Being generous to your favorite charitable organization typically can yield substantial tax benefits to you. There are various types of donations and various requirements to substantiate the gift you choose to give. Are you giving cash or property? Contributions are limited by your AGI (adjusted gross income) between 20 and 50%. (Consult your CPA). Here are some general rules to remember as you prepare for donations:

• Cash donations of less than $250 can be supported by canceled check or credit card receipt, donations in excess of $250 must be substantiated by the charity
• Appreciated property typically provides the most tax savings however proper planning is required
• Understand the differences between ordinary income property and long-term capital gains property during your planning
• Tangible personal property (like art or antiques) is treated for tax deduction purposes based nature of property and the end use by the charity
• Personal property valued at more than $5,000 (except securities) must be supported by a qualified appraisal
• If this property isn’t used by the charity in its tax-exempt function your deduction is limited to your basis in the property
• If the property is related to the charity’s tax-exempt function you can deduct the property’s fair market value

Here are some other key rules to remember for charitable deductions:

• Donation of Services- you may only deduct your out-of-pocket expenses, not the fair market value of your services
• Donating the use of property- No deduction is allowed, because it isnt considered a gift of your interest in the property to the charity
• Driving for charitable purposes- You may deduct only 14 cents for each mile driven related to charity
• Donating a car- The deduction is now limited to what the charity receives when it sells the vehicle unless its used directly by the charity in its tax-exempt function
• Donation of clothing or household goods- they must be in at least “good used condition” to be deductible
• Donating appreciated property to charity is smart because you avoid paying tax on the long-term capital gain you would incur if you sold the property plus you get to donate the fair market value. However, with depreciated property do the opposite, sell it, take the capital loss and then use the charitable deductions.

August is here, and while you are at the beach or relaxing we want to remind you that business owners and start-ups have a common theme to six typical problems worth reviewing. Whether you do $100,000 in sales or $ 5 million, these might apply to you regardless of your growth mode:

• Not having enough cash reserves – Entrepreneurs know they’ll need money to start up operations, but most don’t realize it might take a least a year to realize a steady income from the company. The more advanced company needs to realize that payroll is probably growing and what if a few clients pay late? Start with adequate cash and maintain an appropriate level of working capital. Don’t fool yourself with wishful thinking that the money will somehow be there.
• Credit Cards – We all have heard the story about the business owner who funded their initial operations on credit cards for early stage survival, especially when they were tight on cash early on. Sometimes there is no choice, but small business loans, SBA products or best, a business line of credit (even personally guaranteed). The economy is now somewhat better and my banking community folks are telling me lines are now more available.
• Mixing personal and business finances – For clarity and potential business liability, do not mix personal and business funds. Distributions and salary should be on business accounts only and will make your accounting easier.
• Compensation – Lots of psychology around this one. Do not take too much out of your company and don’t reinvest all your profits- tax calculations can be complicated and we have heard it many times about not owing taxes because it’s all in the company. New owners need to remember you are no longer an employee getting your direct deposit.
• Accounts Receivable – What is your process to collect these? What are terms? Do you know that some clients are required to accept any cash discount you offer by their own finance department? This can be an incredible help with cash flow, trying to meet payroll for that new client you expanded for, and much cheaper than factoring.
• Poor Accounting – Numerous clients come in and their financials just don’t make any sense. Typical causes are lack of knowledge of accounting, software, or not having the time or interest to do it right. The problem is more visible when you are in growth mode and nothing can be analyzed or your banker has declined your credit application because you have “negative cash” or you decided to expense through all your fixed assets.

Business owners underestimate the true costs of launching a business, and many firms close their doors during growth mode. Why? usually the problem is cash flow and a lack of true understanding of where they are making (or losing) money because the time was not put in to build an accounting system that tells the story. Do you know your story?

Learn from others! Happy August

Rob and Rick