Monthly Archives: June 2011

How to Take a Vacation and Write it Off Your Income Taxes

How could you take a trip and also make it tax deductible? There are a couple of possibilities. First, you can do volunteer work. Second, when you have your own company, there is a lot of options. These can include training seminars that are ideally located in top notch vacation zones. However, you should be cautious whenever taking vacation write-offs due to the fact that not all expenditures will be allowable. For example, should you stay in that location several additional days to go sightseeing, then your costs regarding the additional stay are, in general, not deductible.

There are many non-profit organizations that give the opportunity to do volunteer work relating to a charitable purpose. Most of these opportunities commonly require a number of costs in which you could possibly get a tax deduction. In these circumstances, you may have out-of-pocket costs including airline tickets, rental accommodations, plus food. A few of these establishments include Habitat for Humanity, Cross-cultural Solutions, and United Planet. As a standard guideline, your charitable endeavours should be equivalent to working a full-time job throughout the duration of the trip. If you stay at the location that you performed your charitable labor after the job was finished, that part of the trip isn’t going to be deductible.

Many professions require continuing education. Because of this, there are various courses and workshops being offered in many nice vacation zones. Through some meticulous planning, you’ll save on income tax while satisfying your needs to stay certified.

The Internal Revenue Service might audit these write-offs so be sure that they are reasonable. For example, traveling to a seminar located in Hawaii won’t be sufficient to deducting tickets to a theme park. Furthermore, you could deduct your air travel but you should never write off the travel expenses for your children or your significant other unless they’re important employees of your business. If you’re feeling that something you’re considering to deduct is questionable, then you should either pass on it or consult a reliable income tax advisor. You should not be discouraged by this. If your trip is organized appropriately, you will still be able to write off a considerable portion of the costs.

Be mindful if your vacation involves something like a 2-day seminar and a couple days of sightseeing. In this situation, you are unable to write off the entire excursion. The primary reason for the excursion must be the seminar and you may only write off your flight costs (not the rest of the family’s) and hotels for the time period when the seminar was held. In cases where you write off all the expenses, the IRS will likely disallow the items not directly related to business. You should also document precisely why the vacation was taken. An additional basic guideline regarding business trips is to make sure that the costs of your getaway are normal in your industry.

Remember, you should get expert advice during the planning phase of your trip.

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Housing Bubble Unprecedented According to Shiller

Robert Shiller believes housing could fall another 10-25% before we finally reach a bottom. Housing nationwide is back to its March 2003 levels. Since this situation was so unique, it’s impossible to forecast the future with any certainty. Data from 1890 to 1990 shows that housing costs were about the same during this span in real terms. The last 20 years have been unlike any other in history.

A key question going forward will be whether or not we fall below the long-term average valuation (which is usually the case following a bubble). In every other crash throughout history, asset prices went from being vastly overpriced to being extremely cheap before the cycle was completely over.

Shiller also said that we need new financial innovation to make the financial system more stable. Unfortunately, the financial innovations of the last 20 years only made the system less stable.

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Financial Calculations that Every Business Owner and Investor Should Know

It’s obvious that not everyone is cut out for math. However, if you go into business, there are some important metrics that you should learn and understand well. Simple items that you should know include: your cost of goods, profit margin, sales per square foot, payroll percentage, advertising percentage, inventory turnover, return on equity, and liquidity ratios. These are very basic and fundamental, especially for product-based businesses. All formulas in this post work best for an annualized period.

Every industry is different. Some industries have a high volume of sales with low profit margins while, in other industries, the opposite may be true. As a business owner, you should seek to compare your business and strive to be the best in your industry. Obviously, a mini-mart will have a lower profit margin than an upscale restaurant.

First, you must know how much your goods cost and make sure you are making a healthy profit margin. You costs of goods are calculated by:

Cost of Goods = Beginning Inventory + Purchases – Ending Inventory

Relying on intuition alone here doesn’t cut it. Many small product businesses do this. Intuition can be misleading because a lot of money can be spent on materials that remains tied up in inventory at the end of the period. This may lead you to think you’re overspending when you’re actually very profitable.

Next, business owners need to know their gross profit margins. The profit margin on your products accounts for all operating expenses including labor, rent, utilities, materials, etc. It is calculated as follows:

Profit Margin = 1 – (Cost of Goods / Sales of Goods)

Keep in mind that a small percentage can make a world of difference for many businesses.

Next, how well are you utilizing the space in which you rent? Sales per Square Foot is a good metric to analyzing this. Are there competitors that are able to carry as much product and make as many sales with less space? Here is the calculation:

Sales per Square Foot = Total Sales / Square Feet

How much of your total sales is paid for labor? How do you compare to other businesses in your industry?

