Donald Sauder, CPA

Preface: Simple Agreement for Future Equity (SAFE) provides entrepreneurs with an option towards simplified financing on business ventures. While federal taxation can be a puzzle on a SAFE, the hybrid financing method has a place for certain ventures. This blog is to provide funding ideas for ventures to entrepreneurs who want to enjoy a first mile. SAFE Entrepreneurship In recent years, a hybrid financing structure for start-up businesses has been introduced to the marketplace termed “Simple Agreement for Future Equity” (SAFE). Convertible debt has been used for decades to finance entrepreneurship. The SAFE is created to improve upon convertible debt with common characteristics: Conversion provisions for an early exit from the investment SAFE’s are not classified as a debt instrument, since they do not have a maturity date, so there is a chance the SAFE never converts to equity or repayment occurs; simplifies rules of startup financing. Since it is not a loan, there is no accrued interest Simplified documentation of the uniform agreement (if agreed to) saves start-ups and investors legal fees and reduces negotiations of the terms of the investment. Their are typically only two main negotiation terms for a SAFE , 1) valuation capitalization 2) Discount Rate. The negatives of a SAFE are that they require incorporation of the investment; and investors assume all the risk since there is no priority decision to convert the debt; then founders typically receive less equity too, i.e. hinged to the negotiation of SAFE terms. While SAFE tax treatment can be a puzzle of objective determinations and subject to tax court rulings, typically SAFE financing is more an equity investment than debt for federal taxation and highly sensitive to facts and circumstances; individual ruling differ. SAFEs are an ultimate gray area of tax codes. Why a SAFE is advised Most large business ideas are fueled with cash. A SAFE provides…

Preface: If you’ve never respected analytics on tax decision before, you’d be advised to begin today. 2008 is long-forgotten for the majority.  Analytical financial management in your tax planning for all entrepreneurs is well-advised for a business, as this blog exemplifies, for successful continuous financial performance. Tax Planning with Analytics Tax planning as an ultimate objective should be a balanced approach of analytical and financial management towards tax expense minimization. If you’ve been an entrepreneur for years, or are new to business, you may already have workable ideas to minimize federal and state taxes and keep more for yourself. In this blog, we’d like to consider a financial management concept that too many entrepreneurs omit, or have never considered when managing their tax planning – debt management. As your business develops this concept is vital. Sole proprietorships are likely not the subject of this blog, but more so businesses with 5 to 35+ employees. Maybe your advised to borrow on your line of credit, or call your friendly banker for a term loan on that new truck, machine or other high tech equipment to reduce this years taxes. Here’s a conversational excerpt. “Hey Joe, if I purchase that new gadget for $75,000 what will it save me in taxes” entrepreneur Ulrich inquiries? “Well, you’re in a 30% tax bracket and therefore you will save $22,500 in taxes”, accountant Joe responds. “Given that the business tied up all working capital increases during the year in expansion of employee overhead and a few new vehicles” Joes says, “we’ll need to finance most of the $75,000 to keep our liquidity levels in the green”. “No problem” Ulrich responds, “I’m sure banker Jerry will give us the credit”. “I’ve can put that $22,500 to better use than the IRS”. What questions arise from the…

Preface: This blog outlines the proposed changes in the tax laws from the Tax Cuts and Job Acts introduced by the House on November 2. Summary of Proposed Tax Legislation for Individuals and Businesses The House introduced a tax revision to individual and business tax codes on November 2, 2017. The 400+ pages of the introduced tax plan, propose lower tax rates for both business and individual taxpayers. In addition a change to numerous tax credits, and other tax provisions in the plan are for individual taxpayers relevant to say itemized deductions and exemption modifications. While the tax bill has additional hurdles to clear before passage to law, we think it relevant to keep you apprised of tax code revisions pertinent to your tax filings looking towards 2018. Individual Highlights Firstly, individual tax rates are proposed to be simplified to four rates in 2018, e.g. 12, 25, 35, and 39.6 percent. Individual tax payers would be in a 12% effective rate up to $90,000 MJF income or $45,000 filing individually. The 25% bracket would be from $90,000 – $260,000 for MFJ filers, and $45,000 – $200,000 for individual filers; over a $1m would be taxed at 39.6% for MFJ filers. The child tax credit would increase, with a $300 credit for non-child dependents. The proposed plan does not change taxation of qualified dividends or capital gains, nor the Affordable Care Act (ACA) net investment tax or additional Medicare taxes. A joint proposal was filed on November 1, to repeal the employer shared responsibility and individual responsibility required form the ACA. Standard deductions with the plan are proposed to increase 100% to $24,200 for MFJ filers and $12,200 for individual filers. This is designed to result in fewer itemized deductions. With the increased itemized deduction, it is believed that charitable contributions…

