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From the Desk of:

John D. Pivirotto
Calif. Insurance License #0699308

Financial Concepts

Burlingame, CA 
(650) 348-1880
(650)348-0255 Fax


Helping Build & Protect Your Future

Investment Advisor Representative
Securities and Advisory Services
offered through
Lincoln Financial Securities Corporation
Member SIPC

Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2009 Liberty Publishing, Inc.
Copyright 2009 Liberty Publish- ing, Inc., Beverly, MA. The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opin ions, or recommendations of the Financial Planning Association, its affiliates or members. CFPTM and CERTIFIED FINANCIAL PLANNERTMare federally registered service marks of the Cer- tified Financial PlannerBoard of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. Febuary, 2009.
Time for Small Businesses to Rethink Defined Benefit Plans?
 Historically, the defined benefit plan was the standard type of employer-sponsored retirement plan. Over the past decade, however, defined benefit plans have declined in popularity among many small employers. Defined contribution plans, such as profit-sharing plans and 401(k)s, stole the spotlight, particularly during the booming nineties. But, what is the best option for the business owner with 15 or fewer years until retirement, who wants to accumulate a significant benefit in a relatively short period of time? 

The dollar limits for defined contribution plans may make it difficult for business owners interested in accelerating their retirement savings to reach their goals. Strong candidates for defined benefit plans are older owners of closely held businesses with few employees—in particular, owners who are older than their employee population and take home a significant percentage of the payroll.

Compare and Contrast 
Defined benefit plans offer fixed retirement benefits, which vary according to the specific plan, but are generally based on the participants’ salaries and years of service. In contrast, defined contribution plans provide no specific benefits. Instead, retirement benefits are based on the amount contributed and the investment performance of the account. 

Business owners who currently sponsor a defined contribution plan, or did so previously, may also establish a defined benefit plan. This may provide some with the opportunity to increase contributions and take full advantage of both plans. 

Favorable Legislative Reform 
Favorable changes to defined benefit plans began with the Small Business Job Protection Act of 1996, when a repeal of Section 415(e) allowed participants of both defined contribution plans and defined benefit plans to fully benefit from both for plan years beginning in 2000. This legislative reform also eliminated the provision that required married business owners to aggregate compensation. 

In 1997, the Taxpayers Relief Act (TRA) repealed a 15% excise tax on excess distributions from qualified retirement plans. Coined the “success tax,” it was levied on amounts over $160,000 and, when added to income taxes, could take a significant bite out of benefits. 

More recently, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made several changes to defined benefit plans. EGTRRA lowered the possible age for funding full benefits from Social Security’s full retirement age to 62, and raised the maximum annual benefit limit, which is $170,000 in 2005. This figure will be adjusted annually, in $5,000 increments, according to inflation. Furthermore, this legislation boosted the amount of yearly compensation that may be considered for benefit purposes, and the 2005 limit is $210,000. This amount is also indexed for inflation every year in $5,000 increments.

 Note: EGTRRA is currently scheduled to expire on December 31, 2010. All legislative changes will revert to their status prior to EGTRRA unless Congress takes additional action. 

Worth Considering? 
Unlike most other plans, a defined benefit plan can count prior service with the employer in determining the benefit. This allows business owners, who may have delayed setting up a retirement plan until late in their careers, to make up for lost time. Furthermore, an employer sponsoring a defined benefit plan can generally contribute and deduct the annual amount necessary to fund the projected benefit. Some small employers may still find defined benefit plans less attractive than defined contribution plans, because they can be more complex and expensive. However, for the small business owner who has gotten a late start preparing for retirement, or who wants to save more, a defined benefit plan might be a practical option. 

The Importance of Good Recordkeeping 
Maintaining accurate records is an essential task for successful businesses. Precise records can be instrumental in sustaining a positive cash flow, claiming tax deductions, obtaining loans or outside financing, and monitoring the overall progress and condition of the business. Good recordkeeping will also be beneficial to your business in the following ways:

 Progress and Development. 
Wellmaintained records present an accurate picture of your company’s assets, liabilities and expenses. Your records can provide insight into which products are the most popular as well as those that aren’t doing as well. Records allow you to analyze the strengths and weaknesses of the company, and make adjustments accordingly. 

Cash Flow Management. 
Regular recordkeeping will enable you to prepare financial statements, which include balance sheets, profit and loss statements and cash flow projections. Not only will these systems help you stay on top of your company’s finances, but they will also play an important role in the company’s credit and financing opportunities. 

Tax Preparation. 
With all of the incentives provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), it has become especially important for business owners to plan in advance for tax deductions and exemptions. Accurate records will be of great assistance with tax planning and filing, can help your company save money and can provide documentation for all expenditures.

 In order to establish an effective recordkeeping system, a good rule of thumb will be to make daily recordkeeping a routine. Maintaining complete and up-to-date records will be the most advantageous for your company at tax time. This will involve developing files for the following:
  • All supporting documents should be kept in labeled files for ease of use. Supporting documents are invoices, receipts, bills, and cancelled checks. 
  • All income received to the business should be supported by gross receipts. These include invoices, deposit slips and order records.
  • If your business is in any type of retail, you will want to record your purchases, which will help you analyze your inventory at year-end. Keep copies of written checks, credit card statements and invoices.

