Insurers Innovate, but They Don’t Communicate
June 30th, 2009 | Posted by innovLast time, in our column “Insurers: Effective Innovators—Almost,”, we said—in total sincerity, we want to stress—that insurance had the potential to be one of the most innovative industries on Earth.
The response to that column was actually better than we expected. Yes, some of you laughed, others got offended, and more than a handful of you questioned our sanity (a special “thanks” for the offers to pay for the psychological counseling you felt we needed). But most of you got our point: To consistently launch successful new products, insurance companies, just like the firms within your industry, simply have to do a better job of understanding and aligning the three critical underlying components of innovation.
Marketplace success occurs when:
1) You discover a significant need.
2) You conceive of a new product, service, or business model to meet that need.
3) There is clear communication that connects No. 1 to No. 2.
Our point last time was that most insurers—like most businesses in general—spend the majority of their efforts discovering and fulfilling the need, and as a result short-change the communication portion. Innovation is a three-legged stool. If you get the insight and idea right but get the communication wrong, your launch will tip over. It will fail.
To keep that from happening, let us give you three and a half ideas to help you get the communication right. We often tell clients that a bad idea executed brilliantly is the same as a brilliant idea executed badly. They both result in failure. Insurance companies everywhere are sitting with two out of the three ingredients for innovation success in hand. They have created amazing financial tools to help businesses and people in a myriad of ways.
If you met with a creative expert in the insurance industry (they exist), you would soon find out that there are thousands of challenges—everything from putting your kids through college to dealing with the economic downturn—that insurance can help you meet right now. But very few people know about these solutions insurance companies can provide, because the industry has done such a lousy job of communicating about its innovative products.
As a high-ranking marketing friend in the insurance industry recently told us, “If our innovation score was like the SAT, we’d score very high in math but woefully low in verbal.”
So how do you correct this issue? Let’s say that, like the typical insurance company, you have identified a significant need in your market. And let’s also agree that you have a new product, service, or business model that meets that need. Here are three and half ways to make sure your idea resonates with your customer or end consumer. (We’ll continue to use the insurance industry as an example, but feel free to substitute your industry—or better, your company—every time you see “insurance.”)
1) Speak English
Do you know what “Universal Life,” “Variable Life,” or “Whole Life” is? Like most industries, insurance often forgets that insurance professionals are the only ones who understand its language.
It is critically important that you constantly keep this in mind (and act accordingly): You are not the true experts of the benefits your products deliver—your customers are the experts. They use everyday words when they talk about their wishes, dreams, and fears. If you are not using the words your customers use to describe their needs as you go about explaining what you have to fill them, you are making your job 20 times harder than it has to be. The voice of the customer must resound clearly in all of your communication.
1.5) One Voice
If everyone has to agree on the key characteristics of the message you are going to communicate, you will end up with a really bland message. The higher the number of people who have to agree, the worse this gets. Create a small innovation team—or just one person—and empower that team. Get out of the team’s way. Let it live (or die) by how often it’s right. You will get a clearer, better message to market faster.
2) Get the Benefit Right
“Life insurance”? Seriously? Somebody decided to call it “life insurance”? We have a feeling that life insurance got its name because nobody wanted to sell something “death insurance.” But people aren’t buying life (or death) insurance. They are really buying benefits such as an inheritance for their kids or a paid-off home for their surviving spouse.
The point: Would you rather buy “Education for a Whole Entire Family Insurance” or “Whole Life Insurance”? When companies connect the correct insight/benefit (legacy) with the product (insurance) and communicate the benefit evocatively, e.g., “The Five Generation Scholarship Plan,” something magical happens. It sells.
3) Engage the Influencers
Now more than ever, social media sites have allowed us to find those who really care the most and get them engaged in the new idea. We can ask for their insights about how to communicate it, and give them credit. Make them evangelists and carriers of the message. Once your campaign starts, they will be attached to it and help propel it.
This idea is critically important when it comes to people who sell the product directly—like agents. It is important for other advisers, too. For insurance, this would include CPAs. Think: Who are the influencers, advisers, and agents in your industry? When was the last time they helped you discover a need, invent an idea, and launch it?
It is easy to think a great idea sells itself. It doesn’t. Learn to use the voice of the customer to communicate what you have while you are formulating the product itself. Your odds of success will increase dramatically.
Using Design to Drive Innovation
June 29th, 2009 | Posted by innovIn a previous era, all the talk was of strategy, strategy, strategy. More recently, it’s been innovation, innovation, innovation. As design thinking seems poised to sweep away some of today’s celebrated innovation practices, we must be wondering what new provocation is on the horizon. Relax, I’m not planning to conjure one up.
For those of us on the design consulting side of the business, it has not exactly been a smooth ride lately. But then again, I can’t say that I ever remember it being all that smooth, even when the demand for all forms of basic design and new production capability was sky-high.
