I mentioned some of the non-financial pros and cons of either option.  Oftentimes, the non-financial issues really determine the decision, since for many vehicles, the dollar difference between buying and leasing may not always be that great.  There are many lease vs. buy calculators on various websites, including one on our Gift & Associates website, which will give you a financial answer once you have all the relevant numbers to plug into the calculator.  Once you see the difference in dollars, the other factors come into play. 

Some reasons to lease instead of buy:  if you want a new car every two or three years, want lower monthly payments, don’t drive excessive amounts of mileage each year, want the continuous warranty on the car, and don’t care if you don’t have equity in the car.

On the other hand, some reasons to buy instead of lease:  if you want ownership and equity in the vehicle, don’t mind the higher monthly payments, tend to keep the car beyond the loan pay-off date, prefer being debt-free for the period of time after loan pay-off but before you get your next vehicle, drive more miles annually than what the lease would allow you, and don’t mind having to pay for any maintenance or repairs once the warranty period ends. 

After I passed this information to Sam, he said that he would get me the numbers so that we could do that part of the calculation for him.  The difference between leasing and buying with the numbers he had given me turned out to be only a couple hundred dollars, so in his case, it came down to the non-financial reasons.  He had always driven newer vehicles and he wanted to keep his monthly payments  as low as possible, so he went with his natural inclination and leased the car.  His comfort level won out, and I had a feeling that Sam would want to do the driving whenever we would be going out to lunch in the future. 

To be continued…

 Apparently Ted had been just giving his staff cash at the net amount and was in big trouble with the IRS. Sam gets a lot of advice from Ted and he wanted to make sure he was doing it correctly. Fortunately for Sam he was. I told Sam he needed to explain to Ted what his options were for running payroll.
Option one – Do it yourself. This option is by far the least expensive in the short term but also potentially the most expensive in the long run. Not only do you have to calculate the gross wage amount correctly, but you also have to prepare and file federal, state, local, federal unemployment and state unemployment tax returns and make all the payments timely and, in this day and age, electronically.
Option two – Outsource it. This option costs a little more but will save you in the long run. You turn in your hours to a third party service bureau that will accurately calculate the gross to net amounts and will take full responsibility for preparing and filing all the taxes, including the year-end filings necessary. They send you the checks completed and ready to hand out to the employees.
I told Sam to have Ted give us a call and we could help him in this area.
To be continued……….

To be continued…

Sam’s first option was to use a software program for his check writing and for tracking his income, expenses, accounts payable, and accounts receivable. I explained to him that using a software program would keep things neat and orderly, but with the line of business Sam was in, he would have to make sure that all his cash expenses were properly put into the software program, along with the checks that were written and the deposits that were made.

The other option for Sam was to track all his income and expenses on paper each month.

He also had the option of hiring someone to take care of this task for him, doing it himself, or outsourcing the task to our firm. Outsourcing is a great idea for a company, but with the type of business Sam was running, it would be difficult to keep everything on real time.

After we discussed the nuts and bolts details of how these options would work, Sam decided to purchase software to track his financial transactions. Sam was comfortable with handling it on his own at this point in time, but he knew that he always had the option to hire someone to handle it later if the need would arise.

Now that the bookkeeping had been decided, it was on to other issues.

TO BE CONTINUED…

“How do I account for customers who run up a tab and pay for it the following month?” he asked.

I explained to Sam the difference between accrual and cash basis accounting.  “If you were to use the accrual basis of accounting, you would record these transactions as income whenever your customer runs up the tab.  If the customer runs up a $600 tab in June and doesn’t pay for it until July, you will be reporting the revenue and sales tax in June even though you didn’t receive the cash until July.  If you were to use the cash basis of accounting you would not record the sales revenue until you receive the money in July.  The same applies to paying your vendors.  If you are using cash basis accounting you would record the expense when you pay the vendor.  Using the accrual basis, you would record the expense when the goods are received.  Does that make sense?”

“It does,” Sam replied.  “Which way should I be keeping my books?  Is there more of a benefit using one versus the other?”

“Well, cash basis accounting is a very simple way to keep track of revenues and expenses.  It works well with small to medium sized businesses that are simple in nature.  Your primary focus would be on the amount of cash in the bank and making sure bills are paid.  The accrual basis of accounting is a more complex way to keep track of revenues and expenses, but is more accurate.  Revenues and expenses are matched when they are earned, which gives you a more meaningful picture of how the business is performing.  It would require a bit more work but if you’re up for it, I believe that is the way to go,” I answered.

After thinking about the options, Sam decided to use the accrual method.  I came back a week later to assist him with setting up the system.

To be continued….

He asked which entity I would choose if I were him.    After quickly going over them in my mind, I recommended that his business be taxed as an S corporation.  I explained that an S corporation’s main benefits were liability protections against certain creditor situations,  no potential double taxation if he would sell his business in the future, and the ability to save some payroll taxes (dependent on the services he provided to his company and what his other employees were paid, among other factors).

A second option would be to do business as a sole proprietor, which would be the easiest way as far as record-keeping goes, but there were some definite drawbacks to this option.  First of all, there would be no corporate protection for his personal assets.  Also, all of his profits would be subject to self-employment tax (Social Security); with an S corporation set-up, it was possible that some of the money he would take out of the business would be considered distributions, which would not be taxable for self-employment.  There were too many potential drawbacks with this option to suit me.

If he brought in his wife, Cathy, or possibly a friend of his, maybe Mark, to form a partnership to own the business, the same disadvantages as a sole proprietorship would still exist, since a partnership for tax purposes is basically a collection of individuals.  Most of the same tax benefits and drawbacks apply in either situation.

The other option was a C corporation.  They used to be popular back in the 1980’s, but a change in the law made it probable that upon the sale of a business, there would be double taxation (once at the corporate level and once at the personal level).  This major change dried up the market for new C corporations.

I could see that Sam was satisfied that my original answer of being an S corporation was the best option for him.   He contacted the attorney to take care of filing the necessary paperwork to make this happen.

Within a short matter of time, all the paperwork was done and Sam’s Sport Bar, LLC was up and running as an S corporation and Sam was relieved that at least this aspect of starting his business was handled correctly.

To be continued…

For years, Sam has been a client of Gift & Associates for his personal tax returns and tax consultation on his retirement accounts.

Sam is your typical neighbor.  He is married with two children and works as an Operations Manager for a local company.

One spring afternoon Sam gave me a call and wanted to schedule a meeting to discuss a potential business opportunity and career change.  Our story begins here…..

Buying a Business

Sam got a hot tip!  A local sports bar in town was up for sale.  His long-time declaration of, “One day, I’m gonna own a big Sports Bar!” resonated in his wife’s mind.

He sat before me looking for advice on how to evaluate the decision to buy this business and what he needed to think about before leaving his current position and working for himself.

No easy answer, no short cuts, but anything worth doing…

I started with a complete financial review of the business with Sam.  This included reviewing the past 3 years income tax returns and financial statements.  Sam also inquired about creditors or taxing agencies that may have had liens on any assets.

The financial review did not turn up any skeletons so I turned Sam’s attention to the capital his business would need and the capital his family would need during this transition.

Once Sam and his family became immersed in the concept, I then began discussions on financing the purchase, tax strategies and an asset sale vs. a stock sale.  Some of these topics will be discussed in future blogs.

TO BE CONTINUED…