FAQ’s

Can I take tax deductions for education I pay for that helps me in my work?

Yes if it’s to maintain or improve skills in your present job. No if it’s to meet minimum requirements of that job, or to qualify to enter a new business. Employee’s deductions are subject to the 2% floor on miscellaneous itemized deductions.

 

 

Must I pay tax on my employer’s payment or reimbursement of my education expenses?

Maybe not. Starting in 2013, up to $5,250 can be tax-free. Exemption can apply to graduate level courses.

What’s the tax relief for education savings bonds?

Interest on redemption of Series EE bonds is tax-exempt if you redeem them in a year you have qualified education expenses. Exemption depends on the amount of your income in the year you redeem the bond.

What tax treatment applies if my student loan debt is canceled?

Usually you’re taxed on the unpaid loan balance. But tax can be waived if the debt is canceled because you participate in some approved government or other program.

Can I deduct student loan interest?

Yes, as home equity loan interest, not as student loan interest. In this case there’s no income ceiling on your deduction, and certain other student loan limits don’t apply.

What tax benefits are available for continuing/adult education for a sideline hobby?

If it’s not part of a degree or certificate program, and not work-related, the limited deduction (up to $4,000 in 2013 for qualified tuition and fees) may be your only option. The deduction amount depends on your income. Some sideline interests might qualify for exclusion if paid for under an employer-provided education assistance program.

What tax deductions are available for college education?

You can choose to take a tax deduction rather than the college tuition tax credits noted above. A tax deduction is usually taken if income is too high for the tax credits. The tax deduction reduces your amount of income. The tax credits reduce the amount of tax you pay.

A $4,000 above the line deduction for qualified tuition expenses was extended through tax year 2013 by ATRA. Deduction up to $4,000 is allowed on if taxpayer’s (modified) adjusted gross income is $65,000 or less ($130,000 or less on a joint return). If taxpayer’s modified adjusted gross income is more than $65,000 but not more than $80,000 (more than $130,000 but not more than $160,000 on a joint return), deduction is allowed up to $2,000.

Business expense deduction is allowed, without dollar limit, for education that serves the taxpayer’s business, including employment. Deduction is also allowed for student loan interest. A taxpayer may not take more than one deduction for the same item.

 

 

Can a Roth IRA be used for education?

Yes, generally under the same terms as traditional IRAs. Also, ordinary income tax is somewhat less likely, or may be smaller in amount, than with traditional IRAs.

Can my traditional IRA be used for education?

Yes. The 10% penalty on withdrawal under age 59-1/2 won’t apply, but ordinary income tax will apply to at least some of the withdrawal.

How do Coverdell Education Savings Accounts (Section 530) and Qualified Tuition Plans (Section 529) differ?

In several major ways. Section 530 plans limit investment to $2,000 a year per student; 529 plans allow much larger investment. Section 530 plans allow wide choice of investment; 529 investment choices are limited and conservative. Section 530 is a single nationwide program, whereas each 529 program is different. Though both are available for higher education, Section 530 can also be used for primary and secondary education. You are free to use both for higher education for the same student.

What are Qualified Tuition Programs (QTPs)?

Also called Section 529 plans, these college savings plans have been established by almost every state, and some private colleges. You invest now to cover future college expenses, by contributing to a savings account or buying tuition credits redeemable in the future. Investments grow tax-free, and distributions to pay college expenses can also be tax-free. You may choose any state’s plan, regardless of where you live.

Tip: Even if a QTP is used to finance a student’s education, the student or the student’s parents still may be eligible to claim the American Opportunity Credit or the Lifetime Learning Credit.

How can my family make best use of a Coverdell (Section 530) program?

There can be a number of Section 530 accounts for any student. Various family members, such as grandparents, aunts and uncles, and siblings–and persons outside the family–can contribute to separate accounts for a student.

The original student beneficiary for the Section 530 account can be changed to another family member, such as a sibling–for example where the original beneficiary wins a scholarship or drops out.

Funds can be rolled over tax-free from one family member’s Section 530 account to another’s–for example, to avoid distribution when the first family member reaches age 30.

The education tax credit (where applicable) can be waived in favor of tax-free treatment for Section 530 account distributions.

How does a Coverdell (Section 530) Education Savings Account work?

