Business owners face many financial decisions

Dec. 16--People earning a paycheck from an employer need to decide tax deduction levels, how much to put into a 401(k), set a household spending budget and try to sock away a rainy-day fund.

But for those who own their own business, of any size, the situation gets more complicated. Their personal finances are inextricably tied to their business finances. They have to decide about setting up a retirement savings plan, not just for any employees, but for themselves. Tax planning and record keeping often take different approaches. And retirement doesn't just mean a send-off party from your employer; it means planning ahead for who will take over the business and how.

"For small-business owners a lot of their business and personal finances go hand in hand," said Matt Norland, a founder and wealth adviser at Meyer & Norland in Mankato.

While personal and business finances may be closely linked, business owners need to be careful of keeping the right record for each.

"People sometimes co-mingle their personal and business assets. That's a problem. It crosses lines on whether you're running a separate entity. And it's very hard to determine what your profit is," said Ryan McKeown, senior vice president and financial adviser at Wealth Enhancement Group in Mankato.

"If all your personal and business expenses are going in and out of the same account and you get audited, it can be a problem. And you could be missing opportunities for tax deductions."

Wendy Anderson, senior finance consultant with the Small Business Development Center in Mankato, said they work with dozens of people at any given time who are hoping to start a business or expand an existing business.

"There are no fees for our help. We run under the Small Business Administration and Department of Economic Development. And MSU is our strategic partner.

"We also get donations from larger corporation, lenders and businesses that worked with us to get where they are," she said.

Helping businesses succeed, she said, is rewarding.

"It's great to see projects happen and jobs created. That's the win."

Changing rules

Tax and regulatory rules are always changing and the 2017 tax overhaul brought many.

McKeown said new for this tax season is a qualified business income deduction.

"It's a very complicated deduction that can be beneficial for some businesses, but it only applies to some businesses and there's a roundabout way to determine it. It's nice to get a 20% deduction, but it's complicated."

Another big change affecting businesses, particularly farm operations, is a change in how depreciation can be claimed when trading in equipment and buying new.

"The tax law stopped having a 1031 exchange, which made trade-ins tax free in the past. Now when farmers trade in machinery, (the IRS) considers that income and taxable."

Further complicating things is different rules in Minnesota. Federal rules allow a business to deduct 100% up front. But in Minnesota it's 20%, with the rest deducted over the next five years.

"So they eventually get the deduction, but it hurts them if they're having a cash crunch, especially now with low farm income," McKeown said.

"There's not much they can do except stagger their trade-ins. I'm hearing from farmers that they're not going to trade in and that will hurt implement dealers."

McKeown said the complexities of running a business invariably require professional help from financial, tax and legal advisers. But those just starting can find that tough to justify.

"It's a chicken and egg thing. Clients want a business to be worth enough to pay a professional for advice, but if they wait to get a professional, they find there's things they wish they would have done from the beginning. It's a Catch-22."

He said professionals may have to go back and amend taxes for a business for several years, which can be complicated. "And if transactions aren't listed correctly, there's more risk of getting audited," McKeown said.

"But for a new business to pay a couple thousand to get professional advice can be difficult when they're worried about making payroll."

Owners wanting to protect their personal assets in case something happens to their business can do it to a degree.

"Owners can set up corporations or LLCs, which can separate the business assets from the personal assets, but that's not 100%. If you're the sole owner of a business and you're offering all the services and get sued, they're going go after personal assets, too.

Or if you're in a vehicle accident your personal assets are at risk, but your business assets are, too. There's no fool-proof way."

McKeown works with many owners who are nearing retirement and need to make plans.

"If an owner is approaching retirement and trying to figure out how much they're going to spend in retirement, they often find that difficult."

For example, an owner may have always had a cellphone paid by the business, a legitimate expense and tax deduction. "But after they retire, they still need a cellphone but they'll have to pay for it."

The same is true for company vehicles, internet and other business expenses that will become personal expenses in retirement.

Solid projections

When someone comes to the SBDC for help, a variety of steps exist to create a plan for a start-up or an expansion.

"Everyone comes in at a different place. Some have a plan, some don't have an idea where to start," Anderson said.

"First we learn what their project is, whether it's a service business, building a building, or leasing, all those types of things. We really go through that list to make sure nothing is missed."

The next step is to look at their projected income. "How they came to those assumptions. And then you look at the monthly expenses. You look at the first year and the second year, when they should be stabilized. The big thing is can you pay the loan back and can you pay yourself? The lender wants 24-month projections."

She said people often don't have a good handle on what their payroll expenses will be and have trouble estimating the cost of goods. "Especially with startup restaurants and coffee shops and things."

One of the final steps is a balance sheet showing reasonable projected assets to liabilities.

For people who have been in business for a while and are looking at expansion, the process is a bit different.

"Often they are looking at building a building or buying a building versus renting," Anderson said. "Buying big equipment to expand is another big thing."

She said expansion leads to increased sales, but there also are costs to that growth that have to be considered.

"You have to keep in touch with your lender all the time. Your lender is your friend," Anderson said.

She said they tell all their clients to use QuickBooks for their financial record keeping.

"That's the best way to go. That's what the CPAs use."

'It depends'

Norland, a Mankato native, MSU grad and certified financial planner, said his conversations with clients focus on their goals.

"Our business is really built upon trust and relationships. Our clients trust us with some major financial decisions."

He said most business clients have and need a team of specialists to advise them, including financial planners, CPAs and attorneys.

"If they are business owners, there are certainly many issues for them to consider."

Norland works with many clients doing retirement planning.

"The top questions are 'Matt, can I retire yet? Matt, can you help me make more money? Matt, is there a way to manage my portfolio to help reduce the impact of taxes?' " Norland said.

"It's those common goals, to determine whether retirement goals are realistic."

He said when to start drawing Social Security is always a top question.

"Almost any question in the world of finance can be answered by: 'It depends.' The Social Security draw depends on everyone's unique situation."

Those with health issues or those who have little other retirement funds may want to start drawing Social Security as soon as possible. For others, delaying may be best.

Norland said year-end tax planning also requires a close look at the business and the laws.

"And they have to look at tax laws that have changed or will change," he said.

"Most people spend more time planning their next vacation than on their financial plan. If you have the discipline to put down on paper your goals and put down a reasonable assumptions, it helps. It has to be an active plan, not just something you put together and put on the shelf."

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