Using Regulation A to Raise Capital

Article written by EricBank

Like thoroughbreds chomping at their bits on the starting line, small business owners are keenly awaiting the SEC's final release of equity crowdfunding regulations. It's been a long wait -- the JOBS Act mandated the new financing mechanism over two years ago.

No Time to Wait

Some entrepreneurs have not been content to cool their heels while the SEC labors over its task. To raise capital, many continue to place unregistered securities privately via Regulation D. What some don't realize is that there are a few other alternatives for issuing stock without an IPO. Dan and Ben Miller, real-estate developer brothers based in Washington, D. C, have been successful using Regulation A to raise money for projects. Their first foray into Reg A financing created a pot of $325,000 from 175 investors. They used the money to convert a 5,000 square foot warehouse, but the process wasn't easy.

Regulation A

Reg A gives entrepreneurs a safe haven for issuing non-registered securities, but it differs from Reg D in several ways. Reg A is like a mini-IPO, albeit with a fundraising cap of $5 million per year. Here are some key facts about Reg A:

·       You must file SEC Form 1-A, which contains an offering circular (much like a prospectus), a notification and several required exhibits

·       There are three Form 1-A formats to choose form, including a simplified Q&A version

·       You must also file for approval from the states in which you plan to accept investors

·       You can market the securities publicly, much like Rule 506 securities under Reg D

·       Unlike Reg D securities, Reg A securities are not restricted -- in most cases, investors can resell up to $1.5 million of these securities

·       Reg A financial statements requirements are simpler than those for IPOs

·       You can make small investments and you don't have to be an accredited investor

·       The issuer does not fall under the reporting requirements of The 1934 Exchange Act nor the Sarbanes-Oxley Act

·       Reg A offers unique provisions for "testing the waters"

Making a Test Run

Under Reg A, a company can distribute marketing information before filing an offering statement with the SEC. This allows a company to gauge interest in the offering before they have to shell out for accountants, lawyers and other worthies necessary to prepare an offering statement. While you can collect commitments before filing the offering, money can't change hands until the filing is made, approved and distributed.

The Rise of Fundrise

The Millers realized that the software they developed to manage the Reg A application process was of great general interest to other real estate developers. In response to that interest, they built Fundrise as the first "curated and vetted platform" for real estate fundraising. It is, in effect, a crowdfunding portal that uses Reg A and Reg D instead of the JOBS Act rules -- that is, until the JOBS Act rules become effective. Investors participate by purchasing preferred equity or mezzanine debt. The real estate developer pays Fundrise 2 percent of funds raised and an origination fee. Investors pay a 0.3 percent service charge.

Employer Contributions: New Limits for 2015

Article written by EricBank

 

If your small business contributes to an employee retirement plan, you should be aware of the new limits in place for 2015. These can affect you in a few ways:

• You may be able to make a larger employer contribution to your employees' account
• You can accept larger employee contributions in 2015
• If you're self-employed, you may benefit from higher employer and employee limits

 

401(k) Plans

 

For 2015, the maximum total contributions cannot exceed $53,000, or $59,000 for employees 50 and older. This is up $1,000 from 2014. Employees can defer up to $18,000 of their annual compensation, up $500 from 2014. Employees age 50 and older can make $6,000 in catch-up contributions, also up $500 from 2014. Note that these limits also apply to 403(b)s, most 457s, and Thrift Savings Plans.

 

By the way, 401(k)s must pass anti-discriminatory tests that in part depend on the definition of a highly compensated employee. For 2015, the threshold for this designation is up $5,000, to $120,000.

 

Individual 401(k)

 

Many sole proprietors fund their retirements via one-participant 401(k)s. As an employer and employee, you get to make contributions in both roles. As an employee, you can contribute $18,000 of your earned income in 2015, up $500 from 2014. If you're 50 or older, the limit is $24,000, up $1,000. Total contributions cannot exceed $53,000 (up $1,000), not counting the catch-up contribution. You figure your earned income after first deducting both 1/2 of your self-employment tax and your contributions for yourself. Rate tables in IRS Publication 560 help you figure your maximum individual 401(k) contributions as a self-employed person.

 

SIMPLE IRA and SIMPLE 401(k) Plans

The employee deferral limits on SIMPLE 401(k) plans have increased $500 in 2015, to $12,500. The catchup contribution limit is also up $500, to $3,000.

 

SEP IRA

 

For 2015, you can contribute up to $53,000 to each employee's SEP IRA account, up $1,000 from 2014. The contribution can't exceed 25 percent of an  employee's compensation.

