I want to establish a traditional individual retirement arrangement (IRA) for my spouse and I need additional information. What is the most I can contribute to a spousal IRA during the tax year?

Here was my response to the doctor:

* If both you and your spouse work and both have taxable compensation, each of you can generally contribute to a separate traditional IRA. In addition, subject to certain limitations, if you file a joint return and the amount of your taxable compensation is less than your spouse’s taxable compensation, each of you can contribute to a separate traditional IRA based on your combined compensation, even if one of you has little or no compensation

* The amount that you can contribute to each IRA is subject to a limit that can be found in Publication 590.

* Your total contribution to both your IRA and the spousal IRA for the year is limited by certain factors such as your taxable compensation, contributions to a traditional and Roth IRA, and your age.

If you are not sure how much you should contribute towards your retirement plan for 2011 or 2012, feel free to send me an email at Salim@Omargroupcpa.com and I can help you through the process.

Thanks

Salim Omar, CPA

New Jersey CPA firm

55.5 cents per mile for business miles driven

23 cents per mile driven for medical or moving purposes

14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method or after claiming a Section 179 deduction for that vehicle.

In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

If you have any questions about this topic or other business tax deductions, feel free to contact my office at 732-566-3660 or send an email to Salim@OmarGroupCPA.com.

Hope you had a great Thanksgiving Holiday. Mine was spent in Atlanta, GA with family and friends. It was very enjoyable and we all had a blast.

With the year end rapidly approaching, I have devoted this blog post and the next one to share with you the top five mistakes that I see many business owners make that you should be mindful of. Here they are:

1. Thinking that tax planning can wait until the following year

As we approach the year end, you should already be thinking about the following April 15. It is essential to schedule end of year meetings with your CPA and financial advisor to plan year end strategies and to determine the amount of your tax liability or tax refunds. In the event of a tax liability, it will allow you to prepare for the taxes owed well in advance. The mistake to avoid is to not defer meeting with your team of professional advisors until next year.

2. Ignoring December 31^st when making major purchases

If you are planning on making equipment purchases, either by buying new equipment or any other purchases, make sure you always have tax savings in mind. Purchases made before December 31^st may save you on your 2009 tax bill. However, if you make a purchase in January or February 2010, you will have to wait more than an entire year to see the tax benefits.

3. Making decisions based solely on “tax” consequences, not “economic” consequences

This is a big one. Although making purchases before the end of the year will save you on your taxes sooner, it is only worthwhile if you actually have the cash flow to afford it! Small business owners often apply for loans to purchase equipment, assuming they are justified by the tax write-off. But, if you don’t have the money to pay off the loan in a timely fashion, it will cost you more in the end. Tax benefits should always be considered secondary to your small businesses’ cash flow capabilities. (I see many small business owners not cognizant of this fact and thus have dedicated one of my upcoming emails to share with you ideas to enhance the cash flow in your business.)

The rule to consider is that 10% of your net income (or 1% of your gross income) should go towards financial investments for your future, no matter what your income is. While this may initially seem like a significant amount to those who are not currently saving, once you begin to pay yourself first, you will hardly notice that the money is missing from your cash flow. You can also start saving slowly. What I mean by that is you begin with say 2%, then increase to 5% and then within a few months, increase to 10%. For individuals and families who are currently spending their entire net cash flow, staggering the amount saved over a few months will ease the transition phase.

Don’t wait for the end of the year to add to your retirement accounts. If you do this, you are unlikely to set aside the same amount you would if you started early and made regular contributions. For example, if you wait until the end of the year to save for your retirement, it is very possible that you would have used the funds designated for your financial future for other purchases instead. In fact, most people have a hard time with financial discipline when they can see their savings in their bank account on a daily basis. It is important to remember that a small business is a cash generating asset to take wealth out of, not just to have wealth locked up in. You work hard for your cash and your cash should work just as hard for you.

You must not settle for whatever’s left over! Others get what’s left over after you are properly paid, and if the leftovers aren’t enough for the others, reduce staff and cut expenses. If that won’t cut it, do the mercy killing now, not later, and move on.  You must not con yourself into nothing now for later. If you can’t take at least 1% off the top now, there won’t be any later. Consider this statement strongly and review your current cash flow statement for areas that could be improved. Again, it should not be challenging to take 1% of your business’s cash flow for your future retirement savings.

