Financing a Small Business, Part 5 of 5: Know When to Keep Quiet With the Banker

font-470589_1280In February of 2014, I wrote a blog post titled “Financing a Small Business: 4 Items to Remember.” Over the last few weeks I’ve expanded on those 4 things, and today the series concludes with a bonus 5th item that came to me later.

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“Be careful what you say to the banker.”

Or put a little more bluntly: “Know when to shut up.”

Here are a couple of real-world examples I’ve seen where business owners got hung up with the bank because the owner wouldn’t stop talking.

One: I’ve Gotta Have the Money. Actually, I Could Get By Just Fine Without It

A business owner goes to the bank to get a loan for equipment he says he “has to have.”

In the course of the conversation with the banker, the owner goes on and on … and on and on and on … about how successful his business has been.

This is not necessarily bad. Business owners should be enthusiastic, and those of us who are entrepreneurs want to share the excitement of our successes.

The problem here was, the owner used this as a springboard to talk about financial success, which led to the owner saying he didn’t really need the loan, he could just pay cash for the equipment, but the loan would be nice to have.

And then he continued to talk and said that if he couldn’t get the full amount, he’d be happy with a smaller loan. And then he continued to talk and said again that he could get by just fine without the loan, but that it would be nice to have.

The banker had a good question: if you don’t need the loan, then why are you here? The owner fumbled around and finally said something about wanting to build credit. But the momentum was lost.

In the end, the owner withdrew his loan application and never did buy the equipment.

Two: I Can’t Make a Down Payment, But I’ve Made a Lot of Money!

A person goes to the bank hoping to get a quarter-million-dollars of startup financing.

Problem: the person had no money for a down payment.

But they went on and on and on to the banker about how, in their prior self-employment ventures, they made hundreds of thousands of dollars in a short period of time.

The person was bragging about their ability to work hard and make money. They thought they were building a case for getting the loan.

The bank didn’t see it that way.

After the meeting, the banker told me it would have been better if the person had not bragged like that — because the logical question is, if you’ve made so much money, why is your down-payment $0?

The bank rejected the loan application for a variety of reasons, but the person’s boasting didn’t help the cause.

Conclusion

We all want to tell about the triumphs of our businesses. But when you’re talking to a bank, less talk is better.

Give them the information they need, answer their questions, but don’t talk so much that you come across poorly and make life more difficult for yourself.

Recordkeeping Considerations for a Startup Business

income-tax-491626_1280 (1)This post is an excerpt from a presentation I give to entrepreneurs who are trying to get small businesses off the ground.

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Surprisingly, the IRS doesn’t have specific requirements for proper documentation of most items of income and expenses. See IRS Publication 583, which gives suggestions — but not requirements — on proper documentation.

There are some exceptions, mainly for expenses relating to mileage and meals and entertainment, where the documentation requirements are stricter. But in general, there are no hard and fast requirements from the IRS on recordkeeping.

Proving Income

Proper documentation of income depends on the type of business you run. If you’re a service provider, you probably give invoices to your customers. Keep the invoices, along with bank records showing your deposits.

If you’re a retail operation, you’ll need a cash register tape or credit card slips or some sort of documentation to show your sales.

Proving Expenses

Like I said above, the IRS has few if any requirements on proper documentation. But the best way to prove expenses is with receipts.

A receipt, combined with a bank statement/credit card statement/canceled check, should provide all the proof you need for your business expenses.

A receipt shows the date, place of purchase, and what you bought. This, combined with a bank or credit card statement showing payment, is good documentation.

Paperless?

A business can quickly accumulate a mountain of receipts and other documents. A common question is, can you scan all the papers and toss or shred the hard copy?

The answer is yes, as long as the scanned copy is a complete copy of the paper document.

You’re also required to keep the electronic copy for the same length of time as you would keep a paper document (generally a minimum of 3 years). This means you would need to be able to access the files during that time — something to keep in mind if you change computers every couple of years.

Image coutesy of user stevepb on Pixabay.com

Glossary: Earned Income Credit

education-390765_1280The Earned Income Credit refers to a tax credit available to taxpayers between the ages of 25 and 65 whose income is below certain levels.

