As a small business owner, are you taking advantage of all the deductions you are entitled to? With our new guide, Maximizing Tax Credits for Small Business, you’ll have the information you need to make the most out of your deductions come tax time.
As a small business owner, are you taking advantage of all the deductions you are entitled to? With our new guide, Maximizing Tax Credits for Small Business, you’ll have the information you need to make the most out of your deductions come tax time.
Professional tax preparers for small businesses are already hard at work for the fast-approaching April 15 deadline. S corporations, which almost always follow a calendar tax year, are even shorter on time with a March 15 deadline.
Now that the reporting year has ended, most options to optimize a small business tax return lie in the deductions and credits you choose to claim, or in deciding to file for an extension. The estimated 85 percent of small business owners who file taxes as individuals should also review their returns for any claims that could raise suspicions with the IRS.
Home office deduction changes
Small business tax expert Barbara Weltman says the first thing to do is learn about changes in the tax code that affect entrepreneurs, especially those who work out of their homes.
“The good news is there is a new, simplified home-office deduction, since 52 percent of all small businesses are home-based,” says Weltman, author of J.K. Lasser’s Small Business Taxes.
Up until this year, most entrepreneurs working out of a home office had to make some complicated calculations about the percentage of their home’s square footage that they used for business, the portion of utilities and Internet that went to business use, and so on. Now, a home-based business can deduct $5 per square foot up to a limit of $1,500.
The original calculation method is still available, too. Which one should you take? Weltman advises business owners to compare the flat rate to the deduction they claimed in years past. “If you have a space that’s larger than 300 square feet, you might consider calculating it the old way. That’s the maximum you can have on the simplified method,” she says. The IRS also has an online comparison.
Use your time wisely
If you’ve been keeping good records throughout the year, tax time will be a lot less painful. But it’s also important to give yourself time to go over your paperwork and make sure you have everything you need to complete your return, says Chris Whitcomb, tax counsel for the National Federation of Independent Business.
Give your accountant or tax preparer enough time to complete your return and let you review it, Whitcomb says. Among NFIB’s 350-plus members, Whitcomb says nine out of 10 use an outside tax preparer, tax software, or both.
For sole proprietors, independent contractors, and home-based businesses, doing your own taxes isn’t out of the question. The Small Business Administration notes that tax preparation software is a good option, with one caveat: many free products don’t support business tax filers with necessary forms such as Schedule C. Check to make sure your software has everything you need.
Whitcomb adds that getting organized early also helps you find out if you owe money, and to plan accordingly. “You don’t have to file until April 15. You can plan for that cash flow ahead of time if you have to pay,” he says.
Weltman says tax time is your opportunity to make smart elections. One example is the Section 179 deduction, which allows business owners to write off the entire cost of new equipment in one year rather than taking depreciation over multiple years. Eligible items include machinery, computers, certain software, and furniture. Or, a business can take bonus depreciation, which allows half the cost of qualifying equipment to be deducted this year, with remaining depreciation amortized over the item’s lifetime.
“Depending on your tax picture, you should sit down with your tax advisor to figure out the best depreciation strategy for your business,” Weltman says.
Enjoy these deductions while you can. They’re two of 55 tax breaks that Congress allowed to expire at the end of 2013. Congress could retroactively reinstate them, but for now Weltman says that makes 2014 tax planning difficult. For 2013, a business can write off up to $500,000 under Section 179. That number drops to $25,000 next year, and bonus depreciation is on track to be eliminated altogether.
If you laid the groundwork for a business in 2013, some startup expenses can be deducted, such as money spent on product and market analysis and visiting potential business sites. For more small business expenses and deductions, check out the SBA’s guide.
Finally, some states also have special incentives for businesses that aren’t available from the federal government, Weltman adds. Check the rules and deadlines in your state before you finalize your return.
The SBA advises business owners to avoid these common audit triggers:
Where Weltman parts ways with the SBA, however, is over the home-office deduction. SBA repeats the long-held belief that having a home office increases your odds of being audited. “Is it a red flag? My opinion is no, because look at how many people work from home today,” Weltman says.
Just make sure you qualify for the deduction, she adds. If your business has a commercial address and you work from home occasionally, that doesn’t pass the test.
And if you’re doing really well, expect extra scrutiny. Those who report $200,000 or more in income automatically fall into a high audit risk category, Weltman says. This year, there is also an additional 0.9 percent Medicare tax on earned income and 3.8 percent tax on net investment income for single filers making $200,000 and married couples filing jointly who make $250,000.
Need more time?
You can file for an extension if April 15 is coming too fast. NFIB’s Whitcomb says it’s better to get your return right than to rush through it just to meet the deadline, especially if you’re missing key supporting documents.
If approved, an extension will give you five to six extra months to prep your return. But remember, you don’t get extra time to pay. Estimate what you owe and send the payment when you file Form 7004 to request the extension. If you’ve already made quarterly payments, furnish that information to the IRS as well. If you owe money but don’t pay, the IRS could reject your application, and interest and penalties will kick in.
When wrapping up your 2013 return, remember that it’s also time for the first payment of quarterly estimated taxes for 2014, Weltman says. Stay on top of your cash flow projections so you have enough on hand when these payments come due.
Although the expiring tax breaks make for a lot of moving targets, she says it’s best to peg your 2014 tax liability to your 2013 tax obligation. “No matter how much you ultimately owe, at least you won’t have underpayment penalties,” she says.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.
With the proliferation of DIY tax software programs such as TurboTax flooding the market, it can be tempting for financially pinched small business owners to forgo the services of an accountant when filing their taxes. But according to several experts, that could be a serious mistake. Following are some reasons why a small business owner should, at least, have a tax accountant review their returns before filing.
Computers are not infallible
Believe it or not, there are several salient items that even the most deftly assembled software program can miss. Unlike an accountant who deals with thousands of returns over a career, software programs are not designed to detect oversights.
“They're all highly simplified,” says Eric Levenhagen, an Iowa-based CPA who runs his own firm ProWise Tax & Accounting, which specializes in small businesses. “They don't catch everything.”
To prove his point, Levenhagen, who launched his business four years ago, says he is frequently contacted by small business clients who use software programs to file their taxes. In one instance, his client, a sole proprietor, didn't understand that business and personal returns are filed together. The software missed this.
“He had already filed his personal returns and he came to me and said, 'I'm going to file my business return and I want a second opinion on the figures that I'm going to plug in,'” he recalls. “I said we need to go back and change that.”
Financial pros know what to look for
An accountant with years of experience working with small businesses will have likely encountered any tax situation you present. Sure, it might end up costing more than the investment in a tax software program, but the short-term pain of parting with a few dollars compensates for an outcome that could be dire to your bottom line.
“Tax professionals will know additional things to watch out for like audit red flags,” says Levenhagen. “For example, you get people who have too many round numbers on their returns because they're just guessing or estimating their expenses. And there'll be a lot of numbers that end in zeros. That's not a good situation.” Levenhagen explains that such facile approximations could raise the suspicions of the IRS.
Second opinions are valuable only if provided by competent professionals
Make sure that the tax professional you're consulting has a solid reputation as someone who is knowledgeable, reliable and well informed when it comes to current tax laws and trends. Ask trusted colleagues or associates for referrals. Don't pick the first name in a Google search result without doing your due diligence.
Linda de Marlor, president of Tax-Masters, an accounting firm in Rockville, Maryland whose client base is also heavily comprised of small businesses, agrees wholeheartedly. She recalls an example of small business owner client who came to her after dealing with an inept CPA.
“He was a successful real estate broker who was married and had twin sons with asthma,” she explains. “Their previous accountant never informed them that they qualified for a medical reimbursement plan. [If the accountant had done that], it would have saved them at least $5,000 in taxes a year for the 10 years since the twins were born.”
