Belk on Business Josh Belk

Basis, Limitation of Losses and Additional Tax Exposure – Belk on Business – Episode 190

There are a number of ways that one can look at a company’s balance sheet and determine the health of the business and financial discipline of the business owner. One way is to look at the shareholder’s basis in the company, handling of debt and it’s methods or process of making distributions.

Most small businesses owners run their business checkbook like their personal checkbook. Not only can this be detrimental to the financial health of the company but also can create unexpected tax issues (and asset protection issues). Also, the shareholder needs to be aware for tax planning purposes when they can recognize losses and when they can take distributions without an additional tax exposure.

Basis in an entity (tax implications for this podcast will be primarily focused on an entity taxed as an S Corp) is a number that you must track. There are two types of basis, stock basis and debt basis.

Stock basis is calculated as follows:

Cash and property contributed

Plus/minus: Net income/loss

Minus : distributions

There is no such thing as sweat equity. The stock must be purchased via cash or property contribution. To create basis for someone who worked to earn shares, they should receive compensation then purchase the shares to establish basis.

Debt basis consists primarily of either loans by the shareholder or payments on company loans by the shareholder.

If you have a negative stock basis, there will be a limitation on losses and if any distributions were taken in excess of basis will be taxed as ordinary income. You could end up in a situation where you can’t recognize the losses and distributions taxed as ordinary income.

Loans must be bona fide loans which among other things, must include the following:

- expectation of payment

- Loan terms (loan amount, payment amount, interest rate, maturity date)

- Remedies for default

- The loan must be truly intended to be a loan

- Whether shareholder is subordinate to general creditors

- Enforcement by the lender (shareholder)

If a shareholder makes a payment on a company loan, it increases the shareholder’s debt basis. Simply being a guarantor on a loan does not generate debt basis.

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The Power of Ownership with Justin Roethlingshoefer – Belk on Business – Episode 189

Order Justin’s book here: https://www.amazon.com/Power-Ownership-Redeem-Relentless-Pursuit/dp/1394230028

Learn more about Justin and Own It: https://justinroethlingshoefer.com/

JUSTIN ROETHLINGSHOEFER is the co-founder of OWN IT Coaching, a multiple seven-figure coaching company. As a former performance coach in the NCAA and NHL, through OWN IT he has made the same ecosystem that is usually only available to the best athletes in the world now available to you. Utilizing best in class testing, technology, and coaching he and his team have been able to transform the health and lives of hundreds of thousands of leaders throughout the country while empowering them on their journey and making the complex topic of health simple, actionable and personal. He is a speaker and the host of The OWN IT Show podcast. Justin is the author of three other bestselling books including The Athletic Performance Blueprint and OWN IT.

“Ownership is the intersection point of responsibility and accountability”

Topics:

- Changing our mindset from accepting normal to living differently to achieve success

- Types of stress and its impact

- How to tell what our bodies are telling us

- What is HRV and why is it such an important metric?

- The four pillars:

1) Fuel – nutrition and genetics

2) Build – a stronger foundation for better health

3) Repair – the 3-2-1 rule

4) Renew – Life by Design Habits

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Communication and Culture – Belk on Business – Episode 188

A business owner can communicate concrete guidelines that people must conform to or use proposals to start conversations. The proposals are then used to ask questions, promoting curiosity, innovation, and collaboration.

Communicating with complaining will cripple culture. This leads to a culture of individuals blaming instead of taking ownership or finding areas to improve. Communicating with criticism or condescension leads to a culture of contention. A bad culture can lead to employees attacking others, usually the weakest link in the chain resulting in the breakdown of the entire organization. No innovation or collaboration results in the team members feeling siloed, unable to resolve issues whether internally or with the customer.

Communication with collaboration leads to a culture of community. Help to bring along those who may need assistance, asking for help, leaning into others' ideas to resolve problems, coming up with creative solutions to resolve problems or innovative ideas to bring more profit or impact to the organization.

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Indicators of Financial Issues – Belk on Business – Episode 187

There are indicators that reflect when there is a financial issue with the business.

1) Inability to pay bills on time – this will hurt the reputation or brand of the business. A business needs to keep good relationships with its vendors, partners and team members.

2) Ignoring the budget or not making the proper revisions on the budget

3) Not having any savings for emergencies or growth

4) Debt/liabilities increasing due to inability to maintain operating expenses

5) Owner shifting to draws or paying employees as contractors to reduce payroll tax exposure

6) Focusing only on profit = failure to invest in culture and impact to fulfill purpose



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Money Handling Mistakes Pt 2 – Belk on Business – Episode 186

There are many mistakes a business owner can and does make, some which could be fatal to the business either directly through mismanagement of the finances or indirectly through failure to follow proper internal controls or following basics of asset protection. Best to run finances in a proactive manner, not a reactive one making tweaks and not major adjustments which can shake a business and its culture to the core.

1) Ignoring the numbers – for many businesses, especially in the first phase of business ignores the accounting/finance function of the business until either they are needed for loans or taxes. This results usually in overpaying taxes, inability to have an understanding of what is and isn’t working in your business and an inability to plan effectively towards profitability and scaling. Can also result in making poor financial decisions such as purchasing items just for tax deduction purposes or purchasing what the business doesn’t really need.

2) Not budgeting or cash flow planning – budget is developed around goals/projections along with cash flow projections so to be able to hit metrics, determination of when or will we run out of cash, when can we hit savings metrics for scale or improvements, cash flow needed for taxes, equipment, personnel, savings and crisis planning. Cash needed for emergencies and opportunities (this usually should be reflected in retained earnings, not debt).

3) Failure to review financial reports – lack of internal controls around accounting and finance – review payables, receivables, bank statements and credit card statements periodically. Review helps reduce potential for fraud.

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Money Handling Mistakes – Belk on Business – Episode 185

There are many mistakes a business owner can and does make, some which could be fatal to the business either directly through mismanagement of the finances or indirectly through failure to follow proper internal controls or following basics of asset protection.

1) Co-mingling of business and personal finances – this goes beyond paying personal bills with the business checkbook but can pierce the corporate veil.

- Asset protection issues – creates a risk exposure

- Internal control issues – creates a risk with banks and regulators

- Loss of self confidence and confidence others have in you

- Decreased business value – don’t know true business performance whether it is paying personal bills and trying to expense them in the business or pulling cash out of the business beyond payroll and properly determined and documented distributions

2) Mismanagement of debt – debt stress tests the business and will magnify any other financial mismanagement mistakes

- Need profit to cover payments

- Best startups not take on any debt if at all possible

- For all businesses - only take debt on assets with greater book value (not FMV) than corresponding loans

3) Mismanagement of Spend

- Outspending cash inflow

- Not following a properly designed budget or not having a budget at all. Budgets should be designed around goals

- Buying what you don’t need or failure to plan - Rent vs buy (overspending on real and personal assets or properly analyzing if it is needed at all), tax planning or management (payroll, sales, income), planning and saving for growth or seasonal or market fluctuations

- Establish retained earnings for emergencies and opportunities

- Review payables, receivables, both bank and credit card statements (subscriptions or other unneeded spend can be identified – fraud minimized)

- Don’t purchase large nonperforming assets just to reduce tax exposure

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YouTube: https://youtu.be/nh41AdbMgxo