Preface: The Ocean Exploration Trust was founded in 2008 by Dr. Robert Ballard—best known for his discovery of RMS Titanic’s final resting place and as a National Geographic Explorer in Residence—to engage in pure ocean exploration. Our international programs center on scientific exploration of the seafloor with expeditions launched from Exploration Vessel (E/V) Nautilus, a 64-meter research vessel operated by the Ocean Exploration Trust. In addition to conducting scientific research, we offer our expeditions to explorers on shore via live video, audio, and data feeds from the field. We also bring educators and students aboard during E/V Nautilus expeditions, offering them hands-on experience in ocean exploration, research, and communications.   What is next, after every square inch of the globe is under surveillance? Is there a business purposes here, is this luxury entertainment? Explore the Ocean LIVE from your smartphone. https://nautiluslive.org/    

Preface: What is the business future of antivirus software? Beyond what most imagine is this guess. Can you imagine a $1T+ business expense to the globe from a computer virus(s)? If Election are now subject to computers, what really does this say about the future of computer security and therefore antivirus software? What about the development of the IT insurance industry? Will you pay say a $5 or $20 fee a month to protect your personal data in a decade?  More importantly, if you have customer data on your computer, say credit information or ACH information, does your business have cyber insurance? If you don’t run your business with a pencil and paper, here’s to your cyber awareness. Antivirus Software

Preface:  Tax codes and their implications to partnership or operating agreements may be like deciphering hieroglyphics to some entrepreneurs yet the implications of a well-written tax oriented ownership agreement is worth the investment. Your CPA can help you when writing a partnership or operating agreement by working with your attorney to keep you in compliance with tax laws. Here are examples of how they can add value. A CPA Can Provide Valuable Opinions on Partnership or LLC Agreements Credit: Donald J. Sauder, CPA Business’s taxed as a partnership filing a Federal Form 1065 for tax purposes always involve more than one individual or entity in ownership. The “agreement,” whether a partnership agreement for a general partnership (GP) or limited partnership (LP) or an operating agreement say or an LLC, outlines the business rules and legally describes the business relationship with rights and responsibilities among ownership. Often an attorney tailors these agreements as “boiler plate” papers that may omit certain key characteristics or be ambiguous on certain details of the business relationship, e.g. distributions of cash, buy/sell terms, earnings or loss allocations or management oversight. While a CPA cannot write a partnership agreement or operating agreement, (it would be prohibited as unauthorized practice of law or UPL); they can provide valuable insights into aspects of the business agreement document. There is a story where Noble Prize winner Richard Feynman was visiting a Tennessee plant where the atomic bomb was to constructed. Feynman was confused about a unique symbol on the blue prints, and not being an expert on reading design prints, he needed to know what he did not understand. As an expert authority on the project he took a risk and ask “what happens if that value gets stuck”. He feared the answer might be a response that would make…