 

Workplace Plan/IRA Income Limits

Some employees who participate in a workplace retirement plan also maintain a traditional or Roth IRA. Here are the 2015 income limits for those who participate in both workplace plans and IRAs:

 

• Traditional IRA: Singles can fully deduct IRA contributions up to $61,000 income, and partially up to $71,000. Both are up $1,000 from 2014. The limits for married couples filing jointly begin at $98.000 and top out at $116,000, a $2,000 increase for both. If your spouse belongs to a workplace plan but you don't, the limit range is $116,000 to $131,000 for a single filer and $183,000 to $193,000 for joint filers. That's $2,000 higher than the 2014 spousal limits.
• Roth IRA: Contributions are limited for singles when income is in the range of $116,000 to $131,000. The range for married filing jointly is $183,000 to $193,000. All these figures have increased $2,000 for 2015. Remember, you can circumvent the income limits by making a non-deductible contribution to a traditional IRA and then doing a trustee-to-trustee transfer to a Roth IRA.

Three Retirement Plan Options for Small Businesses and Self-Employed Owners

Article written by EricBank

If you are self-employed or a small business owner, now is a good time to consider setting up a retirement plan. The three retirement plans discussed here each has unique pros and cons, but each one will cut your tax bill and provide other valuable benefits. All three work well for small businesses and for the self-employed.

 

SIMPLE IRA

 

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good choice for small businesses with no more than 100 employees, each of whom received at least $5,000 in annual compensation. You can make matching contributions up to 3 percent of a participant's compensation or non-elective contributions of 2 percent of every employee's compensation up to $260,000. Employees can contribute up to $12,000 ($14,500 for aged 50 and older). These plans are easy and cheap to set up -- you file IRS Form 5304 -- and the plan requires no administrator. This plan has higher limits than does an individual IRA (although lower than other employer plan limits), and the employer contributions are deductible. On the downside, SIMPLE IRA contributions reduce allowable 401(k) contributions, and early withdrawals may trigger a 10 percent penalty. You can only set up a SIMPLE IRA from January 1 through October 1.

 

SEP IRA

 

For a one- or two-person company, consider the Simplified Employee Pension, or SEP IRA. This plan is easy to set up using IRS Form 5305-SEP. The SEP accepts only employer contributions. The contribution limits are the lesser of 25 percent of compensation or $52,000. This makes the SEP IRA attractive for the self-employed, although the deduction for self-employed individuals requires a special calculation. You must make contributions proportional to each participant's compensation, but you can skip years. These plans must be established by the end of the year to take a tax deduction in that year. They are very simple and inexpensive to set up and run. Contributions don't affect other accounts and you can terminate the plan any time. Possible disadvantages include the fact that the contribution percentage must be the same for all employees, employers contribute everything, and all employees must be included.

 

Individual 401(k)

 

The individual 401(k) applies to a self-employed person (and spouse). These plans have the same rules as other 401(k) plans. As a self-employed owner, you can make elective deferrals of 100 percent of your compensation up to $17,500 in 2014. In addition, you can make employer nonelective contributions up to 25 percent of your compensation. Total contributions for 2014 can't exceed $52,000 ($57,500 for owners age 50 or older). Once again, you must make a special calculation to figure your maximum contribution. You must open an individual 401(k) with a custodian by December 31 to take deductions in the tax year, but you don't have to file a set-up form with the IRS. The individual 401(k) is attractive because it allows you (and your employee-spouse) to take deductible contributions in a flexible way, and you can contribute up to April 15 for the prior year. However, these plans are somewhat more complicated and expensive because you need a plan administrator, and you must report plan assets annually with IRS Form 5500 once they exceed $250,000.

Top Five Mistakes for Small Business Owners to Avoid

Article written by Eric Bank

Starting a small business can be rewarding, but also challenging. Sometimes, entrepreneurial spirit is great for launching a company but not so good for the day-to-day running of the business. But it doesn't have to be that way. Here are five common mistakes that new owners make -- avoid these and you'll have a much better chance of long-term success.