An education IRA differs from other IRAs in the following ways:

  • No more than $2,000 a year can be contributed to any beneficiary of a single 530 account in any year, and contributors are subject to income limits. Modified AGI cannot exceed $110,000 ($220,000 joint filers).
  • Contributions aren’t deductible and excess contributions are subject to penalty.
  • Withdrawals are tax-free to the extent used for qualified education expenses.
  • Contributions can’t be made after the student reaches age 18, and the account generally must distribute all funds by the student’s age 30.

Unlike other plans, 530 accounts may be used for primary and secondary education, including paying for room and board of children in private schools, and for computers and related materials whether or not away from home.

Do living expenses while in school qualify for tax relief?

Sometimes. Examples are for relief provided for Coverdell Education Savings Accounts (Section 530 programs), for Qualified Tuition Programs (Section 529), for withdrawals from traditional and Roth IRAs, and for student loans.

Do any tax planning considerations apply to the education tax credit?

For an academic period (quarter, semester, etc.) beginning in the first 3 months of a calendar year, you can pick which year to pay the expense and take the credit. That is, pay in December 2012 and take the credit in 2012 or pay in, say, February, 2013 and take the credit in 2013.

Your family may be able to save tax by foregoing the education credit and taking an available exemption for program distributions instead.

 

 

What is the Education Tax Credit?

Two tax credits are available for education costs – the American Opportunity Credit (formerly the Hope Credit) and the Lifetime Learning Credit. These credits are available only to taxpayers with adjusted gross income below specified amounts, see Income Phase-Outs, below. Both credits were extended until December 31, 2017 by the American Taxpayer Relief Act of 2012 (ATRA).

How Do These Credits Work?

The amount of the credit you can claim is either $0, $2,000, or $4,000 and depends on (1) how much you pay for qualified tuition and other expenses for students and (2) your adjusted gross income (AGI) for the year.

You must report on Form 8863 the eligible student’s name and Social Security number on your return to claim the credit. You subtract the credits from your federal income tax. If the credit reduces your tax below zero, you cannot receive the excess as a refund. If you receive a refund of education costs for which you claimed a credit in a later year, you may have to repay (“recapture”) the credit.

Caution: If you file married-filing separately, you cannot claim these credits.

Which costs are eligible? Qualifying tuition and related expenses refers to tuition and fees, and course materials required for enrollment or attendance at an eligible education institution. They now include books, supplies and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

“Related” expenses do not include room and board, student activities, athletics (other than courses that are part of a degree program), insurance, equipment, transportation, or any personal, living, or family expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. For expenses paid with borrowed funds, count the expenses when they are paid, not when borrowings are repaid.

Tip: If you pay qualified expenses for a school semester that begins in the first three months of the following year, you can use the prepaid amount in figuring your credit.

Example: You pay $1,500 of tuition in December 2011 for the winter 2012 semester, which begins in January 2012. You can use the $1,500 in figuring your 2011 credit. If you paid in January instead, you would take the credit on your 2012 return.

Tip: As future year-end tax planning, this rule gives you a choice of the year to take the credit for academic periods beginning in the first 3 months of the year; pay by December and take the credit this year; pay in January or later and take the credit next year.

Eligible students. You, your spouse, or an eligible dependent (someone for whom you can claim a dependency exemption, including children under age 24 who are full-time students) can be an eligible student for whom the credit can apply. If you claim the student as a dependent, qualifying expenses paid by the student are treated as paid by you, and for your credit purposes are added to expenses you paid. A person claimed as another person’s dependent can’t claim the credit. The student must be enrolled at an eligible education institution (any accredited public, non-profit, or private post-secondary institution eligible to participate in student Department of Education aid programs) for at least one academic period (semester, trimester, etc.) during the year.

No “double-dipping.” The tax law says that you can’t claim both a credit and a deduction for the same higher education costs. It also says that if you pay education costs with a tax-free scholarship, Pell grant, or employer-provided educational assistance, you cannot claim a credit for those amounts.

Income limits. To claim the American Opportunity Credit your modified adjusted gross income (MAGI) must not exceed $90,000 ($180,000 for joint filers). To claim the Lifetime Learning Credit, MAGI must not exceed $60,000 ($120,000 for joint filers). “Modified AGI” generally means your adjusted gross income. The “modifications” only come into play if you have income earned abroad.

