Is Your Financial Plan Complete?

Protect Your Financial Future: Will and Life Insurance

In a recent post, (Personal Finance-Part 1, “Direct Your Personal Health Towards Prosperity”) we showed you how to monitor your financial health, and understand the various metrics which help you improve your current situation, and ensure a healthy financial future for you and your family. Awareness of your current status, an understanding of both personal and outside factors, and a solid plan are key components. But there’s more you can do to support your plan.

No personal financial plan would be complete without reviewing your will and life insurance periodically. Both are important when your goal is to expect the unexpected, and be prepared to weather changes which could threaten the financial health and well-being of both you, and your family.

Why You Need Life Insurance

You’re probably aware life insurance protects you and your family’s encumbered assets upon the death of the responsible parties. It ensures mortgages, loans, and credit card debt are paid upon your death so your heirs will not have to sell the house or liquidate other assets to satisfy your debts. Depending on the type of life insurance you choose, it may also cover final expenses such as:

  • Outstanding medical bills
  • Estate taxes
  • Funeral costs

Part of your financial planning process will be to determine which form of life insurance best suits your needs, and to review it regularly to ensure it continues to provide the best coverage possible. What may be the most reasonable option when you’re single, or your income is lower may not be the best choice when you’re married, have children, or own a business.

Consider these questions before making decisions about the type, and amount of insurance you need:

  • Is a spouse or children relying on you for financial support?
  • Do you want to cover the costs of final expenses?
  • Do you have a joint mortgage and/or significant debt?
  • Are you a business owner?

Choosing the Right Policy

There are two basic types of life insurance:

  • Term
  • Permanent

Term insurance is for a specific period of time, and only provides death benefits. It may be inexpensive at first, but when the term ends, typically in 10-15 years, rates will increase with each renewal, as it will be based upon your age at the time of renewal. You will also have to to a new medical examination. If your health has changed over the last 10-15 years, your new premiums will reflect this increased risk.

Permanent life insurance comes in three flavors:

  • Whole life
  • Universal
  • Variable

Whole life insurance has a set payout. Initially, premiums are usually higher than Universal or Variable policies but remain constant over your lifetime. The premium also contains a savings component, or cash value over time which:

  • Earns interest on a tax-deferred basis
  • Can be withdrawn or borrowed against for college tuition, home improvements, or retirement income.

Universal life insurance is a combination of two factors:

  1. A portion that pays your annual insurance premium, and offers some flexibility in both face value, and premiums. For example:
  • You may reduce, defer or increase annual Premium Payments without impacting the Face Value of the Policy and it will only affect your Cash Surrender Value
  • Death benefits can also be changed as your needs, or circumstances change. However, death benefits can be decreased but not increased. An increase would be subject to a new medical exam.
  • The excess over your annual insurance premium is invested in interest-based funds which earn money tax free, and add to the Cash Surrender Value of your policy.

Variable life insurance is a more recent take on Universal Life. The difference is, with Variable policies, the excess paid over the annual insurance premium is invested, income tax free, in stocks.

Regardless of the type of Life insurance you choose, upon your death, the proceeds will go to your estate. This increases the value of your estate. For example:

If you have a $5M estate, and $5M in Life insurance, your estate is now worth $10M. Depending on the size of your estate, and the value of your life insurance policy, your taxable estate could increase. There are other alternatives, which would allow your heirs to receive the insurance proceeds without resulting in adverse tax consequences.

HKMP’s advisors can help you navigate the pros and cons of life insurance options, and help you determine the payout and premium best aligned with your budget, circumstances, and financial plan.

Set Your Intentions With a Will

A will is often overlooked as part of the financial planning process, especially in your younger years. It’s your opportunity to make legally binding decisions while you still have a say in the matter. So why do you need a will?

  • A will is a legal document that spells out your wishes regarding the care of your children, as well as the distribution of your assets after your death.
  • Failure to prepare a will typically leaves decisions about your estate in the hands of judges or state officials, and may also cause family strife.

