a distribution channel for its investment products.

Also in the news this week was a surprising "double-header" of fee-only news, as both Ron Carson and Ric Edelman have converted their practices to be entirely fee-only going forward, with Edelman's firm shedding the last sliver of its commission-based trails (which were down below 1% of revenue anyway) and Carson forming his own limited-purpose broker-dealer to house and sell off his prior commission-based trails to (in order to drop his own FINRA licenses for good).

From there, we have a slew of investment-related articles this week, including: a look at the significance (or not) of the recent inversion of the yield curve; how the U.S. is now reaching the crossover where, for the first time in 75 years, it is now a net exporter of oil, as the country approaches energy independence (albeit still in a globally-interdependent energy marketplace); a deep-dive look at securities lending and its rise as a tool to reduce the cost of ETFs; Betterment's decision to launch a new "two-way sweep" that shifts client cash into short-term bond funds with higher yield (including automatically transferring and investing "excess" client cash held in outside bank accounts, potentially attracting over $2B in new AUM in the coming year); the shift of ultra-high-net-worth investors towards "direct investing" into businesses in lieu of public market (or even hedge fund or private equity) investing, and what may be underappreciated risks in doing so; and a fascinating study from Riskalyze that finds a substantial relationship between the risk tolerance of clients... and other individuals who live in the same state, providing yet another reminder and affirmation that investing is often a herd behavior.

We wrap up with three interesting articles, all around the theme of looking out to the opportunities and challenges of 2019: the first is a look at the major challenges likely to loom in 2019, from the SEC's anticipated re-proposal of Regulation Best Interest and the rising risk of a bear market to the industry's ongoing transition away from an AUM-centric model and the growing availability of "fee-only" insurance and annuity products; the second explores similar industry trends in the UK, which remarkably mirrors the US in everything from the need for succession planning, to the rise of next generation advisors, the emergence of the "second generation" (i.e., non-founder) CEO of advisory firms, and the growing pressure on advisory firm founders to develop business skills to manage their growing advisory business enterprises; and the last is a fascinating discussion around Vanguard's stated intent to come into the financial advice business and drive away high-cost low-value financial advisors just as they did to high-cost low-value mutual fund managers... even as the firm builds its advisory business on top of its own (admittedly low-cost and popular) mutual fund and ETF business, raising the question of whether Vanguard really represents the future of financial advice or the last remnant of its proprietary-product-centric past?

Enjoy the "light" reading!

Pros and Cons of Completing a Rollover Before Year-End

December 13, 2018 02:27 pm 3 Comments CATEGORY: Taxes

For many individuals, their 401(k) makes up the bulk of their retirement savings, yet with an average of just over 10 job changes through one’s career, it’s not uncommon for people to have multiple (potentially expensive and restrictive) employer-sponsored retirement plans. Which means that transferring money out of various retirement plans into an IRA can be tremendously beneficial on many fronts, including lower costs and complexity, as well as increased investment options.

As we approach the end of the year, a common question on clients’ minds is whether or not they should consider rolling over money from their retirement plan into an IRA, and in this week’s #OfficeHours with @MichaelKitces, my weekly broadcast via Periscope and guest hosted this week by Jeff Levine, we discuss the benefits such a move, some of the potential pitfalls you might encounter along the way, and a few rules to keep in mind when making a rollover near the end of the year.

In order to understand the available options, it’s important to first understand the reasons for not rolling money between retirement accounts in the first place. For instance, clients who completed a Roth conversion earlier in the year that included after-tax dollars but still have pre-tax dollars in the traditional IRA would see their year-end balances impacted, making their prior conversion a lot less tax-efficient. Meanwhile, if a client wants to preserve and utilize a “still working” exception in order to delay RMDs from their employer-sponsored plans, then that option will be lost when rolling money into an IRA.

With that in mind, what are some good reasons to complete a rollover into the end of the year? First and foremost is convenience and ease. Because consolidating retirement accounts can reduce the complexity of keeping track of multiple accounts. This is particularly pertinent for individuals over 70 ½ who are subject to RMDs, since it doesn’t matter which IRA their RMDs are taken from as long as the total (and correct amount) is distributed, whereas RMDs must be taken from each employer-sponsored retirement plan account.

Meanwhile, clients who are interested in a making a qualified charitable distribution (where individuals can reduce their taxable income by using their RMD to contribute money to a charity), that QCD can only come from an IRA. Which, in turn, is based on the year-end balance in that IRA, meaning that there has to be money in the IRA in the first place! In a similar vein, clients who might want to purchase a qualified longevity annuity contract may not have that as an option in their employer-sponsored retirement accounts. Instead, a QLAC is more commonly purchased inside an IRA, but again, is subject to certain limitations that can be addressed by completing a year-end rollover.