The American Opportunity Tax Credit

The American Opportunity Tax Credit (AOC) was extended for tax years 2013 and 2017. The maximum credit, available only for the first four years of post secondary education, is $2,500. You can claim the credit for each eligible student you have for which the credit requirements are met.

Special qualification rules. In addition to being an eligible student, he or she:

  • Must be enrolled in a program leading to a degree, certificate, or other recognized credential;
  • Must be taking at least half of a normal full-time load of courses, for at least one semester or trimester beginning in the year for which the credit is claimed; and
  • May not have any drug-related felony convictions.

Amount of credit. The maximum amount of the AOC is $2,500. Generally, 40% of the AOC is now a refundable credit for most taxpayers, which means that you can receive up to $1,000 even if you owe no taxes.

The Lifetime Learning Credit

You may be able to claim a Lifetime Learning Credit of up to $2,000 (20% of the first $10,000 of qualified expense) for eligible students (subject to reduction based on your AGI). Only one Lifetime Learning Credit can be taken per tax return, regardless of the number of students in the family.

  • The credit can help pay for undergraduate, graduate and professional degree courses, including courses to improve job skills.
  • For courses taken to acquire or improve job skills, there are no requirements as to course loads, so that even one or two courses can qualify.
  • The number of years for which this credit can be claimed is not limited.

Choosing the Credit. You can’t claim both credits for the same person in the same year. But you can claim one credit for one or more family members and the other credit for expenses for one or more others in the same year – for example, an AOC for your child and a lifetime learning credit for yourself.

Electing Not to Take the Credit. There are situations in which the credit is not allowed, or not fully available, if some other education tax benefit is claimed – where the higher education expense deduction is claimed for the same student, see below, or where credit and tax exemption (under a Section 529 or 530 program) are claimed for the same expense. In that case the taxpayer – or, more likely, the taxpayer’s tax adviser – will determine which tax rule offers the greater benefit and if it’s not the credit, elect not to take the credit.

What Types of Tax Relief are Available for Costs of my Children’s Higher Education?

A wide variety of tax relief is available, but you’ll need to choose which credit or deduction to claim or which savings plan to use based on your individual tax situation. You also can’t use two different kinds of relief for the same item. For instance, you can’t take the higher education credit and tuition fees deduction for the same student for the same year. You also can’t take the American Opportunity Credit and the Lifetime Learning Credit for the same student for the same year. There may also be limits based on adjusted gross income.

Why should I defer income to a later year?

Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

 

 

What can I do to defer income?

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you’re self employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements.

You can achieve the same effect of short-term income deferral by accelerating deductions-for example, paying a state estimated tax installment in December instead of at the following January due date.

How can I make tax-deferred investments?

Through the use of tax-deferred retirement accounts you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

 

 

What tax-deferred investments are possible if I’m self-employed?

Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for sideline or moonlighting businesses. Several types of plan are available: the Keogh plan, the SEP, and the SIMPLE.

What other tax-favored investments should I consider?

For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

Interest on state or local bonds (“municipals”) is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher paying commercial bonds after reduction for taxes.

For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.

I have a large capital gain this year. What should I do?

If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

What’s the best way to give to charity?

If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair market value of the property.

Why should I participate in my employer’s cafeteria plan or FSA?

In 2013, medical and dental expenses are deductible to the extent they exceed 10% in 2013 of your Adjusted Gross Income (7.5% in 2012). As such, many people are not able to take advantage of them. There is however a way to get around this if your employer offers a Flexible Spending Account (FSA), Health Savings Account or cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.

Can I ever save tax by filing a separate return instead of jointly with my spouse?

You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

  • One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
  • The spouses’ incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately.

What special deductions can I get if I’m self employed?

You may be able to take an immediate expense deduction of up to $500,000 for 2013 (same as 2012), for equipment purchased for use in your business, instead of writing it off over many years. Additionally, self-employed individuals can deduct 100% of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE plan and deduct your contributions (investments).

What’s the best way to borrow to make consumer purchases?

For homeowners, it’s the home equity loan. Other consumer related interest expense, such as from car loans or credit cards, is not deductible.

Interest on a home-equity loan can be deductible. So avoid other nondeductible borrowings and use a home-equity loan if you plan to borrow for consumer purchases.