Payroll Percentage = Total Payroll / Total Revenues

Advertising is an expense in which you can easily overspend in comparison with how much business the advertising generates. General advertising through traditional media is generally expensive and it’s usually impossible to pinpoint how much you are getting in return. Direct advertising, such as direct mail and pay per click online, is easier to quantify and understand its effectiveness. Similar to the payroll calculation, advertising cost is viewed as a percentage of your total sales:

Advertising percentage = Total Advertising Costs / Total Sales

How fast is your inventory turning into sales? Inventory turnover is a key metric in determining how fast your inventory cycle is. The faster you turn your inventory, the less time your cash is tied up. The calculation is as follows:

Inventory Turnover = (Beginning Inventory + Purchases – Ending Inventory) / (Ending Inventory * Number of Periods)

Many business calculate this based on 4 periods per year. That is, each period is one quarter. In general, the higher the inventory turnover, the better your cash flow is. You can usually improve inventory turnover through redesigning business processes and software.

Return on Equity tells you what your return is on the net worth of your company. This is a function of your profits and the difference between your assets and what you owe on them.

Return on Equity = Net Income / (Total Assets – Total Liabilities)

For return on equity, you should aim for a percentage that is at least in the high teens, higher if you’re in a fast growing industry. Be careful with this metric, however. A high number could be an indication that you are too far in debt. On the other hand, I feel that this is one of the most important metrics of a business.

Liquidity ratios are important in determining how well you are managing your short term cash. I tend to lean towards the conservitive side here. There are two ratios I want to introduce. The first is the Current Ratio. This is simply:

Current Ratio = Current Assets / Current Liabilities

I typically prefer to maintain a 2 to 1 ratio here. Some businesses, such as Wal-Mart, have consistent enough cash flows in which they can operate on a lower ratio. This is because the income they have coming in is very steady and is turned into cash quickly. There is nothing tied up in accounts receivable for long periods of time.

There are many business that build up inventory and accounts receivable too fast and the ratio between accounts receivable to sales increases. As a side note, before investing in a company (or buying a stock), always look at how fast inventories and accounts receivable is increasing in relation to sales. If inventory and accounts receivable are rising faster than sales, it should be a red flag.

The amount that you have in accounts receivable is important in two ways: 1) the actual balance and 2) how fast you typically collect on these. High balances with long collection periods may lead to disaster because the business still has yet to collect the money from the sale and it must buy new inventory and operate in the mean time. It can also be misleading because accrual accounting allows a business to book the sales as income prior to collecting the money. The important concept here is that a company’s management can decieve investors buy showing rapidly increasing sales when they are recklessly financing their customers.

The Acid-test Ratio is similar to the Current Ratio but it strips out inventory. This ratio should, for most businesses, be greater than 1 to 1.

Acid-Test Ratio = (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities

When you use these ratios, you should compare them to other businesses within your industry. Some industries are more capital intensive than others and some have steadier cash flows than others. The more capital intensive and the more erratic your cash flows are, the more conservative you should be when financing your company.

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Case-Shiller Index Shows a Continuing Downtrend in Housing

Information available through March 2011 from the Case-Shiller Home Price Index reveals that home prices nationwide have dropped by 4.2% during the first quarter of 2011, after falling 3.6% in the fourth quarter of 2010. The index hit a new low with the first quarter’s data and posted an annual decline of 5.1% in comparison to the first quarter of 2010. National home prices are back to 2002 levels. Las Vegas, meanwhile, has home prices that are at 1999 levels.

The homebuyer credits that ended a year ago only prolonged the correction process. Nationally, the programs temporarily stopped prices from dropping further. However, the laws of economics win in the long run. The inbalance between supply and demand cause prices to keep deflating. Until the market absorbs the many empty homes that exist, prices will remain low. The next few years should offer plenty of opportunities and bargains.

According to the New York Times, the portion of homeowners continues to drop steadily.  2006 was the peak for home ownership with nearly 70% of homes being owner occupied. “Even as the economy began to fitfully recover in the last year, the percentage of homeowners dropped sharply, to 66.4 percent, from a peak of 69.2 percent in 2004. The ownership rate is now back to the level of 1998, and some housing experts say it could decline to the level of the 1980s or even earlier.”

Only adding to the problem is the lack of financing available. People must have better credit in order to buy in today’s market. In addition, many people are still stuck with huge loans that have higher balances than what the properties are worth. The only options for these individuals are either to continue to pay or default. Either way, people in this situation will not be home buyers anytime soon.

Now, it’s become less popular to buy a home. People no longer see houses as investments they way they did in 2006. This is tragic in a way because many properties in many areas offer over 20% return on investment from cash flow alone. But it takes a long period of rising prices to attract most investors.

Because the structural problems will not go away overnight, there’s still time to hold out and wait for the perfect deal.

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