1.  Poor Planning. You can avoid a lot of grief by creating a business plan and budget for the first year of operation. A business plan indicates to investors and vendors that you have seriously thought about your enterprise, including finances, marketing, selling, organizational policies and operational procedures. The budget proves your ability to project numbers and make reasonable assumptions. You'll have to address issues of compensation, taxes, buying inventory and paying interest, among others.
2. Poor Accounting Procedures: Bookkeeping can't wait for a convenient time. You must keep your books up to date and accurate. Without precise information, you are likely to make mistakes that can cost your business dearly. Poor accounting procedures can lead to unpaid bills, uncollected revenues, cash shortages, illiquidity and even bankruptcy. If accounting isn't your thing, by all means hire a bookkeeper or an accounting service to keep your books in good order. The service is worth its weight in gold, and it's tax-deductible.
3. Poor Internal Controls: Even if you have a bookkeeper, you must also create internal controls so that no one employee can hide mistakes or embezzle. Either you or a trusted partner must periodically inspect primary financial documents and make sure they match your financial reporting. These documents include cancelled checks, bank statements, purchase orders and bills. Always sign all check personally. You can use an outside service to reconcile and audit your books, but you should also remain personally involved in creating and maintaining internal controls.
4. Poor Delegation Skills: Some entrepreneurs are, unfortunately, megalomaniacs. They find it impossible to delegate the smallest task, habitually micro-manage every employee and generally make the staff's working lives a nightmare. Inevitably, your product or service will suffer, your employees will turn surly or quit, and you'll be spread so thin that things will fall between the cracks. You can get a grip by replacing this anti-social behavior with good communication and delegation skills. Regularly meet with and talk to your staff, ask for updates (but not six times a day), and establish procedures by which you can judge whether the company is performing well. Use outside vendors as needed to supplement your staff.
5. Poor Involvement: The opposite of #4 is a detached owner who loses control of the business out of neglect. Just as you can't do everything yourself, you can't delegate all the work, because your vision will be quickly lost. Other employees might be more interested in exploiting the business for their own purposes than in following your agenda. You must find the right balance between the two extremes of involvement and lack thereof. Seek the assistance of outside lawyers, accountants and financial advisors to help you evaluate how well you are running your business and be open to their suggestions.

Top 10 Ways to Promote Your Small Business During the Holidays

Article written by EricBank

The holiday spirit puts people in a buying mood. Don't let your small business miss out on its fair share of Christmas cheer. Here are 10 tips for attracting customers and stimulating sales. Don't forget, most of these are tax-deductible -- consult with your tax preparer for all the details.

1.     Say it with music. You can turn just about any business into a festive venue by hiring a few musicians and/or singers. Christmas carols really set the mood, and live music attracts new potential customers. Couple this with some holiday decorating and promote the event on social media.

2.     Shopper guidance. Join your fellow business owners and put together a holiday buying guide featuring local merchants. Include special sale announcements and feed the information to local media and bloggers.

3.     Holiday hoopla. Set up Christmas-themed grab bags, contests, lotteries and other giveaways to attract visitors and reward them for their patronage. If you are a service company, offer a holiday tie-in, such as a free decorating or free tickets to the latest Christmas movie.

4.     Holiday cards. Don't forget to send out holiday cards. Use your customer database to dispatch cards for Thanksgiving, Christmas, Hanukah, Kwanza, New Year's or Festivus. If you have the time, pen a thoughtful, personal note that lets your customers know you're thinking of them this holiday season.

5.     Promote a holiday-appropriate charity. The poor, hungry and homeless -- humans and animals -- need help in the cold winter weather. Hospitalized children need toys, and our fighting forces overseas need CARE packages. Adopt a charity and aggressively promote your interest in it.

6.     Special customer loyalty offers. Say "Merry Christmas" to your best customers by offering them special deals on gifts and other holiday paraphernalia. Make them understand that the deals are exclusively for your longtime customers as a thank you for their business.

7.     Sales spectacles. Team up with your neighboring businesses for sales spectaculars. For example, the business on your block can set up sidewalk sales, festooned with balloons and maybe Santa himself. Bring in some petting animals and you'll be a hit with young kids and their parents. Let your imagination run wild and you'll be surprised at how many good ideas you can develop.

8.     Put out food. NOTHING attracts customers like free snacks. Sure, it might be a little costly, put almost invariably you are repaid with ramped-up sales. Do everyone a favor and gear your offerings toward healthy holiday foods like fruits, nuts and wholesome eggnog. If you live in an area that favors vegan or ethnic foods, stock up on delights that you know will be appreciated.

9.     Promote New Year's resolutions. Help your customer's improve their lives by tying-in a promotion to offer free fitness training, business consulting or other useful services.

10.  Holiday gift cards are a great promotion. Sell them at a slight discount to encourage sales. You win twice --- the sale of the cards and possible incremental sales made to the recipients when they come in to redeem the cards.

How is your small business celebrating the holidays? We'd love to hear from you! 

Leave us a note and let us and our readers know what you're up to. 

Happy Holidays from all of us at Small Business Financials!

Small Business Charitable Contribution Tips

Article written by EricBank

As we enter the final month of 2014, many small businesses are planning charitable contributions. This is a good idea, for many reasons beyond the tax deduction. Let's explore the why's and how's of intelligent charitable giving during this holiday season.