What is a “Cafeteria Plan”?

The idea behind cafeteria plans is that amounts which would otherwise be taken as taxable salary are applied, usually tax-free, for needed services like health or child care. Besides saving employee income and social security taxes, salary diverted to cafeteria plan benefits isn’t subject to social security tax on the employer. With a cafeteria plan, employees can choose from several levels of supplemental coverage or different benefit packages. These can be selected to help employees achieve personal goals or meet differing needs, such as health coverage (family, dental, vision), retirement income (401(k) plans) or specialized services (dependent care, adoption assistance, legal services (legal services amounts are taxable)).

What is Self-Insurance?

With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional health care providers. Funding comes through establishment of a trust or a simple reserve account and a self-insured employer assumes the risk for paying the health care claim costs for its employees.

As with other health care plans, the employee may pay a portion of the cost in premiums. Catastrophic coverage is usually provided through a “stop loss” policy, a type of coinsurance purchased by the company. The plan may be administered directly by the company or through an administrative services contract.

What Types of Life Insurance Plans are Available for Employees?

Traditionally, life insurance pays death benefits to beneficiaries of employees who die during their working years. Most employers purchase a group life policy for their employees. Typically an employee is provided with life insurance coverage that is at least equal to their yearly salary. For example, an employee who makes $50,000 per year would receive $50,000 of coverage. The employer is responsible for the premium, but may require employees to pay part of the premium cost.

What Types of Disability Benefits do Companies Provide to Employees?

A disability plan provides income replacement for the employee who cannot work due to illness or accident. These plans are either short term or long term and are distinct from workers’ compensation because they pay benefits for non-work-related illness or injury.

Short-term disability (STD) is usually defined as an employee’s inability to perform the duties of his or her normal occupation. Benefits may begin on the first or the eighth day of disability and are usually paid for a maximum of 26 weeks. The employee’s salary determines the benefit level, ranging from 60 to 80 percent of pay.

Long-term disability (LTD) benefits usually begin after short-term benefits conclude. LTD benefits continue for the length of the disability or until normal retirement. Again, benefit levels are a percentage of the employee’s pay, usually between 60 and 80 percent. Social Security disability frequently offsets employer-provided LTD benefits. Thus, if an employee qualifies for Social Security disability benefits, these are deducted from benefits paid by the employer.

What Type of Medical Plans are Available for Employees?

Today, most health insurance falls under what is called “managed care” in which you pay monthly premiums, as well as co-pays and deductibles. The four main types of health insurance are briefly described below. For more information contact your plan administrator. In addition, due to the passage of the Affordable Care Act of 2010, which was upheld by the Supreme Court in July 2012, starting in 2014 each state will have a “healthcare exchanges” that enable individuals and small businesses to compare health plans, get answers to questions, find out if they are eligible for tax credits for private insurance or health programs like the Children’s Health Insurance Program (CHIP), and enroll in a health plan that meets their needs.

Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians. Comprehensive benefits typically include preventive care, such as physical examinations, well baby care and immunizations, and stop-smoking and weight control programs. The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.

A preferred provider organization (PPO) is a network of physicians and/or hospitals that contracts with a health insurer or employer to provide health care to employees at predetermined discounted rates. PPOs offer a broad choice of health care providers.

Point of Service (POS) health care plans are similar to HMOs in that you choose a primary-care doctor from the plan’s network, but you must have a referral in order to see in-network specialists. You can also see out of network providers as long as you get a referral first.

Another option to consider is a high-deductible health insurance combined with a health-savings account (HSA) or a health-reimbursement arrangement (HRA). By law, the two must be linked. Note: HSAs should not be confused with FSAs (Flexible Spending Accounts). Money that you set aside in a health-savings account or a health-reimbursement arrangement to pay for certain medical expenses is tax-free. HSAs must be linked to a high-deductible health-insurance plan, and HRAs often are. (For preventive care, such as cancer screenings, you might not have to pay the deductible first.) Typically, a special debit type card is used for the HSA or HRA account to keep track of expenses and payments.

As a Small Employer what do I Need to Know about Employee Benefits?

The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage, including Social Security, unemployment insurance, and workers’ compensation. Funding for the Social Security program comes from mandatory contributions from employers, employees and self-employed persons into an insurance fund that provides income during retirement years.