Don’t go blindly into preparing your will. It’s important you understand:

  • You can prepare a valid will yourself, but you should have the document witnessed to decrease the likelihood of successful challenges later.
  • To be completely sure everything is in order, consider having your will prepared by a trusts and estates attorney.
  • Health proxy’s and other matters should also be addressed by your attorney.
  • Both spouses should have executed wills. Provides consistency among other issues

HKMP is here to help you compile all assets which belong in your will, and where applicable, determine your share of those which are jointly owned.

Strategies To Minimize Tax Liability For Business Owners

As a business owner, you strive to run a profitable, thriving business. But you’re not in business to support the IRS, so how do you avoid paying more than your fair share? As in life, knowledge and information are your best defense, and your greatest assets for ensuring profits remain available for business expansion, including capital purchases, and increased staff.

By now, you’ve probably closed the books on 2021, and are setting your sights on a strong, profitable 2022. You still have time to take advantage of options to minimize your taxes for 2021, and implement tax efficient strategies for 2022.

Your first line of defense is to hire a knowledgeable accountant like HKMP who can help you navigate the muddy waters of the tax code, avoiding costly mistakes, and taking advantage of strategies to minimize your tax liability.

Make the Most of Depreciable Assets

If you’ve purchased tangible capital assets such as machinery, vehicles, computers, or cell phones, consider taking advantage of Bonus Depreciation and/or the Section 179 deduction. Both allow you to accelerate depreciation on new, or used equipment by deducting up to 100% of the cost in the year of purchase. You can also deduct up to 100% of a capital lease in the first year, although you spread the purchase price over multiple years.

Section 179 does contain certain limitations:

  • You must show a profit for the year
  • A maximum deduction of $1.05 million in 2021 and $1.08 million in 2022
  • Maximum equipment purchases of $2.62 million in 2021 and $2.7 million in 2022
  • Smart phones and laptops available for personal use have a 50% limit
  • Vehicles available for personal use have an $11,600 depreciation limit in the year purchased

Bonus depreciation gives you a little more leeway, especially since the limit increased from 50- to 100-percent in 2021. Be aware, the limit will begin decreasing in 2023, until it bottoms out at 20% in 2025. Also, if you take Bonus Depreciation on one asset in a class, you must use it for all assets in that class purchased in the same tax year. Here is where a conversation with your accountant is imperative so you take full advantage of the tax benefits.

Key advantages to using the section 179 deduction:

  • Flexibility
  • You can use all or part of an assets cost
  • Can be used for different classes of assets
  • Does not need to be used for all assets in a class
  • Can be used for Leasehold Improvements

Key advantages to using Bonus Depreciation:

  • You don’t have to show a profit for the year
  • No upper limit on purchases, or bonus depreciation claimed

Above all, you can use both the Section 179 deduction and Bonus depreciation in the same year. Just make sure you’re not applying both to the same asset.

There are other considerations affecting how and where you use Bonus Depreciation and the Section 179 deduction so it’s critical to discuss your options, and best course of action with your tax accountant. Some slippery slopes include:

  • Recapture rules
  • When you have to opt out of Bonus Depreciation
  • Section 179 ceilings on deductions and annual purchases
  • Changes in the allowable percentage of Bonus Depreciation after 2022

Now is the time to plan your future capital purchases, to ensure you’re taking full advantage of the tax savings both options offer.

Accelerating Depreciation on Real Estate

If you invest in real estate, you may want to consider cost segregation to help you pay little or no taxes on your investments. Cost Segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce both federal and state income taxes on their rental income.

By breaking down, and reclassifying certain interior and exterior components of a building to personal property or land improvements, you can take advantage of accelerated depreciation Instead of depreciating the entire building over 39 years for commercial property, or 27.5 for residential property, you can depreciate the portions you break out over 5, 7, or 15 years.

Let HKMP help you decide how best to apply these strategies to minimize your tax liability for 2021 and beyond. They can provide invaluable insight, so you optimize all available tax saving opportunities. They’ll guide you through the constantly changing landscape of tax law, helping you use those changes to your advantage, and avoid costly mistakes in the future.