Every business incurs expenses. Maintaining expense records will be especially useful for filing taxes. Some examples of documents to retain are account statements, invoices and bank and credit card records. Travel, gift and entertainment expenses may require additional information. Make notes on these records regarding the purpose, date and recipient. 

  • Gain, loss and depreciation are usually calculated annually for all assets. Keep all records detailing: the cost, when and where assets were purchased, depreciation deductions, and records pertaining to the sale or donation of assets. As you analyze the effectiveness of your company’s recordkeeping system, consider these questions:
  • Which sectors of your business are profitable, and which are financial losses? • How do you expect these financial indicators to continue in the future? 
  • What are your numbers for the company’s gross profit, net profit, accounts receivable, and expenses? 
  • How do your numbers compare to the previous quarter and year? How do they compare to your competitors? 

A good recordkeeping system can be crucial to the success or failure of a business. Thorough and accurate records will put your company in the best position for expense and income analysis, tax preparation and credit approval. Establishing a recordkeeping system may require some initial time and effort, but in the long run, your investment will return in spades. 

Incentives for Business Investment in Poor Communities
If you are starting or expanding a business, you may want to consider taking advantage of an array of tax deductions, wage credits, grants and other incentives offered by federal, state and local governments to companies that operate in certain distressed areas. While the primary aim of these programs is to revitalize economically depressed inner cities and rural communities, they can also help business owners minimize start-up and operating costs  

The Empowerment Zone and Enterprise Community Initiative 
Launched by the federal government in 1993, the Empowerment Zone (EZ) and Enterprise Community (EC) Initiative encourages businesses to open premises and employ people in areas that have been designated by Congress as “Empowerment Zones,” “Enterprise Communities” or variations on these titles that offer varying degrees of tax relief and a range of investment incentives. The category of “Renewal Community (RC),” which offers more limited incentives, was created in 2001. 

Scattered across the United States, these zones and communities are located in the inner cities of major metropolises, such as Chicago, Atlanta, and New York; as well as in rural counties in states like Kentucky, Mississippi and Texas. 

Taking Advantage of Wage Credits and Property Deductions 
Businesses operating in Empowerment Zones can claim a wage credit of up to $3,000 (i.e. 20% of the first $15,000 of wages) for each existing employee and new hire living and working within the EZ. Renewal Community businesses are permitted to claim a credit of up to $1,500 (i.e. 15% of the first $10,000 in wages) for each worker. Employers may claim these credits for an unlimited number of employees. 

Companies that employ people from certain economically disadvantaged groups may be able to claim additional wage credits, such as the Work Opportunity Tax Credit or the Welfare to Work Credit. These credits have been extended through 2005. 

Businesses located in distressed areas can also take advantage of enhanced federal tax deductions on the acquisition and sale of property. In 2005, small businesses are generally permitted to take a Section 179 deduction of up to $105,000 on purchases of depreciable property, such as equipment or machinery. Qualifying EZ and RC businesses are, however, allowed to claim an additional first-year expense deduction of up to $35,000. In some cases, capital gains tax breaks are available on the sale of assets held by EZ and RC businesses. Qualifying businesses may also benefit from other forms of support, such as funding from federal business development programs, loan guarantees and waivers of federal regulatory hurdles. 

Federally designated Empowerment Zones often overlap with so-called “Enterprise Zones,” established by states or municipalities. Local governments may offer their own incentives to businesses setting up shop in these areas, including sales tax exemptions, property tax reductions, and other special tax credits and loans. Many state and local governments issue tax-exempt private activity bonds, known as “Enterprise Zone Facility Bonds.” The proceeds from the sale of these bonds are used to make low-interest loans to businesses buying and developing commercial property in these zones. 

Businesses restoring certain types of commercial property may qualify for special federal tax breaks and loans. Companies engaged in revitalizing brownfield sites can claim federal tax deductions on the cost of cleaning up certain hazardous wastes, regardless of where the site is located.

 If you wish to find out more about the incentives available for starting a business or expanding into a particular zone or community, contact your local government, the U.S. Department of Housing and Urban Development, or the U.S. Department of Agriculture. For specific advice on how to make the most of the tax breaks available for investment in these areas, see your professional tax adviser. 
Planning Strategies
*Disclosure – Securities and Advisory services offered through representatives of Lincoln Financial Securities Corporation, member FINRA & SIPC. FINRA Branch Office: 233 Bloomfield Road, Burlingame, CA 94010. 
This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in California, Oregon and Colorado only. Advisory Services are offered to residents of the state of California only. Lincoln Financial Securities Corporation is not affiliated with Financial Concepts. Financial Concepts offer insurance & financial services to residents in California and Oregon. Variable & Group insurance products offered through LFS Marketing and Insurance Sales Corporation; fixed insurance products offered through Financial Concepts Insurance & Financial Services.
John Pivirotto’s California Insurance License #: 0699308
Financial Concepts’ California Insurance License #: 0786047