Three thieves stealing from your business
Three thieves steal relentlessly from your business and personal net worth. They are discreet, but you probably encounter them every day. Over time these losses may amount to millions of dollars.
The first thief is unnecessary taxes.
A big change for 2018 was tax code section 199A -- qualified business income deduction. This is part of the TCJA and is available to pass-through entities such as partnerships, S corporations and even sole proprietors. The rules are complex, but it allows a deduction of up to 20 percent of your qualified business income. If you have $100,000 of QBI, that's a $20,000 deduction worth $4,800 of tax savings in the 24 percent tax bracket. The beginning of the year is an ideal time to make any changes to maximize this deduction.
Another strategy is to set up a retirement plan for your business. A business with less than 100 employees may want to consider a SIMPLE IRA plan. The cost is virtually nothing and employer matching contributions are limited to 3 percent. For 2019, the maximum employee contribution is $13,000 plus $3,000 in catch-up contributions age 50 or older.
Larger businesses should consider a 401(k) retirement plan. 2019 contribution limits are $19,000 plus $6,000 in catch-up contributions for traditional (deductible) and Roth contributions. The 401(k) offers you the opportunity to contribute an additional $6,000 to $9,000 per year over the SIMPLE IRA in pretax and Roth accounts. 401(k) plans can also offer voluntary nondeductible contributions in addition to traditional and Roth contributions. These are also referred to as voluntary after-tax contributions. VACs may offer you the opportunity to add an additional $10,000 or even $20,000 to your own account depending on your company contributions.
It gets even better because these VACs can be withdrawn at any time with no penalty. They are also eligible for rollover to a Roth IRA at any time.
In the last 100 years, this second thief has stolen 94 percent of every dollar. A dollar from 1918 would buy only six cents worth of goods today. That's 2.85 percent loss per year, according to the Bureau of Labor Statistics. Countering this inflation thief takes a bit more creativity than countering the tax thief.
It's easy to focus on the cost of your input, but don't forget about other contracts that support your company, such as leases, information tech and shipping. For example, consider using a tenant advisory service to help you negotiate your next lease. You may prefer to stay in your current location and a commercial real estate broker can spend the time working on a better deal while you focus on your business.
One of the biggest inflation thieves has been health insurance premiums. Since 1983, inflation has averaged 2.69 percent, but medical inflation has averaged 4.63 percent. This has major implications for both employers and employees.
One way that small businesses can manage this cost is with a Qualified Small Employer Health Reimbursement Arrangement. Starting in 2017, employers with less than 50 full-time employees can reimburse employees up to $4,950/single or $10,000/family for personal health related costs. This benefit would be used instead of a group insurance plan and allows the employer to control the cost of health benefits.
Inflation also steals your investment returns. To grow your wealth requires returns in excess of inflation. This has been a challenge for short-term investing and working capital, as short-term interest rates have been below the inflation rate since the financial crisis.
Your investment broker may offer a line of credit secured by your brokerage account. The most common type of arrangement is a margin account, but recently many brokerage firms have begun to offer non-margin arrangements. You can keep the risk level low by investing in short-term, high-quality fixed income instruments, while using the account as security for a loan. Borrowing against the account involves risk so be sure to consult your advisers.
The third thief compounds the losses from inflation and taxes. Its name is procrastination. Missed tax savings are gone forever and so is the compound return on that money. If you missed generating $5,000 in tax savings last year, you have also lost the future gains on that $5,000. Over 30 years at 6 percent return per year, that's $23,717 in potential gain.
Procrastination has intangible costs, too. Procrastination acts like the law of inertia: "an object at rest stays at rest … unless acted upon by an unbalanced force." It takes action to overcome procrastination.
• The content of this article does not constitute any investment or tax advice. Any rates of return used are not guaranteed and are for illustration purposes only. Be sure to consult with your own business and tax advisers before implementing any changes. John W. Bever, Certified Financial Planner, is a registered principal with Royal Alliance Associates Inc. (member FINRA and SIPC) and is president of Phase 3 Advisory Services Ltd., a Registered Investment Advisory Firm, not affiliated with Royal Alliance Associates.