Additionally, for clients over 70 ½ with a spouse that is at least 10 years their junior, rolling money into an IRA or other retirement account where that spouse is the sole beneficiary before year-end will lower the RMD from that IRA in the following year. And finally, rolling money from a 401(k) into a Roth IRA can be an effective means of reducing RMDs in the future, and is especially attractive at this time due to the lower tax rates (temporarily?) in effect following the passage of the Tax Cuts and Jobs Act.

Although there are some rules to keep in mind when taking advantage of these year-end planning opportunities at the end of the year, they aren’t terribly complex. Specifically, any money that leaves one account must be out before December 31st, but beyond the common timeframes for rollovers, it’s okay if the money doesn’t transfer into the receiving account until after January 1st. One thing that’s important to keep in mind for clients subject to RMDs, however, is that the custodian likely will not track that last minute change, and it will be up to the advisor to make sure to account for any year-end balance increases for the following year’s RMD.

Ultimately, the key point is to avoid completing any sort of rollover if it is not tax-efficient, but there are some good reasons to move money between tax-favored retirement accounts, particularly towards the end of the year, as well as opportunities for advisors to add value for their clients by helping them manage their tax exposure, particularly for those clients fortunate enough to not rely on distributions from their retirement account for income in retirement!

Unwinding An “Irrevocable” Life Insurance Trust (ILIT) That’s No Longer Needed

December 12, 2018 07:05 am 6 Comments CATEGORY: Estate Planning

The Irrevocable Life Insurance Trust (ILIT) has long been a staple of estate planning – a means of avoiding the death benefit of a life insurance policy from being subject to estate taxes by having it owned not by the insured or family themselves, but an independent third-party trust holding the life insurance for the family’s (beneficiary’s) benefit instead. Which was necessary in a world where, as recently as 10-20 years ago, even basic term insurance for a 30-something-year-old breadwinner to protect the children in the event of an untimely death could cause an estate tax liability.

But the drastic increase in the estate tax exemption, especially with last year’s doubling to $11.2M (or $22.4M for a married couple with portability) under the Tax Cuts and Jobs Act of 2017, has not only removed more than 99% of households from Federal estate tax exposure, but has rendered a large number of existing ILITs unnecessary for families who once had an “estate tax problem” in the past (when exemptions were lower) but won’t be in any foreseeable future.

And the good news is that despite the “irrevocable” label in its name, in many cases it is possible to either “rescue” life insurance out of an ILIT that’s no longer needed, or to unwind the ILIT altogether. In some cases, it may be as straightforward as the grantor simply substituting the life insurance policy out of the ILIT in exchange for cash of equivalent value (or alternatively buying the policy back). In other scenarios, if the life insurance itself is no longer needed, it may be easiest to simply let it lapse, rendering the ILIT irrelevant because it would no longer have any assets left to oversee. And if the life insurance policy has cash value, it can simply be surrendered or sold in a life settlement transaction, with the cash potentially distributed to beneficiaries (at least if the trustee has discretion to do so). Alternatively, if the beneficiaries themselves want to keep the policy, it may be feasible to distribute the policy in-kind under the trustee’s discretion, or to terminate the trust outright (either under the terms of the trust, as a consent termination of the grantor and beneficiaries, or court-directed termination at the direction of the beneficiaries).

Of course, the caveat is that the trustee must still honor the terms of the trust, and if the trust is more restrictive in preventing various “unwinding” or policy rescue options, the parties are still bound by the terms of the trust (unless, perhaps, the ILIT can be decanted to a new trust under state law). Nonetheless, the fact remains that while the “irrevocable” nature of an ILIT means the terms of the trust itself cannot be changed, that doesn’t mean the grantor, beneficiaries, and trustee can’t work within the terms of the trust and state law to eliminate an ILIT that is no longer necessary in today’s estate tax environment!

#FASuccess Ep 102: Transitioning From Wirehouse To Independence: Is The Grass Really Greener? With Michael Henley

December 11, 2018 07:17 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 102nd episode of Financial Advisor Success Podcast!

This week's guest is Michael Henley. Michael is the founder and CEO of Brandywine Oak Private Wealth, an independent advisory firm in the Brandywine Valley of Southeastern Pennsylvania that manages more than $500 million of client assets.