Full retirement benefits normally become available at age 66 for people born after 1943, and age 67 for those born in 1960 or later. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income and Medicaid. Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program.

Workers’ compensation provides benefits to workers disabled by occupational illness or injury. Each state mandates coverage and provides benefits. In most states, private insurance or an employer self-insurance arrangement provides the coverage. Some states mandate short-term disability benefits as well.

A comprehensive benefit plan might include the following elements health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, and sick, personal, and vacation leave. A benefit plan might also include bonuses, service awards, reimbursement of employee educational expenses and perquisites appropriate to employee responsibility.

As an employer, before you implement any benefit plan, it’s important to decide what you’re willing to pay for this coverage. You may also want to seek employee input on what benefits interest them. For instance, is a good medical plan more important than a retirement plan? Furthermore, you must decide whether it is more important to protect your employees from economic hardship now or in the future. Finally, you must decide if you want to administer the plan or have the insurance carrier do it.

How can I save money on legal fees?

It is important to remember that a lawyer’s fees are often negotiable, but your lawyer is unlikely to invite you to bargain over fees! Here are some tips for saving ensuring the cost-effectiveness of legal fees.

Comparison shop for flat fees on simple cases.

Ask about the billing method for hourly rates. A written agreement specifying the fee arrangement and the work involved is the best way to be clear about the total cost of the case.

Choose a lawyer with the appropriate qualifications. Most legal work is relatively routine in nature, and often has more to do with knowing which form to fill out and which county clerk will process it most quickly.

Offer to perform some of the work.

Hire the attorney to act as go-between. Some lawyers are open to negotiating a lower fee if you are only looking for their legal expertise to write a letter to the other side to settle.

Hire the attorney to act as your pro se coach. If you want to represent yourself in court (called “appearing pro se”), hire your attorney to act as a pro se coach who will review documents and letters that you prepare and sign.

Choose a lawyer who specializes in what you need.

Prepare for meetings with your attorney. The more work you do to prepare, the less time your attorney needs to spend (and charge you) for finding the information.

Answer your attorney’s questions fully. If your attorney knows all the facts as early as possible in the case, it will save time and money that might be spent later on further investigations or misdirected case development.

If the situation changes, tell your attorney as soon as possible. You don’t want your attorney heading in the wrong direction on a case.

Maximize contact with your attorney. Consolidate your questions or information-giving into a single call. Unless you have a specific reason for doing so, pass on information in writing or to other office staff rather than speaking directly with the attorney.

Examine your bill. Request that your attorney bill you on a regular basis. Even if you have agreed on a contingency fee and will not actually pay the expenses until the case is settled, you should periodically examine the expenses. Question any items that you do not understand or that are not covered in your fee agreement.

What legal fee arrangements are best for me?

The market rate for any given legal service varies by locality. A “fair” fee is what seems fair to you, based on your knowledge of going rates. Whether you are comfortable with a fee is likely to be based on the following factors:

  • How much you can afford
  • Whether the case is routine or requires special expertise
  • The range of attorney rates for this type of case in your area
  • How much work can you can do on the case yourself

The most common types of fee arrangements used by lawyers are listed below.

Flat fee. The lawyer will charge you a specific total fee for your case. A flat fee is usually offered only if your case is relatively simple or routine.

Note: While lawyers will not set a flat fee for litigation, they can usually give you a good estimate of the costs at each stage.

Tip: Ask if photocopying, typing, and other out-of-pocket expenses are covered by this flat fee.

Hourly rate. Attorneys charge by the hour (or portion of an hour). For instance, if your attorney’s fee is $100 per hour, and he or she works ten hours, the cost will be $1,000. Some attorneys charge a higher rate for court work and less per hour for research or case preparation. And, as a rule, large law firms usually charge more than small law firms and attorneys in urban areas often charge more per hour than attorneys practicing in rural areas.

Tip: If you agree to an hourly rate, be sure to find out how much experience your attorney has had with your type of case. A less experienced attorney will usually require more time to research your case, although he or she may charge a lower hourly rate.

Tip: Ask what is included in the hourly rate. If other staff such as secretaries, messengers, paralegals, and law clerks will be working on your case, find out how their time will be charged to you? Ask about costs and out-of-pocket expenses, which are usually billed in addition to the hourly rate.