Benefits Beyond Taxes

Charitable giving is great for business, because it helps instill a positive image among your customers, especially when you pick a charity that is important to them. One feature of running a small business is that you get to know your customers, so that you can often figure out which causes they find the most appealing. If in doubt, just ask! In one 2010 survey, 90 percent of respondents said they wanted a business to tell them how it is supporting a cause. You also can boost employee morale by giving to a cause they find important, helping to foster a community feeling inside the company. Giving helps your marketing efforts by allowing you to connect with local leaders in a different context, and even garner some coverage on the local news.

How to Proceed

You need to plan the amounts and recipients of your charitable giving early enough in the year so that you can budget and put aside sufficient cash. This can be a challenge to a busy business owner, but consider it another necessity of the job. Select a charity to which your business has some plausible connection. Do you sell food as a retailer or restaurant? Contribute to a charity that runs a food bank or sends food packages to our military personnel overseas. Dentists, doctors, lawyers and other professionals can offer free services to the needy who otherwise couldn't afford to pay. Involving your employees in the decision helps to empower them and increase job satisfaction. Make sure the recipient is legitimate -- the well-known charities are usually a safe bet. Let your customers know what you are doing -- don't hide your light under a bushel basket!

Get Your Tax Deduction

Your business does good when it contributes to charity and does well by its bottom line through the resulting tax deduction. Make sure the recipient's tax status provides you with a deductible expense. The charity is usually a tax-exempt 501(c)(3) outfit and will probably accept volunteered services, inventory and sponsorship of local events in addition to cold hard cash. In general, you can deduct up to 50 percent of your adjusted gross income for charitable contributions, although non-cash contributions can be a little tricky. Here are some tips:

• You can't deduct contributions to a specific person, only to the organization.

• Sole proprietors itemize their deductions on Schedule A of Form 1040. 

• You can deduct the fair market value of contributed inventory or property, but use Form 8283 when the value exceeds $500. 

• You can't deduct volunteer work, but you can deduct some of the expenses you encounter while performing the work -- mileage, special uniforms, hosting a fundraiser, etc. 

• If you receive anything in return for your contribution, you'll have to subtract its value from your deduction. Be aware of this at charity auctions -- only the amount above the auctioned item's fair market value is deductible. Unless, of course, you donate the item as well.

7 million new jobs! Way to go small business!!

https://www.sba.gov/blogs/small-businesses-drive-us-job-recovery

Small Business Health Care Tax Credit 2014

Article written by EricBank

One of the features of the new health insurance landscape is a tax credit for small businesses to offset part of the costs of employee coverage. The amount of the credit has increased in 2014 to 50 percent of the premiums that a small business employer pays. The credit also increases to 35 percent for small tax-exempt employers. Eligible employers can receive the credit for two consecutive years.

Qualified Health Plans

To be eligible for the credit, the employer must pay premiums for employees enrolled through the Small Business Health Options Program Marketplace, although certain exceptions apply. For example, if you pay $50,000 a year for employee premiums and receive the maximum credit, you cut your tax bill -- or increase your refund -- by $25,000. The refund is limited by the total of your income tax withholding and Medicare tax liability. If you forget to apply for the credit, you can file an amended return within three years of the original filing or two years after paying the tax, whichever is later. 

Eligibility Requirements

A business can claim the tax credit if it pays at least 50 percent of each employee's health insurance, not counting employees who are dependents or family members. The business must have fewer than 25 full-time-equivalent (FTE) employees with average wages below $50,800, although the math is a little tricky -- see example below. One FTE can be achieved by one full-time or two half-time employees. The credit works on a sliding scale such that the smallest businesses -- ones with 10 or fewer employees, get the biggest credit, on a percentage basis. For an employee count between 11 and 24, the credit is reduced by a fraction in which the numerator is the number of FTEs minus 10, and the denominator is 15. If the average annual FTE wages exceeds $25,000, the reducing fraction has the excess average wage in the numerator and $25,400 (for 2014) in the denominator. The final reduction is the sum of the employee count and employee average wage reductions, and could possibly wipe out the credit entirely.

Example Calculation

Imagine an employer in 2014 has 12 FTEs and average annual wage of $30,000. The employer shells out $96,000 to pay for qualified employee health insurance premiums. The starting credit is 50 percent of the premiums, or $48,000. The employee count reduction for employees in excess of 10 is (2/15 x $48,000) or $6,400. The average annual wage reduction is (($30,000 - $25,000) / $25,400) x $48,000, or $9,449. Therefore, the total credit is equal to $48,000 - $6,400 - $9,449, or $32,151.

Claiming the Credit

To receive the credit, you must complete IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Include the tax credit in your general business credit when you file your business income tax return. You may be able to carry the credit back or forward. If you are a small tax-exempt organization qualifying for the credit, file IRS Form 990-T, Exempt Organization Business Income Tax Return -- even if you normally don't file this form -- to receive a refund.