What's unique about Michael, though, is that he's a 34-year-old millennial, who only just recently founded his independent advisory firm a few months ago as a breakaway from Merrill Lynch, where he had spent the first decade of his career. And until recently, was so loyal to the firm that he even had his wedding cake shaped like a bull.

In this episode, we talk in-depth about what it's like to build an advisory firm in the wirehouse environment, how the culture of wirehouses and the value of the wirehouse brand itself has begun to change in recent years. The way that wirehouses have increasingly deemphasized the role of commissions but have adopted forms of integrated grids that require minimum production levels in certain product categories just to maintain current grid payouts. And the way that once dominant wirehouse technology is now struggling to keep pace with the growth of independent technology firms instead. We also talk about the breakaway transition itself, how Michael and his team really did have to resign late on a Friday afternoon, and then spend the weekend frantically calling clients to come with them. The reason he's chosen to build his client portal around eMoney Advisor and eschew a standard portfolio performance reporting tool like Black Diamond altogether. Why Michael chose to leverage Dynasty Financial as a back-office provider to support the firm, and the unique decision that the firm made to sell of a small slice of its future revenues to create the necessary startup capital to fund the transition and buy out the deferred compensation plans they would lose by leaving Mother Merrill.

And be certain to listen to the end, where Michael compares the ways that the grass is and isn't greener in the independent channel versus the wirehouse, why most advisors may underestimate the burdens it takes to really be a business owner as an independent, as Michael discovered the hard way when he was forced to rename his brand-new firm just a month after launching. And why he would still build his career again in a wirehouse if he was starting over, even though he's happy so far with the transition he's made to independence at this juncture of his career.

So whether you're interested in learning about steps Michael took to affect his breakaway transiton, some lessons he's learned along the way, or the pros and cons of being independent, then we hope you enjoy this episode of the "Financial Advisor Success" podcast with Michael Henley.

Understanding FPA National’s “OneFPA Network” Plan To Dissolve And Consolidate Its Own Chapters

December 10, 2018 07:05 am 0 Comments CATEGORY: Planning Profession

It’s no secret that the Financial Planning Association has struggled for many years with stagnant membership amidst an increasingly difficult and competitive landscape for membership associations given both the rise of social media (and more online platforms for people to connect outside of traditional networking and professional associations) and intra-industry competition from other membership and trade organizations and even media companies competing for advisors’ attention.

In the case of the FPA, though, the situation is further complicated by the fact that the FPA is not just a single entity, but a national “parent” organization that has 86 separate chapters – each its own legal entity with its own Articles of Incorporation, Bylaws, and Board of Directors – that each sign an “affiliation agreement” to represent the FPA at the local level. And while in the early days of the FPA and its predecessor organizations, a distributed chapter system was necessary – where there were no resources for a national organization, nor the kind of centralized communication and business management technology to execute a national organization – in today’s environment, it simply means 86 different entities repetitively filing Form 990s, 86 different entities implementing their own technology, and 86 different entities each rowing in their own similar-but-not-always-same direction under the national affiliate umbrella.

To address this challenge, last month the FPA issued a proposed initiative to re-form the FPA as not a series of 86 independent chapters (plus 2 state councils!), but a single national entity under one umbrella that can better centralize technology, operations, accounting, and other largely redundant functions of the individual chapters, while reconstituting “The New Chapters” (or TNCs for short) that will no longer be discrete entities but will still have ultimate responsibility for implementing their own local budgets to run their own local programs.

And in return for becoming part of the new “OneFPA Network,” chapters will have the opportunity to send representatives to a new “OneFPA Council” – a form of Participatory Governance system that will allow both a pathway for chapters to provide feedback to the National Board, and also to populate and be represented on key National committees regarding everything from Strategic Partnerships and Resource Coordination of chapters, to the Nominating Committee of the National Board and a new OneFPA Leadership Institute for the development of future volunteer leaders.

Ultimately, the new OneFPA Network is scheduled to roll out at the end of 2019, but the FPA leadership has already launched a “Listening Tour” series of meetings with FPA chapter boards to gather feedback as the final details of the structure are sorted out in the coming months. Though in the end, the real question is not simply how the OneFPA Network will work, but whether it will work, and be the transformational change the FPA really needs to reinvigorate its growth? (Stay tuned for my own thoughts on the likely efficacy of FPA's OneFPA Network proposal next week!)

Weekend Reading for Financial Planners (Dec 8-9)

December 7, 2018 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the latest edition of Financial Planning magazine's annual Advisor Technology survey, showing the most widely adopted advisor software tools in various categories... and highlighting that, with the proliferation of advisor technology, the problem now is not the threat of robo-advisors but simply the burden of choosing which of the ever-growing number of solutions human advisors want to use to deliver their own tech-enabled services!