Tim Kerin, who with his wife Tracey, owns several businesses including a commercial construction firm, learned a very difficult lesson when he and his wife visited an ineffectual CPA several years ago to get a second opinion.
“He did not explain the returns to us nor did he go over how we used expenses,” recalls Kerin. “He just took our numbers and did the return. We should have questioned every line and understood it before signing the return.”
What ensued was a business owner's nightmare—an IRS audit. Kerin says that he and his wife have paid $95,000 in legal and accounting fees, and that the ordeal has been a financial drain on the couple's business operations. Although they did not lose their various businesses, Kerin notes they did have to lay off several employees, sell two company vehicles, and close a storage unit.
The ordeal inspired the Kerins to launch Learning Lessons in Business, a two-year old consulting firm designed to educate business owners on various challenges. Kerin's negative experience with the CPA notwithstanding, he does feel that small business owners who do their own taxes are taking unnecessary chances.
“As much as you may not like to have a professional prepare your taxes, [you should do this] at least once every three years,” he advises. “That way you can probably get some tips from your tax preparer on things that you should have been doing, such as categorizing expenses correctly based on your business activity code (which classifies a business type) and the round number syndrome. And if there are mistakes that the preparer finds by going through your records, then you can see if that same mistake exists in the past.”
Small business owners looking to save money by preparing their own tax returns may be doing themselves—and their companies—a serious disservice. With tax laws continually changing, there may be deductions or other items that you, as a busy entrepreneur, simply can’t keep up with. Even if you feel confident about the reliability of your software program and your gift for numbers, always seek out the opinion of a tax professional who is trained to file returns just to make sure you’re not missing anything. It may be the best money you ever spend.
Congress waited until the early hours of January 1, 2013 to pass the American Taxpayer Relief Act of 2012, which the president signed the next day. Although this was not the first piece of legislation approved at the last minute, it underscores how daunting it can be for small businesses to do any kind of tax planning while they wait to find out what laws and provisions will be enacted. Still, by looking carefully at their returns, entrepreneurs can use their tax situation to help manage their finances and make sound business decisions in the year ahead. We checked with three experts to get their perspective on how small business owners can gain tax advantages.
Pick the right structure
One of the first things a small business can do to manage their tax bill is to examine their business structure to see if it gives them the best tax advantages. "The first tip I would give to almost anybody who has income besides W-2 wages is to form a corporation or a limited liability company (or an LLC)," says Aaron Young, CEO of Laughlin Associates, a Nevada-based company that specializes in helping entrepreneurs find the right business structure. "Right away, you're going to see your taxes go down for the investment of a few hundred dollars."
For example, a sole proprietorship is subject to self-employment tax, but a corporation or an LLC is exempt. An S corporation allows you to take part of your salary in dividends, which further reduces the tax bite. "Small business owners, including very small operators, don't realize that they can benefit from this just like a big company," Young says.
Corporations exist to reduce the risk to business owners and to get every advantage that the government allows, Young says. For example, while a home-based sole proprietor would not be able to write off a home gym, a corporation could turn their spare bedroom into an exercise facility and deduct 100 percent of the cost as part of a wellness plan.
Still, Young warns that sole proprietors should think carefully before incorporating because each business structure has its own legal and tax consequences. For example, depending on who will own the company and whether it will seek outside financing will help determine the best way to incorporate. "It's not good for a husband and wife to own a limited liability company because the government looks at them as one person," Young says. "If you're going to bring in outside equity, then you're going to want to be a C corporation. They have lower tax rates than individual tax rates."
Another factor to consider when incorporating is different attributes of each business structure. For example, shareholders of an S corporation are taxed at their individual income tax rate. In contrast, profits from a C corporation are taxed twice—at the corporate level and then again at the individual level when the profits are distributed as dividends.
Document and deduct
Studies from different sources, including the General Accounting Office, show that many small businesses overpay their taxes. It is clear that many entrepreneurs are not aware of all the deductions that they are legally entitled to.
"I have found that there are two reasons people miss deductions. One is that they don't know what they don't know," says Sandy Botkin, CEO of the Tax Reduction Institute and author of Lower Your Taxes Big Time. "For example, if you talk business with a client in person and then go out to the theater with them, you can deduct 50 percent of the cost of the tickets. You can write off any meals that you have with that client."
The second reason that small business owners miss out on deductions is because they do not properly document their expenses. For example, to document a local business appointment by car, you should record the mileage, the date and explanation of the trip, and the beginning and ending addresses. "If you don't have something triggering you to write down the types of things you need for a deduction, you're not going to do it," Botkin says. He recommends getting software that does the work for you. There are different expense tracker apps on the market—including Botkin's own application Taxbot—that supply everything you need for documentation.
Overnight business trips have their own requirements, but small business owners can still reap a handsome amount of deductions. "For every day you're doing business, you can deduct your road expenses, including 50 percent of your food and 100 percent of your lodging. You can even deduct 100 percent of the dry cleaning bill for the clothes you wore while away,” Botkin says.
In looking for an accountant, Botkin recommends choosing a CPA, tax attorney, former IRS attorney or Enrolled Agent who is "honest but aggressive. Someone who tells you to take every deduction you may be legitimately entitled to with the right documentation and who specializes in your industry."
Review with a pro
Small business owners should set aside time with their accountant to do some serious tax planning, but not at the height of tax season.
"I always suggest to people that they get together with their tax professional in, say, midsummer once tax season is over and the accountant is rested to go forward with some tax planning," says Bonnie Lee, an Enrolled Agent and founder of California-based Taxpertise. "They can pull up a comparative profit and loss statement from the prior year to see if your net profit or sales have increased or decreased and then you can go from there."
Tax issues are rarely a favorite topic among small business owners and the details can seem overwhelming at times. But the evidence is clear that taking the time to review your taxes with a qualified professional could put your business on firmer financial footing.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.
Small business owners who call upon their accountants only when it's time to prepare taxes are doing themselves a disservice. Sure, accountants can fill out the necessary paperwork to keep your business in compliance with the tax authorities, but that's just one function they perform. Many accountants offer a wide range of overlooked services that can accelerate the progress of your small business.
Small businesses that want to get the most out of their relationship with their accountant can begin by communicating candidly. "People are almost embarrassed to ask questions. They think they're the only one with that question or that it's too silly," says Helena Swyter, owner of Chicago-based SweeterCPA. "But an accountant can be a good helper. It's easier for both of us if the small business owner asks questions going forward."
One issue that Swyter runs into repeatedly is how to categorize funds. Some businesses commingle business and personal funds and do not clearly categorize what is deductible. Others do not keep accurate records about business and personal expenditures—such as cash purchases or cell phone usage—making it hard to know what is fully deductible. A good accountant can set up an efficient bookkeeping system when a business is first starting out or review a system that is already in place. "I tell people that the best bookkeeping system is the one that they're going to use regularly," Swyter says.
Accountants can also offer a much needed perspective before major decisions, such as selling or acquiring a business, taking on a partner, or hiring a first employee. Swyter points out that there is considerable gray area when it comes to hiring an employee versus an independent contractor, and even something as simple as knowing whether to buy a piece of equipment in December or January can be fraught with tax consequences that an accountant can unravel. "I tell all my clients that the best thing they can do for me is to ask me questions whenever they have them," Swyter says.
Leverage their network
Because accountants are exposed to different types of small businesses, they can usually offer general advice on a variety of concerns. But in addition to what they know, accountants can help small business owners by who they know.
