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Sorrell Law Firm, PLC 7575 E Redfield Rd # 217, Scottsdale, Arizona 85260 (480) 776-6055

Forming a Business Plan: An 8 Point Approach

Forming a business can seem overwhelming – especially when you’re doing it alone.  Creating a business plan will allow you to refine incomplete ideas, address areas you may have not yet considered, create a map so you know what to do next, and increase credibility for bank loans or investor funding.

While you may think you’ve got your business concept down pat, turning the idea you wrote down on a napkin into reality isn’t as easy as it might appear and many people get so caught up on how to start the process that the business itself never materializes.

Following this solid eight point plan, based on guidelines from the U.S. Small Business Administration (SBA), will help you get down to business, literally:

  1. Executive Summary. The executive summary is a snapshot of your business plan as a whole and touches on your company profile and goals.
  2. Company Description. The company description provides information on what you do, what differentiates your business from others, and the markets your business serves.
  3. Market Analysis. Before launching your business, it is essential for you to research the industry, market, and competitors. What’s working and what’s not working for your competitors? How will you distinguish yourself?  Is there anyone else in your market?  If not, there may not be money to be made.
  4. Organization & Management. Every business is structured differently, so it’s important to understand how your company will be organized and managed. What entity will you use? Who’s in charge of what, when?  What kind of business succession plan needs to be put in place?
  5. Service or Product Line. Tell the story about your product or service. Describe what you sell and how it will benefit your potential customers.
  6. Marketing & Sales. Describe how you plan to market your business and explain your general sales strategy.
  7. Funding Request. If you are seeking funding for your business, make sure to include everything asked for in the plan. Any omissions may put your request at the bottom of the pile, or worse yet, in the garbage can.
  8. Financial Projections. Providing financial projections to back up your funding request is critical. Find out what information you need to include in your financial projections for the bank or angel investor.

It’s likely that you may not even know the answers to these questions.  That’s okay. We can help you to refine your goals, map out your plan, provide the kinds of details needed to make your venture a success, and form your business entity.

Are You Prepared to Include the “Wow” Factor?

When forming a business, you may think your business plan is great; but don’t forget that most people think the same of their own business.  The Wow Factor becomes especially important when you’re all competing for funding.

Make sure your plan has a “Wow” factor by:

  • Explaining in very clear terms why your business plan is unique;
  • Being clear about what you have to offer that’s different from your competitors (skills, experiences, relationships, etc.); and
  • Defining how your business caters to a unique niche in the market, which areas are being ignored and what potential opportunities exist for your business going forward.

The bottom line is that you want to make your business plan stand out far above the rest – your plan needs to be well thought out, organized, and unique.  Even if you don’t need outside funding, complete the business plan so you have a roadmap and the knowledge that you haven’t missed an important consideration.

Let’s Continue This Conversation

If you’re not used to drafting business plans, the task may feel daunting and you may be tempted to jump ahead. Don’t. We’re happy to help you with forming a business plan and make sure you have protections in place so that your business gets off to the right start. And, even if you’re already knee deep in your business, we’ll help you get all of your ducks in a row. Give us a call at (480) 776-6055 and get on our calendar.

Sorrell Law Firm, PLC 7575 E. Redfield Rd., STE 217 Scottsdale, AZ 85260 (480) 776-6055

2017 Tax Cuts and Jobs Act: Understanding the QBI Deduction

Pass through entities, such as LLCs taxed as an S-corporation or a partnership, are the backbone of the American small business community, and benefit most from sweeping changes in the 2017 Tax Act. First, the 2017 Tax Act substantially reduces individual income tax rates, which are the rates that apply to income flowing through to the small business owner.  Further, new tax law allows small business owners to reduce their taxable business income by 20%. Thus, for example, a married couple owning a small business with $200,000 of taxable income would pay an effective tax rate of only 18.3%!