Direct Your Personal Financial Health Towards Prosperity

Monitor Your Financial Health

Every year, you manage your health with an annual physical, eye exam, and diagnostic tests to monitor the wear and tear on your body and identify potential opportunities to strengthen and improve your overall health. Are you giving your financial health the same attention?

When it comes to your physical health, there are prescribed objectives based on your age, gender, and family history. Setting objectives for your personal finances is equally important, using similar factors. Are you financially healthy right now? To answer that, you need to measure where you are versus where you want and need to be to enjoy a healthy financial future.

Useful tools for monitoring financial health include:

  • Understanding Net Worth
  • Managing your Debt 
  • Monitoring Spending Habits
  • Understanding Market Trends and FICO Score
  • Life Changes and financial impact

These tools let you see whether you’re meeting your financial objectives. They help you identify what’s working, and where you need to improve. Now, let’s dig a little further into each tool.

Know Your Net Worth

Your net worth is the difference between total assets and total debt. This will vary based on a number of factors including where you are in your career, how recently you made a major purchase like a home, and market fluctuations. Also significant are marital status, and where you are in the cycle of life. Are you married or single? Of child-bearing age? Have or want children? Although these factors don’t directly impact net worth, they do contribute to present and future savings, investments, debt, and the amount and type of insurance you carry.

In order to fully assess your net worth, you should make two lists. List one is your assets:

  • Current value of your home
  • Cash assets
  • Investments
  • Other significant assets (vehicles, boats, vacation homes, etc.)

List two is your debts:

  • Mortgage balances
  • Loan balances
  • Credit card debt

Are You Managing Your Debt?

First, establish a baseline so you can track what’s working, and what isn’t, based on increases or decreases in net worth over time. Catching a downward trend early allows you to act sooner rather than later, to protect and strengthen your financial health. How?

Step 1, perform an annual review of:

  • Net Worth
  • Mortgage rates
  • Credit card interest rates

Step 2, compute your debt-to-income ratio by totaling monthly payments for:

  • Mortgages
  • Loans
  • Credit cards

Divide this total by your monthly gross income. While experts vary on what constitutes financial health, a debt to income ratio of 20-30% or less is a healthy goal. Though the numbers you use in this calculation only represent a moment in time, you can use them to determine how well you’re managing your debt, as well as how to improve your credit score, and borrowing ability. Excessive debt tells its own story. It is the first place to look if your net worth is trending downward. This, however, is only part of the picture.

Is your financial health bringing you wealth

Optimize Your Spending Habits

Keeping track of your spending habits allows you to monitor and control your debt-to-income ratio. You can do this by entering all cash payments, debit, and credit card charges into either a spreadsheet, or budget and expense tracking program such as Quicken, Mint, or YNAB.

The advantage a tracking program gives you versus a spreadsheet is it links directly to your bank, and credit card accounts, minimizing the time you spend entering transactions. It also lets you automatically categorize expenses, giving you up-to-date information about spending trends, and generating a Profit and Loss Statement.

The experts at HKMP can help you determine which method will be the most effective and efficient for your activity and needs.

Knowing your monthly transactions allows you to create a budget to:

  • Manage essential and non-essential spending
  • Create a savings plan
  • Create a plan to reduce debt
  • Adjust your plans as variables change
  • Review interest rates on debt to pay off higher interest accounts first, or determine where refinancing could save you money

Mortgage interest rates have fluctuated dramatically since 2000, influenced by everything from Presidential elections to COVID, and the 2008 real estate crash. According to Freddie Mac, the annual average for a 30-year fixed rate loan in 2000 was 8.05%, vs. 2.96% in 2021. Re-financing a higher rate loan may be attractive since mortgage rates have dropped every decade. However, with the increase in applications due to COVID, lenders can set higher standards.

In order to ascertain if refinancing would improve your financial health enough to justify the effort, it’s important to educate yourself on whether your debt-to-income ratio and credit score (FICO) meet current requirements.