Preface: Why is working capital management important to doubling a business value? We’ll quote a conversation of Jesus at the table with one of the chief Pharisees “For which of you, intending to build a tower, sitteth not down first, and counteth the cost”. Working capital is the science of cash flow management – an important fuel to any business craft. Investing to Double Your Business’s Value – Part IX Appreciation for astute working capital management is pillar nine of doubling your business’s value. Working capital techniques are vital to any entrepreneurial business; the difference between current assets and current liabilities is working capital simplified. A business with deep pockets, has plenty of working capital. Yet too many entrepreneurs do not understand the term working capital, nor the value of expert working capital management. (If you’re an entrepreneur and your business advisor or CPA has schooled you in working capital management — please take the time to email me; no response is a vote.) Cash flow management is a more frequent term applied to the science; but working capital management is the appropriate application of cash management, i.e. trend setting. Working capital is the fuel of business. Often your lead technicians, sales team, production supervisor, shop supervisor, or office staff are not attending to working capital or cash flow management, and yet calculating and maintaining optimal levels of working capital is imperative, and as important as good customer service, or product quality, for any business. Working capital can be segregated into level one and level two balances. Level one working capital is a minimal balance of working capital required at all time. Dip below that level = fuel lights. While a business current ratio measures working capital metrics, it doesn’t give you a level one or level two balance requirement. Level two is…

Preface: Are 10 Billion people in the word at 2050? Someone is planning ahead; autonomous crop pickers, weekly space images; analytics software with a tsunami of data, vertical farms, scientific research on CRISPR, cameras analyzing chickens to prevent 90% of poultry production problems; and climate catalogs for local production of specialty produce. Is this really the future of farming; a SimFarm reality?  

Preface: In business, journaling is useful for gathering data that can be applied in the future too. If you understand the purpose of reflections about business, and the value of working on your business, and not always in it, you’ll do well to read and apply the Harvard Business Review advice from January of 2016. Investing to Double Your Businesses Value – Part VIII Credit: Donald J. Sauder, CPA Investing to Double Your Businesses Value – Part VIII is not about history being written in Word documents with auto saved features; it’s about you, having the opportunity to reflect on, and write, your own history. Let’s reflect for a moment on a Harvard Business Review article from January 2016, that outlines the value of advised journaling in business leadership: Research has documented that outstanding leaders take time to reflect. Their success depends on the ability to access their unique perspective and bring it to their decisions and sense-making every day. Extraordinary leadership is rooted in several capabilities: seeing before others see, understanding before others understand, and acting before others act. A leader’s unique perspective is an important source of creativity and competitive advantage. But the reality is that most of us live such fast-paced, frenzied lives that we fail to leave time to listen to ourselves. Connect to purpose. All too many leaders have a surfeit of opportunities but suffer a paucity of meaning. Asking questions that bring us back to what is most meaningful to us personally, as well as to what we believe is most important for society and the planet, deepens our sense of purpose. For example, you might ask: What is my daily work? What is my life’s work? Similarly, reflecting in your journal on inspirational words from world leaders or wisdom traditions can act as an antidote to superficiality and…

Preface: Looking at your business through the eyes of prospective buyers, while working to double business value will likely improve profitability, (while you still own your company), and help you locate areas that can increase value from a better understanding of how value is created, sustained, and successfully transferred i.e. doubled. Investing to Double Your Businesses Value – Part VII Credit: Donald J. Sauder, CPA Exit planning for life after business, is a pillar to successful business strategy. Only the best of the best entrepreneurs get it right. You’re advised to exercise a plan to think about exit planning early for your business from the perspective of prospective buyers, even if you have only been in business a few years. It’s a necessary step to double business value, not to say managing your business like a great entrepreneur. Exit planning usually is accomplished with a sale to family or a third-party, i.e. key employee. It is more than signing on an articulate will, or grooming a family member successor. The sooner you start planning a business exit, the more options, and opportunities your business will hold to harvest optimal value, and transfer business wealth successfully in an ownership succession transfer. Planning your exit from a business requires more than thinking through a buy/sell agreement with an advisor, or obtaining continuity insurance. Although some entrepreneurs think exit planning is only necessary if estate or trust planning are required to effectively distribute business wealth, effective exit planning in the scope of doubling business value, is strategizing your business from the perspective of potential buyers. In a third-party sale, you can have an enterprise sale or partial sale. A partial sale typically will result in the entrepreneur continuing to own from 80% to 20% of the business equity. Exit planning is often advised three to five…