Biden's Tax Plan

Reviewing the Biden Tax Plan

With the election in November creeping closer, the campaign season is now in full swing.  And the closer we get, the more details & campaign promises start to emerge from the candidates.

Biden’s tax plan has mostly flown under the radar in the national media thus far, thanks to the global pandemic.  But given that he has at least a 50/50 shot at winning, I thought it made sense to devote a post to what he has in mind if he does win the Presidency.  If elected, we could see some substantial changes to the tax code in the next few years.

Here’s the rundown.

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Buy/Sell Agreements Make the Best Insurance Policies

Buy Sell Agreements Can Be the Best Insurance Policies

Risk management is a pretty common objective for small business owners.  Once a business becomes viable, protecting what you worked so hard to build is usually a priority.  As COVID-19 has shown us, so many things could go wrong in the life cycle of a small business that it makes sense to limit risk wherever possible.

The first place many business owners will look is to the insurance industry.  Errors & omissions, malpractice, general liability, and standard business owner’s policies can be great ways to limit risk in specific areas of your business.  Insurance usually won’t help you much with planned or unplanned successions, though.

What happens when it’s time to retire?  Who might be willing to buy your stake in the business?  How do your partners feel about that?  How will your business be valued at the time?  And what happens if you’re forced into retirement involuntarily?

This is where buy sell agreements come into play.  They may seem mundane, but buy sell agreements are an important component of risk management in any small business.

In our financial planning practice there are a few common mistakes we see with buy sell agreements.  This post will cover those mistakes, as well as the standard provisions we tend to see in effective agreements.

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Your Business Is An Investment

Your Business is an Investment

Quick anecdote to kick off today’s post.

In a small town in the midwest there are two plumbers: Jim and Jason.  Both are 50 years old, and both are married with two kids who will someday go to college.

Jim and Jason are both great at their trade.  They are available when needed, charge a fair price for stellar work, and are well liked in the community.  They have the exact same number of customers in any given year, and both produce the exact same amount of revenue.

Their interest in building their respective businesses is where they differ.  Not from a revenue or growth standpoint, but from an operational standpoint.  Hiring & training support staff and new plumbers.  Systematizing and building process efficiencies.  Jim is hell bent on streamlining his business in an attempt to organize & simplify his work.  Jason is uninterested – he cares more about the customers and the work, and doesn’t mind when his professional world is hectic.

Now let’s fast forward 15 years.  Jim and Jason have brought in the exact same amount of revenue over the last 15 years.  But Jim has been far more efficient with how that revenue has been distributed.  He has systems, procedures, and operations built out to where his only duty is jumping in the car and driving out to see his customers.  Because of that he’s been free to spend more time with his family, and has packaged his business in a way that’s attractive to buyers.  He could sell to his employees or another party, and reap the value of the enterprise value he’s built.  The funds will contribute to his lifestyle in retirement.

Jason is ready to retire, but hasn’t been able to squirrel enough funds away to stop working.  He’s not been able to delegate much of his work to employees, and has virtually no systems or processes in place.  He realizes that in order for someone else to take over his business they would need to spend time – at least a year – working side by side to understand how he has everything set up.  Jason’s had to work twice as hard to produce the same revenue as Jim.  He’s enjoyed far less time with his family and his health has suffered.

It’s not surprising that a tightly run business creates more value.  What is surprising to many small business owners is the fact that failing to tighten up operations could be the difference between capitalizing on years of hard work by selling versus walking away with nothing.

Which gets us to the point of today’s post: your business is an investment.

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How to Get Your PPP Loan Forgiven

How to Get Your PPP Loan Forgiven

We’re now about six weeks into the CARES Act and in round two of the Paycheck Protection Program.  The $310 billion allotted to the program in round two is beginning to dwindle, but has lasted longer than most bankers expected.

There could be another round of stimulus that replenishes the program over the next few months, of course.  There seems to be widespread effort in Washington to ensure that businesses that need PPP funds are able to get them.  Who knows whether that will eventually happen.

For many of the businesses the most pressing question is no longer how they can access the program & obtain funds to keep their operations going.  It’s what must I do to have this loan forgiven?  This post will cover what we know so far.

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The CARES Act Revisited

The CARES Act Revisited: Updates to the Paycheck Protection Provision

A lot has happened in the past week.  And now that we’ve had an opportunity to read through more details of the Paycheck Protection Provision, it’s become clear that the program’s rollout will be messy.  In fact, it already is.