Most banks and credit card companies allow you to check your FICO score as often as you’d like without affecting your credit. If you’re considering refinancing, or making a large purchase, it’s a good idea to check your score regularly, see how it’s trending, and review the factors affecting your score. It’s another valuable tool for gaining insight into improving your financial health. In addition, by obtaining a credit report at least annually, you can monitor your credit card activity, review listing of secured and unsecured accounts held in your name, inquires of credit institutions and other alerts which can affect your credit score .

Financial Health and Major Life Changes

Awareness of your financial health allows you to develop healthy spending and saving habits, so you can meet current and future needs. When you monitor trends, both personal and external, you’ll know when it’s best to invest in assets, or pay off current debt to improve your net worth. In addition you can pro-actively  protect yourself and your family from unexpected emergencies.

Many factors affect your personal financial health:

  • Marriage
  • Births
  • Home and car purchases
  • Number of years to retirement
  • College Tuition

Unanticipated expenses, and fluctuating markets are a reality you can’t control. Monitoring and managing your debt and spending is to your financial health like the daily vitamins you take for your physical health.

Need a financial check-up? Reach out and let HKMP help you implement a plan to ensure a healthy financial future.

Cost of Small Business Accounting Services | HKMP

Small business owners recognize that accounting and tax services are necessary to operate their business and comply with government tax laws. Unfortunately, given the difficulties many small businesses face day to day, business owners consider paying for accounting and tax services as just another cost of doing business. 

This cost is not viewed as one that could lead to increased revenues, lower expenses, and increased profits. In addition, the business’ expansion potential by utilizing additional cash flow or outside business financing is never brought to the table. 

In stark contrast to that, proactive/best in class accounting and tax services can provide small businesses with an impressive ROI (return on their investment) in addition to the standard bookkeeping and tax filing. 

While the average cost for accounting services can run you anywhere from $75 to $500 per hour (depending on the type of services needed and the scope of work) how do you measure the cost, value and ROI of accounting services for your small business?

Measuring the Cost of Accounting for Small Businesses – Is it Worth It?

Many small business owners perform their own bookkeeping services. Recording transactions and managing their financial data utilizing accounting software, such as Quickbooks. Why? Often seen as the most knowledgeable about the business, who better than the owner to record the financial transactions. 

However, the question to ask is whether that is the best use of the small business owner’s time? In most instances, the answer is No. Usually it is better for the owner to use outsourced accounting services or hire a part time employee. 

Thus freeing up the owner’s time to focus on growing and managing the business. Outsourced accounting services utilize per diem bookkeepers, accounting and bookkeeping firms or CPA firms. Your firm can choose to be billed via hourly rates or with a flat monthly rate.

What to Expect From Your Accounting Professional?

Conducting proper bookkeeping in your accounting software is always the first step. Reviewing financial statements is the critical and next step. The numbers within these financial reports tell a story about how well the business is performing or where the business is lacking. 

Digging into the details behind the numbers is invaluable to a small business owner. Small business owners need to spend time reviewing these reports. This is where hiring an accountant, preferably a Certified Public Accountant comes into play. Your CPA can assist you in evaluating your financial statements. 

As a small business owner, items a CPA can review with you are:

  • Whether the price of your product or service is too low
  • Utilizing cost accounting, if your costs of product labor for a service is too high when compared to other businesses in your industry.
  • Using cash flow, do you have the ability to finance debt to make an acquisition, helping your business grow or invest in a new revenue stream

A CPA can assist in making timely business decisions to achieve the goals of the small business owner. The guidance of the accountant/CPA does come at a cost. And what the accountant charges will vary depending on the extent and level of the service provided.

Want to Learn More About How Professional Accounting Services can Help You? Read the Articles.
Advantages of Outsourced Accounting You Can’t IgnoreTax Considerations When Retiring to Another State

Compliance with tax laws and filing requirements is another area in which small business owners seek assistance from an accounting/tax professional. This is an area in which many small business owners are misinformed. 