"Accountants get to be very well networked with other trustworthy professionals, whether it be bankers or attorneys or insurance agents or financial advisers," says Josh Dubrow, a CPA and senior manager at Nussbaum Yates Berg Klein and Wolpow, a New York-based accounting firm. "So if it's not something in the accountant's area of expertise, they typically know somebody that they can direct a small business owner to."
For example, Dubrow is guiding one of his high tech clients through the maze of proposals to raise capital. He is helping them put together a sound business plan, forecasts, and budget. "This is something that I enjoy doing—actively working with my clients to give them a solid foundation in this situation," Dubrow says.
While most CPAs can service a wide variety of businesses, Dubrow concedes that small business owners should interview accounting firms to see if they have expertise in their particular niche before settling on a firm. "You want to know that your accountant has other clients or experience in your industry or has the knowledge base to navigate you in that industry," Dubrow says.
Like Swyter, Dubrow would like to see more small businesses keep an open line of communication with their accountant throughout the year on key business decisions—including those that are not related to accounting—such as entering into a major contract or buying a new facility. Sometimes the accountant can uncover opportunities in the negotiations that the business owner might overlook. "Far too often you hear about these things after the fact, which eliminates tax planning considerations because the year is over or the transaction is done," Dubrow says. "If these [transactions] were structured slightly differently, maybe there could be some sort of tax efficiency [for the small business owner]."
Keep in touch
Besides these major transactions, accountants can handle smaller, day-to-day functions like bookkeeping in some cases. "We do this for a few companies where we are their accounting department, handling everything from paying bills and invoices all the way up to the financials and preparing tax returns," says Kevin McCoy, a St. Louis, Missouri-based CPA.
Some small business owners are not well versed in the financials of their operation, which can lead to costly problems, McCoy says. For example, after he showed one of his clients that the cost of their workers' compensation coverage was alarmingly high, the client is considering negotiating a new arrangement. Regular communication between an accountant and a small business owner is vital to avoid these kinds of mistakes. "I call or email my clients every quarter and encourage them to call me if they need anything in between," McCoy says. "Any farther out than that and you run into surprises that nobody likes."
Case in point: one of his clients had bought stock in another company without realizing that the company was burdened by heavy tax liabilities that the new owner was obligated to pay. "If they would have come to me up front and told me they were interested in buying this company, we could have advised them about checking them out more thoroughly or going for just an asset purchase and not the whole company," McCoy says. "We like to hear from our clients on anything that's out of the ordinary or different from their day-to-day operations."
Currently under debate in Congress, the Marketplace Fairness Act, which, if passed into law, would require all online retailers to collect sales taxes for the sales where they ship goods. Such a law may have considerable ramifications for small businesses that have an online reach. But how much? Recently, business writer Iris Dorbian spoke to Gary Mllkwick, vice president of 1800Accountant.com, an accounting firm in New York City that works with small business clients nationwide. He also offers some tips on how small businesses should prepare themselves if the Marketplace Fairness Act is enacted into law.
ID: In light of the new Internet sales tax bill that may become law shortly, what should small business owners who have an online presence keep in mind? How will this affect them?
GM: The whole issue focuses on the relationship you have with a state to where the state has the jurisdiction to tax you. In the past, the laws have always been that if you have a physical presence (i.e. brick and mortar store) in a state and if you have employees in that state, then you, as a company, are responsible for collecting sales tax in those states where you have a physical presence.
However, when the laws were written 30 or 40 years ago, they weren’t anticipating the Internet. Now what this law is saying is that if you have more than $1 million in online sales a year, then you are responsible for collecting and remitting taxes to all states in which you are selling to—which is wherever the clients are purchasing or where the customers are located. That’s a big change. In the past, if you were operating an e-commerce business in California and you only had 15 employees there then all you had to do was collect sales tax on sales made to customers in California.
ID: Is this bill something that small business owners with an online presence should worry about?
GM: It depends on how big they are. For the mom-and-pop companies that maybe have $10,000, $20,000 or $100,000 a year in revenue, it’s not going to affect them. In one version of the bill that passed, the threshold that you would have to comply with the law is more than $1 million. My understanding is that some people in the House want to increase that to $10 million because even if you’re a business with a $1 million in revenue, that doesn’t mean you’re generating much profits. And if profits decline, [this bill could hit small businesses hard] due to collecting and remitting sales tax from different states. The people who are most worried right now are those who are in the $1-million to $10-million annual sales bracket.
ID: So the bill could actually benefit qualified small business owners?
GM: While it is true that the law does create some additional reporting requirements, it may actually make the scary process of collecting and paying sales taxes much easier than the business owners expect. The bill passed by the Senate and now being considered in the House includes a provision that states have to provide free software that calculates the sales tax on items sold in the state, and files the required reports for the business owner. There is also a safe-harbor provision in the law that protects small business owners from penalties if they collect the wrong sales tax amount because of a problem in the software they use.
Also, in the bill passed by the Senate [there’s a provision that] will force states to simplify their sales tax collection process. In particular, each state will only be allowed to have a single point of contact for sales tax. Right now, some states, such as Alabama, require separate payments in each county. So the law could reduce the number of sales tax jurisdictions from hundreds (maybe thousands) to just 50 (one for each state).
GM: Yes and we expect to get more calls as news stories about the law continue to appear. I think business owners are going to be quite relieved once they understand what the law actually says. The key is to be prepared for the change. The proposed legislation has broad bipartisan support and it's a pretty good bet that it will pass in some form. Business owners who are prepared can continue to profit from online sales, while those who wait until the last minute may have to scramble to comply.
ID: As a small business tax expert, do you see any problems with the bill?
GM: Not necessarily. I kind of see it from both sides. I think for our clients, they would like to see a higher threshold of $10 million to $50 million because that $1 million threshold is pretty low. The margins are so thin they’re not making very much profit on a million dollars in online sales.
ID: Based on your experience and insight, how should small business owners who have an online store or e-commerce site prepare themselves if this bill becomes law? What should they do and what should they not do?
GM: Make sure they have good reporting systems in place and they have a plan for being compliant. The worst thing is if they aren’t prepared and don’t begin collecting the sales tax. Then you run into serious penalties and interest. Figure out a way to be in compliance—whether that’s [small businesses] doing it internally or whether it’s hiring someone else to do it.
Disclaimer: The opinions expressed are solely those of the author and interviewees. Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.
Many small business owners exhaled a collective sigh of relief after the 11th-hour passage of the American Taxpayer Relief Act of 2012. While most of the Bush era tax cuts have been extended or made permanent, uncertainty lingers around the potential impact of higher payroll taxes and surtaxes related to the Affordable Care Act (often referred to as ObamaCare). Small businesses owners are now scrambling to adjust their returns for 2012 to take advantage of retroactive deductions and implement tax strategies for 2013. And those that fall into the new higher income marginal rate will likely see their taxes rise this year and beyond.
While some provisions were made permanent, like marginal tax rates and alternative minimum tax (AMT) exemption amounts, estate and gift tax exemption levels, other deductions and credits have only been extended through this year. “I have a greater sense of certainty when it comes to tax planning for 2013,” notes Andrew Schrage, co-owner of Money Crashers Personal Finance. “I no longer have to guess, which makes for a more streamlined roadmap as I plan my finances throughout the year.”
Kent Reed, owner of franchised brokerage services company Murphy Business & Financial Corp. in Atlanta, Georgia, was disappointed with the final deal. He had hoped for more comprehensive tax reform, as Reed and the small and medium-sized businesses he consults regard the tax code as an obstacle when it comes to strategizing. “Before we can even adjust, they change it,” notes Reed. “It makes it very difficult to plan long term.” Reed decided to postpone filing for 2012 to see if there are any deductions he can take.
