Weather Proof Your Business

Now that we have your attention, we would like to talk to you about liquidity and cash flow. In prior recessions, a business owner could pretty well predict how much their business would be impacted. Unfortunately, all bets are off with the current recession which has hit harder and is more far reaching than any other economic downturn in our lifetime. Nobody is quite sure how long and how deep the current recession will be and the next steps necessary to turn things around. If you’re a small business owner, the uncertain economy makes it difficult to predict what 2009 will bring. One thing for certain is that cash is king. You will need to make sure your company has the liquidity to weather this economic storm and, if possible, take advantage of acquisition opportunities at prices unimaginable 12 months ago.

If you have a financial forecast, great. If you don’t have one, even though it may be difficult to build, it is more important than ever. In today’s market, you have to be able to answer the following questions:

1. Based on your key revenue drivers and current pipeline, what is your best estimate of revenues over the next 12-18 months? With that, what is your forecasted net income and cash flow?
2. What happens to net income and cash flow if you stress test your forecast under “best case” and “worse case” scenarios?
3. What is your current break even point and how can that break even point be reduced?
4. What strategies will you implement if revenues or net income fall below the monthly forecast?
5. What are your peak cash flow needs over the next 12-24 months and how does that compare to your current bank financing?

Whatever you do, don’t get caught short of cash in this market. Anticipate what may happen. Prepare today....don’t wait until your options are more limited. Consider hiring outside expertise to help make sure you are ready. Our Director of Business Consulting, Paul Breimayer, specializes in financial modeling, profitability analysis, cash flow improvement and helping small businesses obtain bank financing. He has an extensive background in running businesses in good times and in bad. Please do not hesitate to give him a call at 415-408-5021 if we assist you in any way.

California Tax Update

California Mandates Electronic Payments for Certain Individuals For tax years beginning on or after January 1, 2009, individual taxpayers will be required to make their tax payments electronically if:

• An estimated tax payment is made for more than $20,000,
• A payment with an extension request is made for more than $20,000, or 
• An original return is filed reporting a tax liability of more than $80,000.

Note that these provisions do not apply to 2008 tax return payments made in 2009. If the first estimated tax payment for 2009 is included with an extension payment for the 2008 tax return, then the first payment required to be filed electronically will be the one due June 15, 2009. 

Once a taxpayer becomes subject to the electronic payment requirement, all future payments regardless of amount, type, or year, must be paid electronically. Failure to comply with the electronic payment requirement will trigger a 1% penalty on the amount of the required payment.

Note that these provisions apply only to individual taxpayers. Fiduciaries, estates and trust are not required to make electronic payments.

California Raises Threshold for Required Individual Estimated Tax Payments

For tax years beginning January 1, 2009, the threshold for required estimated tax payments is increased to $500 (from $200) for individual taxpayers filing single or married/RDP filing joint. The threshold is increased to $250 (from $100) for those who are married/RDP filing separate. If an individual taxpayer’s actual tax (after withholding and credits) for the preceding year or estimated tax for the current year is below these thresholds, then estimated tax payments are not required. 

California Removes Safe Harbor for Estimated Payments

 For tax years beginning on or after January 1, 2009, the “safe harbor” rule will no longer apply to individual taxpayers with adjusted gross income equal to or greater than $1 million dollars ($500,000 for married/RDP filing separately). Affected taxpayers will be required to pay an underpayment penalty for any quarterly estimated tax payment that falls short of the required percentage of the total taxable income for the subject tax year. 

Note that for large corporations, those with taxable income of at least $1 million, the “safe harbor” rule had already been eliminated in prior years. For all other taxpayers the “safe harbor” rule continues to apply. This rule exempts the taxpayer from underpayment penalties if the estimated tax payments equal or exceed the prior-year tax liability.

California Accelerates Individual & Corporate Estimated Tax Payments

For tax years beginning on or after January 1, 2009, the required estimated tax payments for individual taxpayers and corporations will be 30% for the first and second quarters and 20% for each of the third and fourth quarters. Previously, estimated tax payments were required in four equal installments (25% each).

Corporations whose estimated tax is not over the minimum tax are still required to pay the entire amount of the tax for the first quarter. 

California Accelerates LLC Fees

For taxable years beginning on or after January 1, 2009, the due date for the LLC fee is the 15th day of the sixth month of the current taxable year. The fee must be paid with the new FTB Form 3536. A 10% penalty will be added to the fee for any underpayment. The underpayment penalty does not apply if the LLC timely pays a fee equal to or greater than the total LLC fee paid for the previous taxable year. The annual minimum tax of $800 continues to be due on the 15th day of the fourth month of the current taxable year and is paid with FTB Form 3522. 

California Changes Net Operating Loss Rules

NOLs are suspended in 2008 and 2009 for businesses with net business income of more than $500,000 for the taxable year. Businesses with net income of $500,000 or less will continue to be able to claim NOL carryovers from prior years. The carryover period for denied NOLs will be extended. For NOLs after January 1, 2008, the carryover period is 20 years. For years beginning on or after January 1, 2011, NOLs will be allowed a 2 year carryback (reducing 2009 and 2010 income) limited to 50% for 2011 and 75% for 2012.