Tip: The Only New Year’s Resolutions You Need

In the wake of the New Year, many of us burden ourselves with a laundry list of resolutions to do things differently and to improve upon our personal and professional goals.  For many entrepreneurs, a new year offers a clean slate and a tantalizing chance to achieve greater business success. Individual goals may vary, but here are five central principles that are integral to business success in today’s competitive world. Focus on them and you’ll see some big improvements.

  1. Clarify your business goals. Whether it means updating an existing strategic plan or starting from scratch, having a focused business plan that states specific, realistic, measureable goals, as well as a timeline and a budget is crucial. This is not a purely academic exercise. You can—and should—share this with all your employees. A strategic plan is a key tool (edited as needed for outside audiences) when you need to apply for business funding or when you seek business partners. With that said, a business plan needn’t be written in stone. If circumstances or opportunities change, update the written plan to reflect these changes.
  2. Proactively manage cash flow. Alongside your business plan, prepare a month-by-month rolling cash-flow projection. To avoid unwelcome surprises, review and update the cash flow-plan at the end of each month. That way you can adjust your elective spending and readjust your pricing systems to keep your company financially healthy.
  3. Evaluate payment options. Don’t limit your financial planning to revenue forecasts. Make sure you offer customers the easiest and most convenient means to pay for goods or services. Pay attention to the latest technology for mobile payments and electronic payment methods. Offer your customers secure options with maximum convenience.
  4. Know your market. Apply the resources and/or staff time needed to research your specific market and competitors. Stay ahead of the game by anticipating market trends and understanding your key competitors’ sales and marketing strategies. For many small business owners, it often makes sense to hire a freelance marketing professional who has the know-how and experience to do this quickly and cost-effectively.
  5. Manage your time mindfully. Think not so much about managing your time as knowing your priorities each and every day. Spend your time on the things that move you closer to your goals. If boosting business revenue is your aim, first do those tasks that contribute most to generating more income. Every day, determine what needs to be accomplished in the next 24 hours to bring you closer to that goal. Control interruptions when you can. You might have to stop whatever you’re doing to take a client call, but limit email, texts or phone call distractions by blocking off time on your daily calendar to return routine calls and answer non-urgent email.

Everyone’s an Owner

Some experts are predicting that the recent tax legislation will create a ton of new business creation and activity—just not the kind that lawmakers originally intended. These people are predicting a surge in efforts for reclassification and the organization of cover companies by employees so they can have their salaries recognized as business income, significantly lowering their tax burden as a result.

A central tenet of the Republican bill is that it reduces both corporate and pass-through business tax rates. Corporate profits are now taxed at only 21 percent, and owners of pass-through companies will get to take a 20 percent deduction. While these same experts predict it will take some time to adapt, they believe that as lawyers and accountants delve into the new rules, they will find ways to minimize taxes for their clients using the new tax structure.

A group of tax law professors and lawyers wrote a paper on various ways imaginative and wealthy individuals can use the preferential business tax treatment to reduce their taxes. This academic paper is entitled “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation” (available for download via SSRN), and it chronicles how they believe individuals in various fields and scenarios will create or turn themselves into small businesses to take advantage of the new tax structure.

Below is a brief synopsis of the different strategies. As always, remember that each situation is unique and you should consult your tax professional before implementing any of these strategies—this is definitely not a DIY type of situation.

Partnership Game Changers

Some of the paper’s authors believe that people will transform themselves into self-employed contractors or partnerships, thus turning their wages into pass-through profits and entitling them to the 20 percent deduction.

The IRS lays out pretty strict guidelines on who can be classified as an independent contractor, with a bias toward workers being treated as W-2 employees—so this isn’t a simple path. The most likely candidates are individuals in certain professions, such as law firms. One example given is that associates (partners would already receive the pass-through treatment) could create an LLC and then be hired by the firm. There are provisions that prevent guaranteed payments from qualifying for the deduction; however, many feel these regulations are weakly written and might only apply to S corporations.

Split the Difference

Another strategy professional service pass-throughs can use is to split their companies into parts. One part would perform the services portion of the business, while the other would own the real estate and/or any productized revenue streams. Separating the service portion of the business would allow the other segments to qualify for profit deductions where they would not otherwise if they were comingled.

Self-Incorporation

Initially, many believed the easiest way to arbitrage the new tax rate structure would be to organize a corporation.

Currently, however, most entrepreneurs avoid forming corporations due to double taxation (profits are taxed at both the corporate level and then again as dividend distributions). The reduced corporate rate of 21 percent combined with the top dividend rate of 20 percent means that even taxpayers in the top brackets will do better not incorporating; however, opportunities for interest earning investments are still available.

Conclusion

Change often means opportunity when it comes to tax law. The new tax law substantially shakes up business taxation, and as professionals sort through the finer details, new strategies will emerge for some taxpayers.

Stock Market: Outlook for 2018

Before considering what might be ahead in 2018, perhaps it’s worth looking back to acknowledge that 2017 was a banner year—both a great year for U.S. stocks, as well as the year when international markets turned a corner. In the United States, earnings for 2017 have been solid and growth expectations are on an upswing. Worldwide, gross domestic product growth ramped up in 2017, and the Organization for Economic Cooperation and Development has indicated that it expects to see every one of the 46 economies that it tracks post growth for 2017. The United States was able to shake off the lingering effects of recession faster than other nations, and we finally saw earning revisions improving and earnings growth accelerating on a global level. The world economy is now outperforming most predictions—a happy state of affairs that has not happened since 2010. Analysts are anticipating that this trend will continue and even strengthen throughout 2018.

Here in the United States, the major topic of conversation centers on how the Trump administration’s tax reform might affect the markets. Here’s a sampling of viewpoints regarding the possible effects of corporate tax reform:

  • Many analysts hope the lower corporate tax rates will help stimulate confidence and job creation as well as boost after-tax earnings per share for many publicly traded companies. Other analysts believe that corporate tax cuts have already been priced into stock valuations and don’t believe the lower tax rates will fuel anything but modest growth. Some note that valuations are already well above long-term averages and don’t expect that tax reform will propel the overall market on any significant upward trajectory.
  • Some analysts believe reduced tax rates will help boost consumer spending. Not everyone agrees of course. Some investment advisors believe consumer spending has been on an uptick for several years and don’t think cuts will have much additional impact on the economy.

Apart from tax reform, there are other key issues that could affect the markets in the new year. Under outgoing Chairperson Janet Yellen, the Federal Reserve has embarked on a steady course to gradually reduce the Fed’s reinvestment in mortgage-backed securities and treasuries. Under its new leadership (chairman and vice chairman), analysts expect a continuation of this strategy.

On the global front, North Korea remains a major issue, and the wave of populism in Europe that began with the Brexit vote also bears watching. If populist politics continue to triumph, the resulting isolationism could hurt equity markets worldwide.

The commentary above is general in nature and is not intended to replace the advice of tax and investment professionals.