“For small business owners looking to put new assets into service or build out their space, it’s a good year to do it,” notes Claudia Lazzarato, tax manager at Pleasanton, California-based tax and accounting firm Sensiba San Filippo. Deductions set to expire or be reduced significantly were extended for 2013. Scheduled to drop to $25,000 before the fiscal cliff deal, limits for Section 179, which allows small businesses to deduct qualified equipment purchases, were increased from $125,000 in 2012 to $500,000 for companies with less than $2 million in qualified capital expenditures for 2013 and 2012, retroactively. Set to expire at the end of 2012, the deduction for 50-percent bonus depreciation was extended through the end of 2013 (2014 for certain types of property).
Alternative minimum tax exemption amounts have been permanently increased from $33,750 to $50,600 for single filers and from $45,000 to $78,750 for married couples filing jointly. “Now that these amounts are set, we know how hard our clients will be hit by AMT and whether there’s a way to avoid it,” Lazzarato points out.
Certain tax credits also remain in place through this year. The research and development (R&D) credit, which expired at the end of 2011, was extended through 2013 and made retroactive through 2012, as was the work opportunity credit for employers that hire veterans or those from groups that have faced barriers to employment.
Among the Bush era tax provisions made permanent are the six federal income tax brackets (10-35 percent), with the addition of a top bracket (39.6 percent) for higher income taxpayers ($400,000 individuals/$450,000 married couples filing jointly), and the 15-percent tax on capital gains and dividends (increased to 20 percent for income at or above that top bracket). “As most small businesses are structured so revenues flow through to their personal income, it’s an especially important planning point to try to stay below that higher income threshold,” explains Lazzarato. Scheduled to drop to $1 million, the estate and gift tax exemption has been made permanent at $5 million (indexed for inflation), along with the exclusion amount "portable" between spouses. “This is good news for family-owned businesses and small business owners gifting business stock,” notes Lazzarato.
Even those small business owners that remain below the higher income threshold, their taxes will rise to some extent, as Social Security payroll taxes have returned to their pre-2011 rate of 6.2 percent (up from 4.2 percent). “It makes it all the more important for small business owners to decide how to invest money coming in as a means of managing their taxable income,” explains Lazzarato. And the fiscal cliff deal did not postpone the implementation of the Affordable Care Act surtax of 0.9 percent on earned income above certain threshold ($200,000 for single filers; $250,000 married) and 3.8 percent on the lesser of net investment income or modified gross income over these amounts. For this reason, Reed has postponed adding new staff through at least the first quarter until the effects of these higher taxes can be measured.
To complicate matters, personal and dependency exemptions have been phased out for those in the higher income brackets (adjusted gross income $300,000 married filing jointly; $250,000 single), who may also be subject to limits on itemized deductions. Schrage has decided to hire an accountant for the first time. “Up until now, I’ve always used Turbo Tax,” notes Schrage. “But I just don’t feel comfortable filing my own returns this year.”
Reed expects to pay $4,000-$6,000 in additional taxes this year, depending on where the AMT hits. His accountant has recommended changing the structure of his business from an LLC to an S Corp, allowing profits to be split between salary and S corporation distributions. “Rather than being on a cash basis from year to year, we’d accrue and have some stock,” explains Reed. While his salary would be subject to payroll taxes, dividend distributions are not. “You want to put more money into goodwill and capital gains because you’re taxed at a lower rate.”
Another tax benefit for S Corps is the retroactive restoration of the shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets for 2012 and 2013. “Under the temporary incentive, shareholders reduce their basis (or value) in the stock of the S corporation by their pro rata share of the adjusted basis (typically the smaller amount) of the contributed property, rather than by the fair market value (typically the larger amount) of the charitable contribution,” explains Lazzarato. “The lower basis reduction for charitable gifts benefits the shareholders because their value (basis) in the stock remains higher while reducing taxable income by the higher amount (fair market value).”
“You don’t want to base all your business decisions on taxes,” cautions Lazzarato. “But you should at least calculate them beforehand so you know what to expect at the end of the year.” While there seems to be less uncertainty now, many small business owners have a wait-and-see attitude about how the deal will affect their bottom line. Schrage would like to see all deductions/credits for small business made permanent, though he’s not holding his breath. “That would take a lot of the guesswork out of hiring.”
by Robert Lerose.
Every year brings new changes to the tax code that can have an impact on small businesses, and this year is no exception. For example, in 2013, new taxes on Medicare for earned and unearned income will come into play for the first time as part of President Obama's healthcare legislation. Amid the welter of changing regulations, there are some steps almost every business can take to ease the burden of tax planning and keep the cash flow moving in the year ahead.
Set aside a fix amount
Being responsible for your own taxes can be an unfamiliar and startling concept for those new to running a business. Some individuals who have been used to having taxes automatically deducted when they were salaried employees may not be prepared for paying quarterly taxes when they make the transition to business owner.
Perhaps the most common outcome of this circumstance for business owners is not putting money aside to pay estimated taxes every quarter. "I see this all the time," says Barbara Weltman of Big Ideas for Small Business and author of J.K. Lasser's Small Business Taxes 2013. "They get used to the idea that the money coming in is available to be spent," instead of dividing it accordingly.
Putting a fixed percentage of every dollar generated, such as 25 percent, in a separate account to meet ongoing tax obligations is a simple, practical solution. A business may also decide to incorporate to save on their taxes. Choosing the S corporation route lets shareholders pay tax at their personal income tax rate and sidestep the corporate rate.
Regardless of the structure a business chooses, keeping good records is essential. Weltman also recommends that small businesses get outside professional help for tax planning and preparation. In addition, small business owners who are knowledgeable themselves about changes in the tax code will be able to make informed decisions.
For example, Section 179—which covers deductions on new and used equipment—was expected to be reduced to $25,000 this year. However, due to the recently passed “fiscal cliff” deal—or, more formally, the American Taxpayer Relief Act—the limit was enhanced to $500,000 for both 2013 and, retroactively, for 2012. "There are certain tax provisions that many small business owners might want to take advantage of," Weltman explains. "For instance, if you're a contractor who needs cement mixers and expensive equipment, this might be the time to do it. Section 179 will go to $25,000 in 2014 unless Congress acts."
Know your business’s tax needs and opportunities
Getting referrals from trusted sources—such as bankers, attorneys, or other business owners—is a good first step in looking for a tax professional, Weltman says. As with any service provider, each advisor may offer different benefits. For example, John Beidle, the president of St. Louis-based 1040 Wealth Designs, represents taxpayers in front of the IRS. He also says he teaches business owners how to pay the least amount of tax legally possible.
Often his first step is to review past returns to understand the unique circumstances of a business before making suggestions. One problem he runs into often is when a business tries to do too many different things as a single business entity without realizing the various tax consequences for each activity.
"I run into Internet consultants and software people who might be publishing an ebook or selling an online membership—but they don't realize that they can categorize a percentage of that as passive income," he explains. "I find a lot of missed opportunities for business owners."
Besides looking for these hidden opportunities, small business owners can avail themselves of other ways to maximize their cash flow. "The best way is to situate yourself so you're getting paid immediately by taking cash, credit, PayPal, or any other payment form," Weltman says. If you have to invoice, try to get paid in increments as milestones in the transaction are reached. Finally, send invoices electronically and always follow up on late payers. "Accounts receivable are not fine wine," Weltman says. "They don't get better with age."
Tax accounting made simple
A little planning and a little discipline is all it takes to make tax planning just a regular part of running a business. Case in point: The Albany Distilling Company, a small micro-distillery that uses mostly New York State agriculture ingredients in the manufacture of its small-batch rum and whiskey products.