Also in the news this week was the stunning news that wirehouse Wells Fargo will be rolling out a pilot program for "independent" RIA offices (albeit still operating under the Wells Fargo brand) in an effort to stem the tide of brokers breaking away to the RIA channel, and the news that the SEC is going to take a hard look at its own custody rule in 2019 and whether it's time to update the requirements for the modern technology-driven world (where custody is far more complex than just having physical possession of a client's printed stock certificate!).

From there, we have several articles on industry trends, including a look at the initial success of recent Financial Planning Re-Entry Initiative from the CFP Board's Center for Financial Planning to increase the number of women in financial services, an updated discussion from Bob Veres on the recent OneFPA Network proposal (and the FPA National Board's response to his earlier criticisms), and the news that the FPA NexGen community is transitioning itself away from being an independent community for younger advisors and instead will adopt the vision and mission of FPA National and serve as its community for any advisors who are new to the profession (whether entering as young students or more experienced career-changers instead).

We also have several practice management articles this week, including a reminder of the importance of focusing not just on reducing employee turnover but "regrettable" turnover, the impact of culture and how it is naturally set from the top by a firm's founder/leader (but can be consciously changed/improved), and tips for advisors who want to negotiate a better deal for themselves when changing broker-dealers (and understanding what can potentially be negotiated in the first place).

We wrap up with three interesting articles, all around the theme of finding our own purpose and success in life: the first looks at how, despite the popularity of the saying "do what you love and the money will follow," a better approach is probably the Japanese concept of "ikigai" which considers both whether what you're doing is something you love, something you're good at, something the world needs, and something you can actually get paid for (and that it takes the intersection of all 4 to really succeed financially at what you love); the second takes a fascinating look at how luck may play a far greater role in success than we realize (but talent does matter, and you can choose to put yourself in positions where good luck can happen to you); and the last explores how the key to getting what you desire (and aspire to) is being willing to change when necessary in order to achieve it.

Enjoy the "light" reading!

Year-End Tax Planning Opportunities For Cash-Basis Small Business Owners

December 5, 2018 07:03 am 2 Comments CATEGORY: Taxes

Generally speaking, business owners have at their disposal two common accounting methods allowed by the IRS. The first, and more complex, is the accrual method, in which businesses recognize income when the business has performed its service or delivered its goods, and expenses after everything has occurred that would require an expense to be paid. Neither of which require the buyer to actually pay the seller.

Conversely, the other, and far more common method for small business owners, of accounting is the cash basis method, generally does require the exchange of funds, and typically is not dependent upon the preceding (or subsequent) delivery of good or rendering of service.

While historically business transactions were relatively straightforward and direct, the advent of debit cards, credit cards, and other means of electronic payment means that buyers and sellers now affect their transactions in some form of payment other than cash.

Fortunately, though, the cash basis method allows for more than just the transfer of actual cash. For instance, a payor’s expense recognition for paper checks that are mailed depends not on the date written on the check itself, but on the date of the postmark… which can be meaningful if that occurs at the end of the year. Conversely, payees don’t wait until the funds hit their checking account to record income, but rather, can recognize income once the check is received.

Meanwhile, credit card payments have their own subtle differences from cash or checks, in that payee’s must wait until the money from the payment is actually credited by the payment processor to their account, whereas the payor recognizes the expense as soon as the charge is made, rather than when they (eventually) pay the credit card bill.

All of this raises some potentially useful strategies to affect positive tax outcomes (recognizing, of course, the oxymoron inherent in that phrase). For instance, business owners can reduce taxable income in a given year by waiting to send out invoiced for goods delivered or services rendered, thus pushing out income into the following year. Alternately, businesses looking to increase current-year deductions could prepay certain expenses, like insurance, and using something called the “12-Month Rule,” a substantial amount of those (and other) expenses can be pulled into the current year in order to stack deductions.

Other useful strategies include taking advantage of Bonus Depreciation – which allows for accelerated depreciation of certain assets, and (after the passage of the Tax Cuts and Jobs Act) gives businesses the ability to deduct 100% (!) of the purchase price of used property that is “new” to the business – and the Section 179 expensing election, which is also a way to accelerate depreciation and was enhanced by the TCJA.

The key point, simply, is to recognize that there are several strategies that advisors can help business owners take advantage of, and create, some real hard-dollar savings. And, while some of these strategies may be relatively straightforward, they can still have a significant impact on a business owner’s tax liability.