Contingency fee. Under this arrangement, the attorney’s fee is based on a percentage of what you are awarded in the case. If you lose the case, the attorney does not get a fee, although you will still have to pay expenses. A one-third fee is common.

Tip: Ask whether the lawyer will calculate the fee before or after the expenses. This can make a substantial difference, since calculating the percentage of the attorney’s fee after the expenses have been deducted increases the amount of money you receive.

What questions should you ask?

Before committing yourself to a consultation, ask potential candidates the following questions:

  • Do you provide a free consultation for the initial interview?
  • How long have you been in practice?
  • What percentage of your cases is similar to my type of legal problem? (A lawyer with experience in handling cases like yours will be more efficient).
  • Can you provide me with any references, such as trust officers in banks, other attorneys, or clients?
  • Do you represent any clients or special-interest groups that might cause a conflict of interest?
  • What type of fee arrangement do you require? Are the fees negotiable?
  • What information should I bring with me to the initial consultation?

Follow up your phone calls by scheduling interviews with at least two of the attorneys. Don’t feel embarrassed about selecting only the best candidates or canceling appointments with some of the attorneys after you complete your initial phone calls.

Next, interview the candidates. Come prepared with a brief summary of your immediate case (including dates and facts) as well as a list of general questions for the attorney. The purpose of the interview is twofold: (1) to decide if the attorney has the necessary experience and is available to take your case; and, (2) to decide if you are comfortable with the fee arrangement and, most importantly, comfortable working with the attorney.

How do I find a good lawyer?

The first step is to compile a list of names. Ask relatives, friends, clergy, social workers, or your doctor for recommendations. State bar associations usually have lawyer referral lists organized by specialty.Martindale-Hubbell also has a comprehensive lawyer referral service. For specific groups such as persons with disabilities, older persons, or victims of domestic violence consult a community lawyer referral services. The court and your banker may also be good referral sources. Finally, don’t forget the yellow pages of the telephone book, which often lists lawyers according to their specialties.

Tip: If you use a referral service, ask how attorneys are chosen to be listed with that particular service. Many services make referrals to all lawyers who are members (regardless of type and level of experience) of a particular organization.

Tip: Be aware that many bar associations have committees that conduct training or public service work in various areas of specialty. An attorney serving on one of these committees could have the expertise you are looking for.

After developing a list of potential lawyers, interview them initially by telephone to narrow down the list and then arrange face-to-face interviews.

How would I handle a dispute on my own?

Many disputes can be resolved by writing letters or negotiating with the other party on your own, or by using arbitration or mediation. Legal self-help manuals and seminars can provide you with the tools to handle a portion of, or the entire, dispute.

Tip: Consider hiring an attorney to review papers or provide advice, rather than fully representing you.

Negotiating on your own. Negotiating on your own behalf is often the best way to solve minor disputes. Visit your local library or search online for resources that explain the best way to negotiate a dispute.

Tip: Before starting the negotiation process, it’s usually a good idea to familiarize yourself with legal issues that might come up by calling a legal hot-line or consulting other sources of information.

Mediation or arbitration. Dispute resolution centers have been established in every state. Most specialize in helping to resolve problems in the areas of consumer complaints, landlord/tenant disputes, and disagreements between neighbors or family members.

During the mediation process, a neutral person assists the two sides in discussing their differences and helps them possibly reach an agreement. In an arbitration setting, the neutral third party conducts a more formal process and makes a decision (usually written) after listening to both sides.

If both parties agree to it, using a dispute resolution center or a private mediation center is a lower-cost alternative to bringing a lawsuit to court or hiring an attorney to represent you during a negotiation process.

Small claims court. Small claims court may be appropriate if you have a monetary claim for damages within the limits set by your state (usually $1,000 to $5,000). These courts are more informal and involve less paperwork than regular courts. If you file in small claims court, be prepared to act as your own attorney, gathering necessary evidence, researching the law, and presenting your story in court.

When should I hire a lawyer?

For certain legally complex or time-consuming disputes or problems, there is no doubt that a lawyer is necessary. For example, if you want a will prepared, or a more complex business deal handled, you will need to hire a lawyer. And, if a court case is involved (other than a simple, routine matter), you’ll almost always need a lawyer.