Founded in March of 2011, the two-man operation took prudent steps from the very beginning to deal with their tax requirements. "We have two accounts: our checking account and our money-to-pay-taxes account," says co-owner John Curtin. "Whenever we make a deposit or do a transaction, we make sure the taxes associated with that transaction immediately go to a separate account. We do not access it other than to pay taxes."
In addition to their standard corporate tax, Albany Distilling must also pay quarterly taxes to the federal and state government for the alcohol they produce, and sales tax for items sold in the retail section of their distilling operation—a total of four separate taxes.
"It's really important that we keep our tax money untouchable," Curtin explains. "We figure the taxes monthly and set the money aside and pay them when they're due." He and his partner use an accountant to handle their financial chores, freeing them to concentrate on producing product.
It's too early to predict sales for 2013, but Curtin hopes his start-up will hit at least $75,000 to $80,000 in revenue by year's end—enough to cover their expenses, including taxes, and a small stiped for living. “It's difficult for me to justify taking any sort of pay at this point because things are so tight." As for his company’s tax strategy, Curtin’s finds keeping it simple is the best approach: "I have no great advice about taxes, except just to pay them," Curtin says. Preferably followed by a stiff drink or two.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified financial planner and tax advisor.
A year ago, John Fratrick, owner of J.F. Improvements, a small home repair business based in New Berlin, Wisconsin, had a problem. The rate of gaining new customers for his business, which he had been operating since 1992, had slowed to a mere trickle. And to generate leads, Fratrick was still relying on old-fashioned marketing standbys, such as postcard mailings and ads in the yellow pages. On the plus side, however, he was due to get a small business tax refund.
With business at a stalemate, Fratrick attended a webinar on how to increase sales with social media and soon after contacted the speaker, Sonny Ahuja, a web designer and the CEO and founder of an international online perfume retailer, GrandPerfumes.com, for tips on attracting clients.
“As I got to know about his business, I advised John to use the [incoming tax refund] to build a better website,” recalls Ahuja. He also suggested that Fratrick launch a Google Adwords campaign to rev up business for J.F. Improvements. (Google Adwords is a program that creates ads and keywords pertinent to your business).
Fratrick then asked Ahuja to redesign his site, which he did, charging less than his regular fee. Ahuja also set up the Google campaign, since, as he tells it “most people do it wrong therefore they lose a lot of money without generating any business.”
Fast-forward to October 2012. “John had to pause his campaign as he was completely booked until the end of February 2013 from the business he received as a result of his new site and Google Adwords campaign,” says Ahuja, who prefers to funnel his tax refunds into growing or marketing his business. “J.F. Improvements would be still struggling if John had not invested that money into a new approach of lead generation that he was not used to.”
Certainly, this example is a great case study on how a small business tax refund can be used smartly to boost business. But what are some other ways that a windfall from Uncle Sam can benefit small business owners?
Improve promotional/marketing copy
As a small business owner, you know that if you want to promote and grow your business, then marketing is essential. Without leveraging multi-channel resources at your disposal, whether it’s digital and word of mouth marketing, print ads, or TV/radio campaigns, customers and prospects may never learn of your company’s existence. However, if you have a limited budget, it’s imperative to get the most “bang out of your buck.”
Nash Haywood, managing partner of Netset Media, a five-year-old web marketing business in Baltimore, Maryland with many small businesses clients, suggests using your refund to hire a copywriter or designer to tweak website or document copy. Haywood says the potential payoff from this tactic, which could run anywhere from $100 to $300 an hour for a one-time fee, should not be underestimated.
“Many people get turned off if a business doesn't have a professional looking and sounding identity,” he explains.
Add video to your website
Another way of increasing a healthy stream of revenue and prospects to your company is investing in adding video to your website, says Alfred Poor, author of "Power Marketing for Small Business: How You Can Boost Sales with Low-Cost Video."
To bolster his point, Poor, who frequently speaks to small business owners about marketing, cites a 2011 study by video hosting platform Brightcove that found a video clip on a website is “53 times more likely to show up on the first page of a Google search.” Also, based on the same study, visitors will spend 344-percent more time on a site with video than one that’s video-free.
And for the budget-conscious small business owner, adding video can be a very cost-effective marketing tactic, one that can be covered by even a modest tax refund. “A professional short video can cost $500 or less,” Poor says, “and you don't even have to own a camera or a computer.”
Explore direct mail
Yes, this tried-and-true marketing strategy still has plenty of value, particularly if it’s part of an integrated marketing initiative, notes Ahuja.
“Many businesses can't afford direct mail anymore so there's less competition now,” he says. “Direct mail has become sexy again. Now the key is to do a multi-step campaign while making sure the ingredients of ‘higher opening rates’ are added.”
Start or fund a retirement plan
If you are enjoying a steady and healthy cash flow and have loyal, hard-working staff, then you may want to consider using your small business tax refund to create a new benefit that improves employee retention. Christopher Tasik, managing director of Tasik Financial, a certified financial planning firm based in Stamford, Connecticut that works with many small business owners, says one good use of a tax refund might be “to pay any start-up expenses that might be incurred by establishing a 401(k) plan.”
Tasik further adds that if the refund is large enough,“it could also help offset the matching contributions that [small business owners] might need to make if they did a safe harbor plan,” he says. (A safe harbor plan allows employees to contribute part of their salary to a retirement plan, while requiring the employer to contribute matching funds.) “In addition, under certain circumstances the IRS provides for a $500 tax credit (Form 8881, Credit for Small Employer Pension Plan Startup Costs) in each of the first three years of the plan as long as certain requirements are met.”
Streamline your accounts receivables
Why adhere to a regimen of sloppy bookkeeping when you can improve your paperwork by using state-of-the-art online accounting software? Haywood strongly advises using software like Freshbooks or Zoho, both of which he says are “perfect for many service-based businesses.” Each software system boasts automated features that can help small business owners “stay on top of cash flow and get paid quicker.” Not only that, but according to Nash, they’re fairly inexpensive, pricing at usually around $200 or so a year.
Pay down your debt
Of all the tips offered here, this is one that not only makes the most sense—but also is the most obvious. Start with bills that have the highest interest rate, suggests Tasik. At the same time, “the business owner should also work to develop a cash flow projection-based budget” to avoid paying bills now only to see the same debt appear again in the next few months.
For small business owners, getting a tax refund is always a pleasant windfall. But it can be even better if the money is leveraged effectively to improve your business.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified financial planner and tax advisor.
As a small business, you’re always looking for ways to maximize the bottom line. But come tax time, it’s best to minimize that income, so you can hold on to more of it. This requires budgeting and planning well before Dec. 31, as you need to have enough money to take advantage of the many tax deductions and credits available to small businesses. And for those businesses worried about the fiscal cliff, it may make sense to do the opposite this year if on the brink of jumping into a higher tax bracket.
However your business is structured, any income that remains after all your bills have been paid is taxable. “Every dollar you can defer is a dollar worth deferring,” notes Arthur Cooper, President and CEO of Optimum 7, an internet marketing company based in Morristown, N.J. with offices in Miami, Fla. Cooper recommends pre-paying fixed monthly expenses (e.g. rent/mortgage, utilities, monthly subscriptions, insurance) for early 2013 to reduce taxable income for 2012. “Business expenses are counted on an accrual basis [when they occur], while income is counted on a cash basis,” notes Cooper. “So, it makes sense to delay accounts receivables and any bank deposits until the first week of January.”