Let me share with you an interesting fact you may not be aware of. The personal savings rate in the United States has been approximately 4% since the late 1980s. That is half of what it was in the 1970s, and substantially less than other developed countries. The Japanese save at least three times the U.S. rate, the Germans double. At this rate, our nation’s wealth will be considerably behind other nations over the next decade.

Many retirement plan options allow for deductions for either the small business owner’s gross annual income or for the business. This presents a tax benefit in addition to the benefit of building personal wealth. When determining which course of action is the best for you to take, you should outline the benefits of each retirement plan, the process of establishing them and the ultimate outcome of your financial planning. Similarly, your company flexible savings account can serve as a useful tool to pay medical expenses and dependent-care expenses with your pretax dollars.

Understanding your financial benefits as well as those of your business can often be enough to compel small business owners to pay themselves first. So, discuss savings concepts with your CPA in your next meeting and work to establish a regular savings program that works for you and your business. Before you know it, you will have begun to build your future financial freedom.

The sad fact is most business owners have no idea what their numbers are. And that means there’s no good reason they should expect their business to improve – because they lack a way to measure the results!

Perhaps the most important financial indicator to know is the net cash flow of your business on a monthly basis. When cash runs out, the business most likely has to resort to closing its doors. If cash is termed by many as “king” then net profit certainly deserves the title of “queen.” To illustrate its importance, here’s a personal example. I work really hard, but I stopped working for free a long, long time ago. I insist on generating profit. I track and measure it constantly. I’m very big on keeping score.  I’m also very aware that bigger is rarely better, unless running a company up for sale or a public offering.

Very few small business owners spend enough time analyzing, what parts of their businesses…what services….what clients….what geographic territories….etc., are most (net) profitable vs. least (net) profitable. They let low profit stuff consume the same resources as high profit stuff. They over spend money in overly fancy offices, addresses, staff, etc to impress people without profitable purposes.

The two important questions that should be asked are:

•    How does this contribute to NET?
•    How much does this contribute to NET?

Every justification I hear for wanting to do things with little or no net profit are invalid.

The other financial indicator that many small business owners don’t do an adequate job of understanding and tracking is the lifetime value of the customer. The lifetime value of a customer is one of the most valuable things you as a business owner can know. It is the total profit of an average client over the lifetime of his or her patronage.

Example:  Let’s say that your average new customer brings you an average profit of $100 on the first sale. He or she repurchases three more times a year, with an average profit of $150 on each reorder. Now, with the average patronage lasting two years, every new client is worth $1,000: {$100 + (3 x $150) + (3 x $150)} = $1,000.

Why is this calculation so important?

By knowing what the value of an average customer is, you can then determine two things:
- How much you can afford to spend to acquire a new customer
- How much you can afford to spend to keep an existing customer from leaving you and purchasing from a competitor.

The other extremely important number is the total cost per lead. Most small business owners don’t know what this amount is for their business.

Let me give you an example: If you spend $500 on an advertisement in a magazine and that ad generates 5 qualified leads, then your cost per lead is $500/5 = $100 per lead. Once you know this number, it enables you with the ability to measure and compare the ROI from each advertising initiative you do.

From the above example, if you convert two customers, a 40% closing, then your cost per sale is $500/2 = $250. The cost per sales is the other indicator most small business owners don’t keep track of. If the lifetime value of your customer is $1,000, would you spend $250 to get that customer? How about $500? How about $750?

The response should be a resounding “yes.”

You would find all the media out (some examples of which are coupon advertising, direct mail, newspaper, Internet, etc,) that would allow you to do that.

Here are three other financial indicators that you should measure and keep track of:

1.    Average transaction size or average client fees per year: Once you know this number, you can find ways to increase it through up-sells, cross-sells, price adjustment, etc.
2.    Number of customers for the day / revenue of the day:  Another important number to keep track of.
3.    Capture of names/addresses/birthdays of new customers: A prospect may not purchase from you today but because their name is in your database and you are keeping in touch with them, they may become your customers in the future. By collecting pertinent information, you can keep in touch with your new customers and prospects.

Unfortunately many small business owners I talk have not identified the key financial indicators in their business, hence can’t measure and improve on them.