To qualify for the QBI deduction, the business must be a qualified business, the definition of which excludes service providers (lawyers, CPAs, doctors, financial planners, realtors, consultants, etc.).  However, these excluded businesses receive the QBI deduction if their adjusted gross income does not exceed $315,000 for joint filers, $157,500 for individuals (over which amounts the QBI deduction is gradually phased out).  Wages paid to the business owner are not reduced by the QBI deduction. While owners of qualified businesses are not subject to these income limitations, there are other limitations that could apply. The QBI deduction is applied to the aggregate of all business income/loss for all businesses the taxpayer owns, and is limited to: 1) 20% of the QBI for each separate business, and 2) the greater of (a) 50% of the W-2 wages the business owner received from each separate business[1] or (b) 25% of the wages the business owner received from the business plus 2.5% of the qualified property owned by the business. Qualified property is defined as depreciable property owned and used by the business.  Qualified property is valued at its original cost basis and remains qualified property over its depreciable life not to exceed 10 years.

The structure of the 2017 Tax Act as it applies to small businesses reflect congressional efforts to incentivize investment into capital assets. The economic effect of which increases demand for assets such as equipment, machines, furniture, and real property. Increased demand results in more manufacturing, which leads to more jobs thereby reducing unemployment; when demand for labor increases, prices for human resources increase leading to higher wages. More production results in an overall growth of our economy and GDP. Further, lowering the tax bill on small business owners will put more money into the hands of middle class Americans which, with more disposable income, results in more spending and investing at the grass roots level. This is clearly a tax plan designed to grow the American economy by lowering the tax bill on small business owners and promoting business investments into property, plant, and equipment.

Because of the way the QBI deduction is allowed and limited, business owners should consider separating ownership of various profit centers.  For example, a doctor that owns the building out of which she operates is subject to the QBI income limitation. If the doctor spins ownership of the building into a separate LLC and leases the building back to the medical practice, then the QBI income applicable to the medical practice does not apply to income arising from the real estate leasing entity.

For the foregoing reasons, it’s wise for business owners to visit with their business and tax advisors to review how the 2017 Tax Act will affect them, and to consider reorganization options to maximize their ability to benefit from our new tax laws.

[1] The 50% of W-2 wages provides incentive for the business owner to pay themselves a wage subject to the Medicaid and Medicare portions of employment taxes. Flow through income from S-corporations escape employment taxes thus the new tax laws added the W-2 limitation to make sure the QBI deduction feature is not abused.  
Sorrell Law Firm, PLC 7575 E Redfield Rd # 217, Scottsdale, AZ 85260 (480) 776-6055 2017 Tax Act

House of Representatives Releases 2017 Tax Act Reform Bill

Below is a summary of the U.S. House of Representatives 2017 Tax Act as it relates to individuals.

Tax Rates: The 2017 Tax Act compresses the current 7 tax brackets (10%, 15%, 25%, 28%, 33%, 35%, AND 39.6%) into four tax brackets: 12%, 25%, 35% and 39.6%. The 12% tax bracket applies to all taxpayers except for those whose marginal rate is in the top bracket, in which case the 12% rate is phased out for the top earners.

The 25% tax bracket starts at $90,000 for married taxpayers ($45,000 for single).

The 35% tax bracket starts at $260,000 for married taxpayers ($200,000 for single).

The 39.6% tax bracket starts at $1M for married taxpayers ($500,000 for single).

Standard Deduction and Personal Exemption: The current standard deduction of $12,700 for married taxpayers ($6,350 for single) is increased to $24,000 for married taxpayers ($12,000 for single).  The standard deduction increases to $18,000 for single taxpayers with at least one child. However, there will no longer be personal exemptions (currently $4,050).

Small Business Owners: Individuals owning a closely held business will pay a maximum rate of 25% for a portion (about 30%) of their business income with the remaining 70% taxed at the individual tax rates.  Capital gains, interest income, and dividend income retains its character as under current law.

Child Tax Credits: Child tax credits (currently $1,000 per child) are increased to $1,600 per child, plus non-child dependents are allowed a $300 credit. Credits are a dollar for dollar reduction in your tax liability (not a tax deduction, but rather a credit acts like a tax payment and could result in a refund if you otherwise have no tax due).  Under the new law, the refundable portion of the tax credit will remain $1,000.  These credits are phased out for married taxpayers exceeding $230,000 ($115,000 for single).