Despite or because of the uncertainty of what tax rates may look like next year, Cooper is sticking with what’s worked best for his business, minimizing income and maximizing expenses. “This is the choice every business has to make,” says Cooper. “For those businesses sure to face higher taxes next year, an argument could be made to generate as much income as possible this year, as you’ll pay more in taxes but at a lower rate.” Collect on all those unpaid bills and deposit very check before year end while waiting until after Jan. 1 to pay your bills and accrue any business or capital expenses. Cooper, who's had the same accountant for 25 years, advises consulting a CPA well versed in all the deductions/credits available to small businesses. “The fact is nobody knows what will happen. Congress could kick the can down the road again,” notes Cooper. “But in terms of tax planning, you can’t wait until they’ all go home for the holiday recess. It will be too late.”
While virtually any expense related to the cost of running your business can be deducted, there are also many credits available to small businesses. While deductions are subtracted from income, on which your tax liability is based, tax credits are deducted directly from your tax bill, essentially reducing your tax liability dollar for dollar. Rachel Scott, MBA, EA and Principal at Canoga Park, California based
VSA Accounting Services, encourages businesses take advantage of those deductions set to expire or change in 2013. Sections 179, which allows businesses to deduct up to a maximum of $139,000 on equipment and software purchased and put into use in 2012, is due to drop to $25,000 in 2013. And bonus depreciation of 50% on equipment purchases over the $560,000 threshold for capital investment writeoffs is to be phased out. “If you have profits and can declare dividends,” notes Scott. “Qualified dividends are still being taxed at 15%, but that’s due to rise next year.” Scott recommends declaring dividends and reducing profits now to take advantage of that lower rate. Another overlooked deduction is for startup costs, up to $10,000 for 2012. This shrinks to $5,000 for 2013. Small businesses can also claim a tax credit for up to 50% of the costs to set up a retirement plan.
Christopher Tasik, founder and managing director of Stamford, Connecticut based Tasik Financial Strategies, LLC, recommends small business owners max out their 401k contributions ($17,000, if under 50; $22,500, if over 50). “If the amount you’re putting in every pay period doesn’t hurt a little bit, you’re probably not putting enough in,” says Tasik. For 2012, businesses with only one employee-owner can contribute up to $50,000 ($55,000 if over 50). Tasik suggests looking into multiple employer plans to help scale the costs. “The real value of a 401k to a business is employee loyalty,” notes Tasik. “It’s really not that huge of a cost for the value.”
The Affordable Care Act (often referred to as ObamaCare) provides tax credits for up to 35 percent of premium costs for certain small businesses starting or continuing to provide health insurance coverage to employees through 2013. In 2014, the maximum credit increases to up to 50 percent. Health savings accounts (HSAs) allow employers and employees to make tax-free contributions to the account for medical expenses. For 2012, the maximum contribution for individual coverage is $3,100 and $6,250 for family coverage (with $1,000 additional catch-up contributions for people age 55 or older). Some state even offer writeoffs for HSAs.
Another way to build goodwill among your employees and reduce your tax liability is by giving bonuses. Gifts or $25 or less are also tax deductible. You can also take a federal deduction if you pay state and local taxes before Dec. 31.
Don’t forget to hold onto those receipts for smaller expenses. While the IRS only needs receipts for business expense over $75, you need some form of documentation to claim the deduction. “You could be losing out on potential writeoffs,” warns Greg Jones, CEO of Tysons Corner, Virginia based Bookkeeping Express and co-owner of two Five Guys Burgers and Fries franchises. “Having organized records makes it easier to deduct those expenses.” Jones recommends categorizing receipts and outsourcing part of internal systems (e.g. payroll, bookkeeping) as a way to self audit your business. Such best practices should be implemented throughout the year. “You have to take care of the basics,” notes Jones. “You need to know what deductions are available and what you need to prove them.”
Budgeting is a key part of keeping that financial house in order. “Every small business needs to have a budget,” Tasik points out. “You can’t do any tax planning without money in the bank.” Small businesses should already have a budget in place for next year and be measuring that budget against actuals throughout the year. Jones recommends getting bringing in your CPA twice a year for a “temperature check” to make sure you’re maximizing all the deductions and credits available to your business, particularly those specific to your business’s industry.
Jones and his partners in the limited liability company that operates their Five Guys restaurants keep reinvesting their profits into growing the franchises rather than taking distributions. They are set to open a third next month. As long as the money stays within the LLC, it’s not taxed. “If want distributions throughout the year, be prepared to pay come tax season,” says Jones. “For us, we’d rather grow the business now. We look at it as more of an annuity for when we don’t want to work anymore.”
It’s not that you won’t have to pay, it’s just a matter of when. “The more you can defer your tax burden, the better financial shape you’ll be in,” explains Cooper. “Especially when you compound that activity year over year.” All that income deferred into January becomes taxable the next year or when you sell your business or retire. “It’s far better to show as little income as possible in any given tax year, as it lowers your business’s tax burden,” advises Tasik.
It may be among the least sexy aspects of running a small business, but that doesn’t mean that payroll shouldn’t be a priority. An effective and efficient payroll operation facilitates timely and accurate employee pay while withholding taxes correctly in accordance with state and federal regulations. Having a system that fails to perform these basic functions will not only incur the justifiable wrath of employees, but could also result in penalties, audits and other draconian measures that could threaten to end your business.
No doubt, if you’re an experienced small business owner, you already know this and have some kind of payroll system in place. But as the famous writer Oscar Wilde once said, “It is always with the best intentions that the worst work is done.” Suppose your payroll system has experienced some software glitches lately or perhaps was not in compliance with federal and state tax regulations. How do you rectify these errors, ensuring they will never happen again? What best practices should you, as the small business owner, undertake to improve your payroll operations?
Minimize your pay cycles
Having different pay schedules for different types of employees, such as monthly for management or bi-weekly for hourly employees, may be a commonplace practice, but it can lead to duplicating errors in the payroll process.
”The less of these schedules, the better,” says Tiffany Washington, owner/founder of the five-year-old Waldorf, Maryland-based Washington Accounting Services, which specializes in small business payroll and has close to 1,000 clients.
“Minimizing pay cycles can help prevent the duplication of multiple processes so that the payroll department can operate more efficiently,” she continues. “To maximize efficiency, every type of employee should be paid on the same pay schedule (weekly, bi-weekly, or monthly). This will allow the payroll department to focus on one task at a given time. Having one pay schedule to maintain instead of three is a lot easier to maintain. It will also lessen the chance for errors to be made during the payroll process.”
You may have an online payroll system you consider state-of-the-art, but it will ultimately prove to be counterproductive and costly if it doesn’t mesh with your accounting system. Washington cites a client, with 33 employees, and more than a dozen out-of-state workers, that recently encountered this problem. These distant employees, coupled with the incompatibility of the client’s online payroll and accounting systems (which the client was initially not aware of), was wreaking havoc on the payroll operations, particularly when it came to following out-of-state regulations and administration fees.
Although the withholding of taxes was being done correctly, explains Washington, “the unemployment [taxes weren’t] being coded to the correct state where the employee lived. Instead it was being coded to where this employer was located, which was in Maryland. So everyone was getting unemployment in Maryland instead of it being coordinated to the specific state that they were living in.”
Washington and her staff rectified the situation by filing “two years of amended unemployment returns,” she explains. But not even that cleared things up completely. “There were some penalties that had to be paid because things were not filed in a timely fashion, but we were able to get them up and rolling and in compliance,” she notes.
Outsource your payroll
If you’re a small business owner who doesn’t have the time or energy to invest in building a new payroll system or updating an older one, you may want to consider outsourcing it to a third-party provider. However, before you sign up with any payroll service, do your due diligence and make sure you get referrals from other reputable small businesses or people whom you trust. And remember, the cheapest is not always the best.