Last week I wrote a post outlining a few of the provisions in the CARES Act meant to provide economic relief to small businesses.  What we’ve come to realize in the last few days is that the Treasury Department has a great deal of latitude in how these programs will actually be offered.

For example, the permits the Treasury Department to issue up to $349 billion of loans to small businesses through the Paycheck Protection Program.  Businesses with fewer than 500 employees can apply through an SBA approved lender for loans up to either 2.5x their average monthly payroll over the previous year, or $10 million (whichever is less).  The bill stipulates that the pay back period for the loans may be stretched out to up to 10 years, with an interest rate no higher than 4%.

Then, early last week, the Treasury Department stepped in and communicated that all loans will have a two year amortization period and 0.5% interest rate.  And on Thursday, Secretary Mnuchin announced another interest rate revision to 1%.

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Unpacking the Coronavirus Stimulus Bill

Unpacking the Coronavirus Stimulus Bill

As you may have heard, the Coronavirus stimulus bill was signed into law by president Trump last week.  The package is called the CARES Act, and provides over $2 trillion of economic stimulus across a variety of channels.

My first thought here is sheer size of the package.  $2 trillion is a TON of money.  While at some point I’ll look into how the package will be paid for, I’ve spent more of my energy recently learning what’s in it.  The bill includes a mix of forgivable loans to small businesses, bailouts to corporations in certain industries, and checks mailed directly to taxpayers falling under a certain amount of adjusted gross income.

For many of our clients at Three Oaks Capital, there is urgency surrounding the relief opportunities for small businesses.  This post will cover the four sections I think are most relevant.  I’ll circle back and try to cover implications and opportunities for individuals in a subsequent post.

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Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

Where Do We Go From Here? Market Thoughts & The Risk of Financial De-Leveraging

Well that escalated quickly.  We are now officially in the second fastest bear market on record.  Bear markets become official when stocks fall 20% or more from their peaks.  Ordinarily this takes months to play out.  Bad news comes out, stocks sell off a bit.  Everyone goes home, thinks about it, and comes back the next morning.  More bad news comes out, stocks fall a bit further, and so on.  Here’s some data from Marketwatch on how long it typically takes to enter a bear market:

Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

With the Coronavirus driving the U.S. and much of the world to shelter in place, our economy has come to a screeching halt.  Some forecasters are guessing that we’ll see a 5% drop in GDP this quarter, others are predicting as much as a 30% drop.

Whatever camp you reside in, the picture is not pretty.  Markets did not take long to notice.  Whereas it takes on average 136-137 trading days to enter a bear market based on the data above, it only took us 19 to get there this time – the second fastest on record:

Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

So where do we go from here?  A stimulus package is just about to be passed (finally).  Markets rebounded as much as 12% yesterday and another 4.5% today.  Even though the public health picture still looks bleak, we are starting to wrap our heads around how long the pandemic may continue.

Here are a few things I’m reading and my thoughts on what happens next.

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Obtaining a Mortgage as a Business Owner

How to Obtain a Mortgage as a Business Owner

If you’ve bought a house in the past, you are probably familiar with the underwriting process involved when obtaining a mortgage.  You might even have nightmares about the reams of paperwork you had to provide to your mortgage lender to get approved.

Being approved for a mortgage is not an easy process.  For business owners it’s even more complex.  Typically mortgage lenders provide pre-approvals based on some combination of your W-2 income history, pay stubs, or an offer letter from an employer.  Unfortunately for business owners, these sources may not show consistent income a lender could use in a standard approval.

So what do you do?  Recently I had Maggie Hopkins, a local Sacramento mortgage lender, on the podcast.  Since she shared so much valuable information on the episode (and because I love re-purposing content), I thought I’d summarize the important points on the blog this week.  If you own a business, here’s what you need to know about obtaining a mortgage.


 

The Typical Mortgage Underwriting Process

Like any bank, mortgage lenders want some assurances that they’re going to get their money back, plus interest, before giving any to you.  So, when you walk into your mortgage lender and ask for financing, they’re going to ask for your tax returns, pay stubs, credit reports, and any other documents that might be relevant.

If you’re an employee collecting a w-2 salary, lenders may be willing to assume that income will continue indefinitely.  They’ll also take your other debt into consideration, and use some type of debt to income ratio to determine how much they’re comfortable doling out.

If you don’t have a w-2 salary that doesn’t mean you can’t get a mortgage.  But it does likely mean that you can’t get a conventional mortgage, that meets the down payment and income requirements established by Fannie Mae and Freddie Mac.