When deciding whether to hire an attorney, consider the following:

  • Does the matter involve a complex legal issue or is it likely to go to court? Is a large amount of money, property, or time involved? These factors indicate that you need to hire a lawyer.
  • Is there a form or self-help book available that you can use instead of hiring a lawyer? You may be able to solve certain problems with only minimal assistance.
  • Are there any non-lawyer legal resources available to assist you?

Unlike more complex transactions, some transactions can be handled without a lawyer. For instance, a living will can often be prepared with the help of organizations such as the American Association of Retired Persons (AARP). Non-profits that deal with retired and elderly persons may also be able to provide you with the necessary paperwork to create a living will in your state, as well as additional information and/or assistance in completing the form properly.

Should I keep a cash reserve in my small business?

You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill.

What steps can I take to improve my business cash flow?

To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:

  • Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm’s collection policies are not aggressive.
  • Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
  • Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product’s market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
  • Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
  • Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm’s cash reserves.
How can I avoid running into cash flow problems in my small business?

Failure to properly plan cash flow is one of the leading causes for small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.

A business’s monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable – credit sales. Accounts receivable are usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, which increases your cash. Now your cash has completed its flow through the operating cycle and is ready to begin again

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear.

A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

 

 

What legal requirements might affect a home-based business?

A home-based business is subject to many of the same laws and regulations affecting other businesses. Be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business. For instance, be aware of your city’s zoning regulations. Also, certain products may not be produced in the home.

Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

In terms of registration and accounting requirements, you may need a work certificate or a license from the state, a sales tax number, a separate business telephone, and a separate business bank account.

Finally, if your business has employees, you are responsible for withholding income and social security taxes, and for complying with minimum wage and employee health and safety laws.

Is a home-based business right for me?

To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what’s involved, and a lot of hard work.

You have to be willing to plan ahead, and then make improvements and adjustments along the road. Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.

What should I include in a business plan?

The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:

  • Introduction
  • Marketing
  • Financial Management
  • Operations
  • Concluding Statement

Q: What should be included in the introduction to my business plan?

A: The introductory section of your business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.

Q: What should be included in the marketing section of my business plan?

A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.

Q: What should be included in the financial management section of my business plan?

A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide “what if” statements that address alternative approaches to any problem that may develop.

Q: What should be included in the operations section of my business plan?

A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.

Q: What should be included in the concluding statement of my business plan?

A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also be specific as to how you plan to achieve your goals.

How do I know whether I have what it takes to run my own business?

Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.

When determining what business is “right for you,” consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you’re willing to make to running a business.

Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?

What’s involved in succession planning for family businesses?

Transferring the family business requires the family to make a determined effort to do the following:

  • Create a business strategic plan.
  • Create a family strategic plan.
  • Prepare an Estate Plan.
  • Prepare a Succession Plan, including arranging for successor training and setting a retirement date.

These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.

Q: What is a business strategic plan?

A: A business strategic plan defines goals, objectives, and targets for a company and outlines its resources will be allocated in order to achieve them. When a strategic business plan is in place, it allows each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company’s future. A strategic plan is long-term in nature and focuses on where you want the business to be at some future date.

Q: What is a family strategic plan?

A: The family strategic plan establishes policies for the family’s role in the business and is needed to maintain a healthy, viable business. For example, it should include the creed or mission statement that spells out your family’s values and basic policies for the business, and it may include an entry and exit policy that outlines the criteria for working in the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.

Q: What is an estate plan?

A: An estate plan is a written document that outlines the disposal of one’s estate and includes such things as a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the business because without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.

Q: What is a succession plan?

A: A succession plan identifies key individuals who will be groomed to take over the business when the time comes. It also outlines how succession will occur and how to know when the successor is ready. Having a succession plan in place goes a long way toward easing the founding or current generation’s concerns about transferring the firm.

How can I ensure that my small business will survive the transition into the next generation?

Less than one third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.

The following is a list of options to consider:

  • Close the doors.
  • Sell to an outsider or employee.
  • Retain ownership but hire outside management.
  • Retain family ownership and management control.

There are four basic reasons why family firms fail to transfer the business successfully:

  • Lack of viability of the business.
  • Lack of planning.
  • Little desire on the owner’s part to transfer the firm.
  • Reluctance of offspring to join the firm.

The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.