"You 'get what you pay for' from service providers, and often times, going with a provider based solely on price means you sacrifice important things like customer service or flexible platforms,” says Jason Maxwell, president of MassPay,, a payroll provider for small businesses. “Some companies will simply look online for a payroll service, or use a website to seek out competitive bids. A business owner might find the cheapest deal this way but could easily end up using an out-of-state provider that is not familiar with specific state regulations. Going with the cheapest option may also mean you sacrifice accuracy in processing.”
Washington strongly echoes Maxwell’s sentiments and adds that very small businesses may want to find a payroll or accounting firm that can also offer bookkeeping, accounting, and payroll together. “It can definitely be cost effective,” she says. With outsourcing, small business owners “are no longer accountable for payroll mistakes.” This also applies for not being responsible for legal compliance as well.
Understand state and federal tax guidelines
If you don’t calculate your payroll taxes correctly, you will incur a penalty. The only question will be when and how much.
Tom Reahard, CEO of Symmetry Software, a Scottsdale, Arizona-based company that specializes in providing payroll and payroll-related software applications to both small and large businesses, suggests that at the end of each pay cycle, small business owners should “look at their payroll register to make sure the taxes being withheld are correct.” Also, run reports that will show your federal and state liability as well as when those taxes are due.
By following the above tips and paying attention to details, you can improve your payroll operations in no time. Not only will you be thankful for turning this integral aspect of your small business into a well-oiled and reliable machine, but so will your employees.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.
by Jeff Haden
I am applying for a business loan and the lender is scrutinizing every aspect of my business. He just asked for my Accounts Receivable Turnover. Is he digging too deep?
--Name withheld at request
Accounts Receivable Turnover (ART) is a measure of the frequency of payment on accounts receivable, the money owed to you by your customers you are waiting to "receive."
The lender is simply taking a close look at one of the factors that affects cash flow. In effect a credit sale is like a loan, so the lower the ratio the more slowly your customers are paying off the loans you make to them; the higher the ratio, the more quickly you're being paid.
How fast are you getting paid?
Here's the formula: ART = net credit sales / average accounts receivable
For example, say last year your net sales were $200,000. You don't take payment by credit card; you send invoices. The average, at any given time, of your outstanding receivables was $50,000.
200,000 / 50,000 = 4, so your Accounts Receivable Turnover is 4.
If your customers purchase goods or services through a purchase order, or you send invoices, the money you are owed is considered a receivable. If you're a consultant and you perform a service and bill the client later, the bill is a receivable--it is money you are owed but have not been paid.
But a credit card sale is not "credit" for the purposes of this metric; while the customer is using credit to make the purchase, you get paid right away (roughly speaking.) The credit card company extends the credit, meaning that's a receivable for it, not you. So don't include credit card sales in your net sales, at least for the purpose of this metric.
So, two main factors affect your ART: Your payment terms and whether your customers meet those terms. You may ask for payment on receipt, or within 15 days, or 30 days--whatever makes sense for your business, offset by customer expectations. If your terms are too tight some customers may find another vendor willing to offer more generous terms.
Many companies set payment terms of net-30, which means 30 days from the invoice date. Others set terms of 15 days, seven days, or even "on receipt."
Of course, if you specify net-seven and expect payment within seven days of receipt of invoice, the entire process typically takes longer: It may take you several days to generate the invoice, then another day or two to actually process the payment and make a deposit... all of which increases your ART.
You can do several things to increase your ART:
Keep in mind ART does not exist in a vacuum. Say you take credit card payments and fees are 3% of sales; if you can receive check payments within seven days from the majority of your customers, building in an intentional receivable delay may more than offset the fees you would be charged by the credit card company.
So if your ART is relatively high because you've made smart business decisions, walk your lender through that analysis. If it's low, work to get paid more quickly.
Even if you don't get the loan, raising your ART will help your business.
Article provided by Inc.com. © Inc.
What’s really going on inside your customer’s head? That’s the question that drives the work of Roger Dooley, an Austin-based marketing consultant, blogger, author and all-around curious mind about the role our brains play in purchasing behavior and decision-making. It’s a fascinating new field that might hold as many answers as it does questions. Business writer Erin McDermott recently spoke with Dooley about engaging shoppers’ senses, the power of the smell of a muffin, and why the sound of a price matters.
RD: We may not know exactly what’s going on, but two things are quite certain. First, multiple senses are engaged. We tend to focus on the visual aspects of a store, but smell and sound come into play as well. Touch and taste are less engaged at the point of entry, though I’m reminded of the restaurant Chili’s where, to enter, you grasp a door handle shaped like—of course—a pepper. Second, it’s very likely that a snap judgment takes place within milliseconds. The customer hasn’t studied any displays, read signs, etc., but forms an immediate emotional impression. We know this takes place on websites, and the subsequent experience is shaped by that unthinking first impression.
RD: The olfactory pathway to our brain is fast and unfiltered, and smells are capable of producing emotional responses and triggering memories. This is why stores with bakeries ensure the smell wafts through the store interior. The smell of baking bread will get us salivating for a slice, and for many of us may trigger the memory of bread baking in our childhood. Bad smells have the opposite effect—they may trigger emotions like disgust, hardly the sort of encouragement you want to provide shoppers.
RD: For in-person shoppers, bold, colorful tags or signs on some items suggest that the item is a bargain. That is, if it looks like a sale, it probably is a sale. Some research shows that prices that appear precise—$498.22—are more credible than rounded ones—$500.00. Working in the opposite direction is that customers convert prices to spoken syllables in their brain, so a more complex price with decimals seems a bit larger than a similar number with fewer syllables. I always recommend testing various approaches to see what works best in a particular situation.
RD: The simplest solution is apparently one of the best: saying “sorry.” One set of experiments showed that rude behavior by one individual caused an increase in the probability of retaliatory theft by another individual who was the victim of the rudeness. When the first person apologized immediately after the behavior, the retaliation effect disappeared. In general, you won’t convince an unhappy customer that the problem was their fault, though some merchants try. It’s better to apologize quickly and solve the problem.
RD: Like most people, I—incorrectly—assume that I’m totally rational in my shopping behavior and would never be influenced by all these non-conscious effects! Seriously, I don’t worry too much about it. I do pay attention to marketing techniques that businesses use and admire those firms that do things well. I now shop often at a Texas supermarket chain, HEB. There’s research that shows a small food sample improves your attitude, even about unrelated things. In one experiment, people rated their home television better if they had been given a food sample. Whether HEB knows about that research or just wants to create a fun store environment, I’m not sure, but they have many more sampling stations than their competition. Sushi, muffins, cheese, wine, and even freshly cooked food items are spread around the store, though most heavily near the entrance. Of course, at some times of day there are no samples. My disappointment when I’ve missed the tasty morsels suggests that those samples are part of why I prefer that store.
Note: This interview has been condensed and edited.
The next time you eat out, take a look around at what remains on all those plates. Ever wonder where all that food and trash ends up? Michael Oshman has. As founder and executive director of the Green Restaurant Association (GRA)—a national, non-profit based in Boston—he’s been working to shift the $630-billion restaurant industry towards ecological sustainability by setting standards that certify a restaurant as “green.” Oshman recently spoke with business writer Susan Caminiti about educating restaurant owners, how even small changes can make a difference, and why sustainability is good for the planet and a business’s bottom line.
MO: There are nearly one million restaurants in the U.S. and together they produce hundreds of thousands of pounds of garbage each year. The industry is also the largest consumer of electricity in the entire retail sector. So it has a huge impact on the environment. Before I started the GRA there were already small environmental groups speaking out against things like the use of Styrofoam in restaurant packaging. We’re not the green lobbying arm of the restaurant industry. Our loyalty is to help save water, waste, energy, and reduce the use of toxic chemicals. So what we did is create a systematic way to motivate the industry to move towards a more sustainable way of doing business.