Itemized Deductions: Current law phases out itemized deductions for higher income taxpayers with complex formulas. The 2017 Tax Act repeals the phase outs.  Current law allows mortgage interest deductions for up to two homes on debt not exceeding $1M.  The 2017 Tax Act allows mortgage interest deductions on only one primary residence with a limit of a $500,000 mortgage. Current law allows deductions for state income and property taxes.  The 2017 Tax Act limits these deductions to state and local taxes paid in connection with a business activity, plus property taxes up to $10,000. The current itemized deductions for casualty losses are repealed in the 2017 Tax Act.  The 50% limitation for cash contributions to public charities is increased to 60% allowing a larger deduction for charitable giving. Tax preparation expenses will no longer be deductible under the 2017 Tax Act, as are deductions for medical expenses.  Likewise, alimony payments will no longer be taxable to the payee nor deductible to the payer.  Further, there will be no deduction for unreimbursed employee expenses.

Sale of Principal Residence: Under current law, taxpayers may exclude from income gain on the sale of their principal residence up to $500,000 for married taxpayers ($250,000 for single) if they reside in the home for 2 out of 5 years.  Under the 2017 Tax Act, to receive the exclusion, the taxpayer must hold the residence as a primary residence for 5 out of 8 years, and the exclusion is phased out for high income taxpayers ($500,000 for married taxpayers, $250,000 for single).

IRA and Retirement Plans: The current law allows taxpayers to convert qualified plans into “Roth IRAs,” then invest aggressively and if they make substantial gains, they retain the Roth IRA with all the gains, free of tax; however, if their aggressive investments lose money, they can retroactively reverse the conversion to recoup the costs of converting to a Roth IRA. The 2017 Tax Act closes this loophole.  

Overall, the 2017 Tax Act lowers taxes on all individuals under $500,000 of income, and simplifies some of the more complex rules while closing unnecessary loopholes.

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The Truth About Trump’s Tax Plan

With internet news comes rumors and hyperbole; what makes tax reform different?  Nothing.

Social media is swarming with articles and tweets of how Trump’s tax plan will punish the middle class to fund tax cuts for billionaires. True?

CNBC.com argues that those making $8.5M per year receive massive $1M tax cuts while middle class taxpayers save only $1,000. Of course, the top earners to which MSNBC refers currently pay upwards of $3.7M per year in taxes (wow!) while the lower income earners are paying close to $5,500.  CNBC claims the top earners save 27% under Trump’s plan while lower income earners save only 10%.  USA Today ran this exact same article. Do these numbers pencil out?

Let’s look at a single parent with one child earning $75,000 per year.  Under current law that taxpayer gets $8,100 of personal and dependent exemptions and a standard deduction of $9,350 resulting in taxable income of $57,550, and a tax liability of $6,970 (accounting for a $1,000 child tax credit). Under president Elect Trump’s tax plan, the same taxpayer is allowed a standard deduction of $15,000 but no personal and dependent exemptions (Trump eliminates them as part of his simplification initiative). However, Trump allows a child care deduction[1] ranging from $7,000 to $12,000 (let’s use the average, $9,500 for our calculations) resulting in taxable income of $57,550. Trump’s tax rate is only 12% resulting in a tax liability of $6,060. This is a savings of $910 per year (or 13%).Continue reading

Sorrell Law Firm, PLC 7575 E. Redfield Rd., Suite 217 Scottsdale, Arizona 85260 (480) 776-6055

What is Tax Policy?

The purpose of taxation is to raise money for our government. When designing our tax system Adam Smith resolved certain principles as guidance: Smith required our tax system to be equal (in proportion to each person’s share of the tax base), certain (so people knew exactly how much they owe), convenient (so the tax assessments arose as the taxpayer’s received the income), and efficient (a low cost of collection leaving the largest portion possible for government spending needs).Continue reading

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