It also means lenders will look at your other sources of income.  And for self-employment income, lenders historically use the average of your last two years.  Doing so helps them confirm that your business profits are not a short term “flash in the pan” that might disappear next month.

This can be less than convenient, since net profit is usually the only metric that matters.  Any type of fluctuation in bottom line profits in the last two years could impact your pre-approval amount or your eligibility entirely.  Funding a big expansion or other expenses that might crimp profits over a short period of time tend to work against you.  So do gray area personal expenses you might be running through your business: home office deductions, cell phone bills, etc.  Anything that depresses your income, while ordinarily “good” for tax reasons, may mean you’re not able to obtain as much financing as you’d like.

 

Other Mortgage Options for Business Owners

So what are your options if the last two years haven’t been stellar?  An obvious answer would be to wait it out.  Take a two year period where you cut expenses as much as possible in order to prove adequate self employment earnings.  Or simply grow revenues.  (Although I should add, from a business management standpoint, growing revenues is not always the answer, and can lead to more pain than gain).

Another option is to pursue what’s called a “bank statement loan”.  Whereas banks have been exceptionally rigid with their underwriting policies and standards since the mortgage crisis in 2009 (for good reason), they are starting to loosen more recently.  Some lenders are beginning offer mortgages based on the deposits to your business bank account – not your tax returns or pay stubs.

As Maggie shared with me, these are typically 5, 7, and 10 year adjustable rate mortgages (ARMs).  Which isn’t quite as appealing as a borrower in this low interest rate environment as a longer term fixed rate mortgage would be.  Nonetheless, it can be very helpful.  And you can always refinance later if your business income becomes more consistent over the few years after obtaining one.

 

Down Payments

Conventional mortgages require 20% down payments.  Coming in with less than amount isn’t a deal breaker, but it means one of two things:

  1. You need to obtain an FHA loan and private mortgage insurance
  2. You need another type of unconventional (non-conventional?) loan on less favorable terms

FHA loans can be extremely helpful.  You can put down as little as 3% since the FHA is guaranteeing the mortgage.  The downside is that you have to pay private mortgage insurance (PMI), which can be anywhere between 0.55% and 2.25% per year.  That’s added to the interest you’d pay on the loan anyway.

The alternative is to work outside the bounds of conventional loans.  Realistically this means letting your mortgage broker go to work for you.  Mortgage brokers can work with any number of different lenders, and should have a good understanding of which banks tend to offer the best terms for your situation.  While you don’t necessarily need to pay private mortgage insurance if you have less than 20% down, do expect to pay a higher interest rate.  Maggie also shared with me that while it’s possible to obtain a bank statement loan with less than 20% down, you’re probably not going to like the rate & other terms.

 

What to Make of Points, Rates, Closing Costs, and other Terms

Then there’s the question of points, rates, closing costs, and terms.  One of the biggest takeaways I got from Maggie was that mortgages are one big package deal.  Lenders try to ascertain your capacity and willingness to pay off the mortgage, and then extend an offer accordingly.  Better credit scores mean that you’ll get more favorable terms.  Negative marks on your credit history mean you’ll end up paying more.

From there it’s all negotiable.  You can squeeze your annual interest rate down by buying points & paying more up front.  Which could be a good idea if you’re certain you’ll stay in the house for the entirety of the loan.  But that may not be your best option.  At the end of the day the rate, closing costs, and term should all be aligned with your objectives for the property.  If it’s a flip, pick the loan with the lowest possible down payment and closing costs.  If it’s your forever house, scrutinize the rate.

At the end of the day, your mortgage broker’s job is find a lender to offer you a loan on the most favorable terms and the right structure.  There are a ton of moving parts in the mortgage world.  Just because you don’t have 20% down or two years of schedule C income doesn’t mean you can’t get into a house.  Even if you own a business that doesn’t produce consistently high self-employment income.

My Top 5 Year End Tax Planning Tips

My Top 5 Year End Tax Planning Tips

Happy holidays!

It’s now December, and if you blink hard enough (or drink enough egg nog) you’ll wake up & find yourself in January of a new year.  For many people, holiday office parties & Christmas shopping comes hand in hand with a few year end financial chores.

There are plenty of these financial “chores” you could occupy yourself with if you chose.  But since December 31st coincides with the end of the tax year, today’s post will cover my 5 favorite year end tax planning tips.  These are five of the most common year-end opportunities I see to reduce your long term tax liability.

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