MO: By establishing clear standards of what a restaurant needs to do in areas such as water efficiency, energy, and waste reduction and recycling, to name a few, in order to be certified as green by our organization. We can certify any food service operation, including restaurants, university dining halls, bakeries, and corporate cafeterias. So far, we have 850 restaurants that are green certified by us or in the process of being certified.
MO: If it were just that one owner who didn’t recycle or didn’t compost, it wouldn’t make any difference. But that’s not the case. It’s the collective actions of many, many businesses, small and large, that make the impact. And there’s so much a small restaurant owner can do now that they couldn’t 22 years ago when I started.
MO: Take the spray hoses that every restaurant has to wash off dishes. There are commercial grade hoses available now that conserve water and are also energy efficient. They cost about $70 or so but can save a restaurant anywhere from $1,000 to $2,000 a year on energy. Water-saving toilets are another option. You don’t have to go to the edge of Alaska to get something like that anymore because there are more companies out there selling them. Lighting is another area. The bulbs that restaurants are buying now are likely to be much more energy-efficient than anything on the market 22 years ago.
MO: The food waste in restaurants accounts for about half of all its waste. It’s huge. To be able to get rid of half your waste—that’s amazing. And to have a method by which that waste will go back into the soil to be used to grow more food is even better. It stays out of the landfills and goes back into the soil. So composting is among the top-10 list of things that restaurants should do.
MO: In major cities across the U.S., such as New York, Washington, D.C., Boston, and Chicago, restaurants have to compost in order to be certified green by us. (A list of all the cities can be found here). We started with the cities because we wanted locations where there were already two or more composting companies operating so that there would be a little price competition.
MO: Everything is an education process. If you’re already recycling, then you’re already on the way to composting. We’re not asking these restaurants to have a giant composting pile out back. They already throw out all their food waste in a trash bin. The change comes in arranging for that waste to be picked up for composting rather than to be taken to a landfill.
MO: I like to answer that by turning the question around: Is there a return for a restaurant not to be green? That’s the question that’s getting harder and harder to answer yes. Just using the right light bulb saves energy and money. It’s not theoretical; it’s real. Restaurants can reduce waste by 95 percent by composting and recycling. They can save up to $2,000 a year with a more energy efficient water hose. They can reduce their liability by using less toxic cleaning chemicals. How do you argue against that? If I was teaching at the most conservative business school and even left out the environment perspective—just spoke about the financial implications of doing these things—a company would be irresponsible not to make these moves.
This interview has been condensed and edited.
Sara Sutton Fell launched FlexJobs.com in 2007 at a time when her own work situation was in flux. She’d already launched and sold her first job-search company and was later laid off as she was about to give birth to her first child. Trying to manage that work/life balance sparked an idea: a website that offered real opportunities for a career that didn’t involve long commutes, a rigid schedule, and gave leeway for dealing with families on the move. Sutton Fell runs the FlexJobs.com out of her own house in Boulder, Colo., but there’s no “company home office.” All of FlexJobs’ 24 team members telecommute, too.
SSF: The first big piece of advice is to be realistic about the opportunity. Really research it and do your due diligence. For me, entrepreneurship is passion-based. It’s an idea that I can’t get out of my head or I keep waking up in the middle of the night thinking about it. For me, that’s the “tell.” This is something that I’ve got to explore. And when you go through that exploration process, that’s when you’re being realistic. You flush out the idea, the opportunity, and look at the competition. You also need to be honest with yourself about what it will take. And you may not know [that]—there’s no way to know until you do it. A lot of it will be hard work, determination, and sticking it through some rough patches.
For women, one of the biggest challenges is finding mentors or people to really talk with about it. The biggest lesson I learned when my first company ended, that I carried very firmly into this next company, is having the confidence to listen to my woman’s intuition. A lot of people will tell you that you should be doing it a different way, or better, or that it’s already been done. Those are the naysayers trying to direct your ship. It is very important to listen to your gut.
SSF: It varies. We have a management call once a week. There are eight of us on that call and it is interactive. We make sure everyone’s there—we take roll call (laughs). For calls with fewer participants, it’s definitely nice to be able to engage and collaborate and be a bit more casual about the whole process. But I actually do make a point of asking friendly questions about people. For example, one of our team members just moved from Atlanta to Texas and of course I asked, “How’d the move go?” “Are you settled?” Things like that, because especially being remote, it’s very important to make those friendly, personal connections. These are people—they have lives. They’re not just a staffer. And if you’re in an office, that happens more naturally because you’re standing in an elevator together or in the kitchen making coffee. So I do make an effort during meetings to do that.
We also do a lot of screen sharing, so that, say, everyone can see my screen. The challenge is having the technology that’s working for you.
SSF: We have individual team meetings for the writers, or researchers, or the marketing team. Those are opportunities to be a bit chattier sometimes, but also to collaborate and to brainstorm.
I do have a ringing endorsement for Yammer.com. It’s kind of like a Facebook for companies—you can invite people who are tied to your domain and it enables a chat. But you can also create separate groups—for example, we have a researchers’ group. They’re on at all different times, in different time zones, including one in Europe. We have people looking for jobs all of the time. And if someone runs into a problem or has a question, they can chat about it on Yammer and someone will respond. You can leave a window open on your screen, or you get an email saying you have a new message. It’s actually a really interesting and dynamic environment for people who, in many cases in our company, haven’t met in person, to work together. And it’s really intimate, like in an office, where you can poke your head in and say, “Can I ask you a quick question?”
SSF: In a remote environment, it’s even more critical to hire people who care passionately about the company and the job. I want people who aren’t going to look at this as just a job—they actually believe in what we’re doing. They tell their friends about it. Even if they weren’t on our team, they’d be telling their friends about it.
In terms of skills and traits that I look for, proactive communication is probably the top of the list. I want someone who isn’t afraid to ask questions, who’s not afraid to say, “Hey, I don’t understand this. Can you explain it to me?” That’s one of the challenges of working remotely. You can’t look over and see that somebody’s face looks frustrated. Instead, you do need to rely on that level of honest communication.
Self-discipline is also important. I look for people who are organized and self-motivated. But I also want to hire people who are going to be satisfied with this work environment, because working remotely 100 percent of the time is not for everybody. If you’re someone who derives some of your social life from work, for example, working remotely might be pretty difficult for you. A lot of the people on our team have pretty darn busy lives outside of work. And they’re looking for that remote job to help them juggle that busy life. I’ve found that by offering them that flexibility, we get such an exchange of loyalty, passion, drive, and focus when they are working.
SSF: Go with your comfort level. Employers can put certain metrics in place. So, if it’s a new hire, you’ll have to look at what the role is, what you want this person to do, and what pieces of the puzzle can be done remotely. Then decide how you are going to measure their success. Is it the number of leads they get that day? Is it things on a to-do list that they can cross off? Whatever it is, what are the metrics that you’re really looking for them to accomplish? And try to make them as measurable as possible so that at the end of the week you can come up with a tally that shows how successful they’ve been.
I also recommend putting into place a regular check-in. I like weekly check-ins. When we’re training someone, we usually do two or three check-ins the first week, just to open the door to building that relationship and really encourage them to ask questions and make sure they’ve got it down.
SSF: It can be tough. It’s something that is important to me—to create an environment where we are supportive of each other and we somehow celebrate together. Some of our team members are in Colorado, so historically we’ve had a Colorado holiday lunch and this summer we may try to do a barbecue.
We do have an open policy that if one person is in another team member’s town, then, of course, on the company dime they can go out to lunch, or drinks, or whatever it is to meet each other.
It’s trying to be human—sending flowers when someone is sick, or a birthday gift, or just doing the things that you’d do in an office environment. You just have to take an extra step to make that happen.