The EIC is surprisingly complex. The IRS publication on the subject, Publication 596, lists 15 bullet points under a table titled “Earned Income Credit in a Nutshell.”

Here’s a very basic overview of the EIC.

You Might Qualify for the EIC if:

  • Your income is less than $14,340 (or $19,680 if married) and you have no children
  • Your income is less than $37,870 (or 43,210 if married) and you have 1 child
  • Your income is less than $43,038 (or $48,378 if married) and you have 2 children
  • Your income is less than $46,227 (or $51,567 if married ) and you have 3 or more children

*-These numbers are based on the 2013 EIC.

The amount of credit is based on your “earned income,” which generally means wages and self-employment income.

There is a formula to determine the credit but in practice, everyone uses the chart in Publication 596 to determine the credit amount.

Marriage in the Tax Code, Part 4: Joint Returns Still the Norm in 1917

wedding-rings-150300_1280This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code.

As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years, literally, to finish, so I can’t guarantee when the next post on this topic will appear.

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As detailed in Part 3, the tax code changed in 1917 and drew millions more people into the tax system. But one thing that didn’t change for most married couples was the way they filed tax returns.

There were still no filing statuses and there was still just one tax bracket that applied to everyone. Married couples received no preferential treatment.

But just as in 1913, most married couples continued to file joint tax returns. Indeed, the percentage of joint returns filed in 1920 was actually slightly higher that the percentage of joint returns filed in 1913 (98.0% in 1920; 97.6% in 1913). By 1923, the percentage of joint returns had decreased (to 96.4%) but joint returns were still the overwhelming choice for most married couples. (Source: a memo by a “Ms. Coyle” at the IRS in 1941: http://taxhistory.tax.org/Civilization/Documents/marriage/hst28695/28695-1.htm)

There are two explanations why joint returns were so common even after the changes from 1917-1919:

  1. There were fewer women in the workplace and thus more one-income married couples. According to the U.S. Department of Labor, women made up just 21% of the labor force in 1920, compared to 47% in 2010. By default, a tax return filed by a one-income married person was counted as a “joint” return.
  2. Even though the tax rates after 1917 were different from what the tax rates were in 1913, many taxpayers still fell within the first range of the tax bracket and thus out of the higher “surtax” range. The 4% tax bracket applied to the first $4,000 of taxable income. There was a $2,000 exemption amount for married couples, and an additional $200 exemption for each dependent. So a family of four could have combined gross income of $6,400 (the equivalent of about $73,000 today) and still fall in the 4% range.

I’ll give some examples in Part 5.

Financing a Small Business, Part 4 of 5: Don’t Spend Money Just to Get Tax Deductions

income-tax-491626_1280In February of 2014, I wrote a blog post titled “Financing a Small Business: 4 Items to Remember.” Over the next few weeks I’m going to expand on the 4 things from that post, plus a bonus 5th item that came to me later.

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At the end of each year, you’ll see accountants giving blanket advice to purchase things so you can get tax deductions. I give the same advice but with a catch:

Make sure you actually need the things you’re buying. If it’s something you need and were planning on buying, then yes, make the purchase in December so you get the deduction in the current year. BUT … don’t do something just to get a tax deduction.

(You also should consider whether a deduction will be more valuable this year or next year; if you think your income will be higher next year, it might be better to wait and make the purchase next year so you can get the deduction when your income is higher.)

Doesn’t it Make Sense to Find All the Deductions You Can?

Of course you should take every tax deduction you can find. But what I’m saying here is, don’t do something just because it’s tax deductible.

The reason being: tax deductions are not a dollar-for-dollar reduction in tax owed.

Let’s say you’re in the 25% tax bracket. A deduction saves you 25 cents for each dollar spent.

So if you buy something for $1,000, you’ll save $250 at tax time.

But you haven’t really “saved” money … you’ve spent $750 net. If you didn’t need what you bought, you just wasted $750 so you could get $250 back at tax time.

That’s a bad exchange if your only reason for the purchase was to save on taxes.

Major outlays of cash require planning and thought — something beyond just “hey, let’s do this to get a tax deduction.”

Image courtesy of user stevepb on Pixabay.com