Generally, they follow a reactive approach to tax returns by consulting with a tax professional, prior to the tax deadline, but after the fiscal year is completed. This is usually within 2 ½ months after the close of the fiscal year. This is not the best way to approach tax compliance and planning. Your firm should switch to a proactive approach.

Conducting tax planning throughout the year will yield the highest returns. Making informed decisions during the year will impact the small business owner’s tax bill at the end of the year. 

This proactive approach provides the small business owner with opportunities to make changes during the tax year that can save/defer taxes that would be due after the close of the year. Unfortunately, once the year is over, the majority of these opportunities are lost. A proactive approach may come at an additional cost over the reactive approach. 

However, a tax professional can provide a cost / benefit analysis for the small business owner prior to beginning the engagement to demonstrate the effectiveness of the proactive approach.  

Accounting Cost For Small Business: Conclusion

As the business owner, you cannot measure the average cost for your accounting services for your small business solely by the amount you pay. You need to factor in the following:

  • Uncovered opportunities to grow the business
  • Increase in the ability to make informed and timely decisions
  • Realization of saved tax expenditures or revenue

A small business owner must change the mindset that accounting and tax services are just a cost of doing business. Instead, the owner needs to tap their entrepreneurial spirit and consider it an investment in the future of their business.

Sales and Use Tax For Online Sellers After the Wayfair Case

It has been nearly three years since the U.S. Supreme Court decision was handed down that changed sales and use tax rules for online sellers. Known as South Dakota v. Wayfair, Inc., or simply as the Wayfair case, the ruling removed the physical presence requirement for sales tax nexus.

As a result, states can now require businesses to collect sales tax on goods and services sold in the state even if the business has no physical presence in the state. The ruling primarily affects online businesses and companies that sell via mail or telephone order (sometimes referred to as MOTO businesses).

Surprisingly, many companies have yet to adapt to the ruling. Often companies have heard of Wayfair but haven’t done anything about it.

Here are some of the most common questions clients have about how they can keep up with their sales and use tax obligations.

How does a company know where to file sales and use tax?

To know if it has a filing responsibility, a company needs to understand state law and how it applies to the company’s activities in the state.

Wayfair expanded states’ ability to require out-of-state companies to collect the state’s sales tax. Now, states can require out-of-state companies to collect the state’s sales tax if the company has sufficient “economic presence” in the state.

The most common economic threshold for a sales tax requirement is $100,000 in sales or 200 transactions in a state. The traditional parameters, however, such as whether a company has an employee presence or physical locations in the state, still apply. Complicating the situation, each state has its own parameters for determining when sales and use tax needs to be collected.

How can companies be sure they’re calculating sales and use tax correctly?

Calculating sales and use tax requires an analysis of state law and an understanding of the state’s sourcing rules. Depending on the state, some transactions are taxed all the time while some are circumstantially exempt.

Typically, a state will source a sale to the jurisdiction where the good is sold or delivered. Identifying that particular jurisdiction, however, can be tricky. Most states have a tax rate lookup system that enables companies to search for the correct jurisdiction and rate. However, it can be daunting when a company has thousands of customers with different addresses. Complete accuracy would require a check of every single transaction.

Alternatively, a company can invest in sales tax automation software. Whether that software produces the correct result depends on whether the correct information was input at the start.

What are the greatest challenges for companies that want to handle sales and use tax compliance in-house?

These companies face three main challenges: personnel, cost and risk. Calculating sales tax in-house requires at least one individual who is more than just knowledgeable about sales taxes. Companies that invest in such a person risk that person moving on and taking their knowledge with them. Also, calculating sales tax isn’t really a full-time job. Returns are typically due around the 20th of the month, so there’s a lot of downtime for an inhouse sales tax expert.

In addition, compliance and research software costs may be associated with handling sales and use tax in-house. Finally, if the person handling sales tax doesn’t rise to the expert level, there’s increased risk that the decisions made will turn out to be incorrect. This may lead to taxes, penalties and interest upon audit.

What tools can companies use to help with sales and use tax compliance?

Software can help, but the more complicated the software, the more expensive it gets. Also, software needs to be set up correctly and checked often to ensure its accuracy. This requires an expert.

Another option is to outsource the function or employ a hybrid solution. For example, a company could work with a sales tax expert on a quarterly basis to make sure filings are occurring in the right states, tax is being charged when it should be, and tax is being calculated correctly and for the right jurisdiction.

Although sales tax is often the smallest item on the invoice, companies should take it seriously. States will be motivated to go after out-of-state companies that haven’t been filing when they should have.

Contact us if you’d like assistance getting a handle on your sales and use tax obligations.

5 Questions All Leaders Should Ask To Assess Cybersecurity Risk

The Cost of a Data Breach

A study conducted by IBM last year, The 2020 Cost of a Data Breach Report, put a price tag on data breaches. According to the study, the average cost of a data breach is $3.86 million. Also, 80 percent of data breaches resulted in the exposure of customers’ personally identifiable information, which is the most expensive type of breach to remedy.

Stolen or compromised employee credentials and cloud misconfigurations are the most common causes of data breaches, with 40 percent of breaches caused by these incidences. Misconfigured cloud networks increased data breach costs by half-a-million dollars, according to the study.

Cybersecurity Starts at the Top

Statistics like these make it clear that cybersecurity should be an important part of every organization’s operating plan. Ensuring a well-protected network starts at the top.

Here are five key questions leadership should ask to assess cybersecurity risk:

Question #1: Is your executive leadership informed about cyber risks that threaten the company?

Cybersecurity is about managing risk. A breach can have dire consequences. This makes managing cybersecurity risk a critical part of an organization’s governance, risk management and business continuity framework. Early response actions can limit or even prevent possible damage. Accordingly, timely reporting to leadership should be built into the strategic framework for managing the enterprise. The CEO, CIO, business leaders, continuity planners, system operators, general counsel and public affairs should be part of the chain of communications.

Question #2: What is our exposure to cyber risk, the potential impact of a breach and our plan for addressing both?

Identifying critical assets and associated impacts from cyber threats is critical to understanding your specific risk exposure. These will most likely be a combination of financial, competitive, reputational ando/or regulatory risks. Risk assessment results are key to identifying and prioritizing specific protective measures, allocating resources, informing long-term investments and developing policies and strategies to manage cyber risks at an acceptable level.

Question #3: How does our cybersecurity program apply industry standards and best practices?

A comprehensive cybersecurity program leverages industry standards and best practices to protect systems, detect potential problems and enable timely response and recovery. Compliance requirements help to establish a good cybersecurity baseline to address known vulnerabilities. However, they do not adequately address new and dynamic threats or sophisticated adversaries. Using a risk-based approach to apply cybersecurity standards and practices allows for more comprehensive and cost-effective management of cyber risks than compliance activities alone.

Question #4: How many cyber incidents is normal for us? At what point should executive leadership be informed?

Executive engagement in defining the risk strategy and levels of acceptable cyber risk enables close alignment with the business needs of the organization. Regular communication between leaders and those held accountable for managing cyber risks provides awareness of current threats, security gaps and associated business impact. Analyzing, aggregating and integrating risk data from various sources and participating in threat information sharing with partners helps organizations identify and respond to incidents quickly. Ensuring that protective efforts are commensurate with risk.

A good way to establish updated security protocols is to have an assessment of your network. This can show you where you stand and provide insights to a solid plan of action.

Question #5: How comprehensive is our cyber incident response plan? How often is it tested?

Even a well-defended organization will experience a cyber incident at some point. When network defenses are penetrated, the leadership group should be prepared with a Plan B. Documented cyber incident response plans that are exercised regularly help enable timely response and minimize impacts.

Devise a Cybersecurity Plan Now

When it comes to cybercrime and data breaches, it’s not a question of if, but when. Now is the time to devise a plan for how your organization will deal with a data breach when one occurs.

Meet with your key leaders use the questions to assess cybersecurity risk. If you don’t have adequate answers, commit to doing whatever it takes to get answers before your organization is the victim of a data breach.