Having lived one career on the corporate design side of the consumer-products industry and now a good part of another on the consulting side, I’ve seen the ascendancy of design as a profession and the movement of design toward business competency. At the outset, designers were about style and the creation of bright shiny objects, and we dutifully manned our post at the last decoration station on the way to the marketplace.
Today, there are arguably two design strategies in the marketplace. You either succeed as the low-cost producer, or you successfully differentiate your offering by design in a relevant, meaningful way that is valued by shoppers, consumers, and sellers. As such, the theoretical role of design in business is relatively uncomplicated and straightforward.
The complications come with these two questions: Where does the core idea around a differentiated, relevant, valued offering come from? And what is its relationship to this thing we used to call design? You know—the bright shiny objects.
In our practice, we refer to the former as innovation strategy, and to the latter as design strategy. Somewhere in between resides the opportunity for brand strategy, and we hope to create a system in which there is a seamless flow from ideas to brand meaning and, finally, to how that brand or product or service is expressed and communicated.
Putting all three aspects of this brand-building practice together provides validity in thinking about design as one of the primary idea generators for the creation of viable business platforms. Assuming that the manifestation of a business offering is realized in the context of a brand, that brand requires meaning, a defined expression, and then, given some success, a plan for continued opportunity development that sustains and grows the business.
True innovation requires the adoption of a belief system that sometimes must prevail in the face of other data metrics. Read up on the great inventions and business wins and you will note that at the core of most of them lie belief, dedication, and the passion to succeed. Today’s business leaders are often too afraid to move ideas forward without ironclad data proofs that they will be successful. All too often, they are the losers. Use your head, listen to your heart, and feel what’s in your gut.
As long as the human spirit and the marketplace lives on, I’m sure we will be inventing and innovating. Innovation is the commercial side of discovery and invention. Change is a huge driver of both discovery and invention. The world changes around us and we discover new things and we observe change and invent new things to deal with change.
If designers are content to function as purveyors of bright shiny objects, they will likely fade into obscurity. On the other hand, if they step forward and deliver the orchestration of the total experience with a brand, product, or service in the context of our changing environment, their future, too, looks bright.
School board says no on tax breaks to all but one developer
June 27th, 2009 | Posted by taxJun. 27–School directors in Scranton shot down all but one of seven requests for extended tax breaks for developers during a special meeting Saturday morning.
Board directors voted 8-1 to extend the Keystone Opportunity Zone for the Green Ridge Health Care Center’s new assisted living facility, which will be
built adjacent to the existing nursing home at 2740 Boulevard Ave. But notably, the board decided by a 7-2 vote to nix extended abatement for the Mount Pleasant Corporate Center, a $27 million project of the Greater Scranton Chamber of Commerce.
Other abatements not approved were for Ice Box developer Bob Burke, Donald Rinaldi of the “Renaissance at 500″ project on Lackawanna Avenue, Dominick and Carl Scartelli, and Village at Tripp Park property owners Roger Leonard and Brian and Kris Kizer.
School directors reviewed only seven of the original 21 requests for an extension of the Keystone Opportunity Zone, a state designation that gives businesses state and local tax breaks. The other 14 had already been rejected by Scranton City Council.
For two hours, school directors, developers and city residents debated the merits of the controversial tax breaks and whether the breaks represent incentives for businesses to create jobs that might not otherwise be created — or create unfair tax advantages for newer businesses that might compete with long-established businesses.
Many of the requests were decided by 8-1 votes, with director Bob Lesh, who sees KOZs as having merit and creating jobs, voting “yes” to all and director Todd Hartman, who sees KOZs as “a wash” in whether or not jobs are created, voting “no” to all. In the Mount Pleasant vote, Mr. Lesh and Kathleen McGuigan voted in favor.
Green Ridge Health Care’s expansion survived because the owner, Michael P. Kelly, provided a “concrete” example on what he can do with a KOZ — the current nursing home is a KOZ — said board president Tom Gilbride.
“We’ve seen his work in the past and it’s been very successful,” Mr. Gilbride said after the meeting.
Other board members, like director Chris Phillips, had argued that KOZs have more costs associated with them for the school district than benefits. But because of the service Mr. Kelly provides — housing for senior citizens — “the benefit far exceeds the cost.”
Mr. Kelly said the tax abatement will allow him to build a 38,000-square-foot, 72-room assisted-living facility, instead of one 32,000 square feet in size. “We won’t have to scale back the project and leave out some of the amenities I wanted to provide,” he said.
He hopes to have the new facility — for senior citizens who need help living but not a nursing home — up and running before summer 2010.
The major pitfall to the request for Mount Pleasant Corporate Center on Linden Street was chamber officials couldn’t say what businesses were interested in building on the property and when, board officials said.
Chamber president Austin Burke said he thinks with the tax abatement extension, the entire site, which can hold 210,000 square feet of office space, could have been built out completely in two years. Now he has no idea, indicating some properties without KOZ status have sat undeveloped for 20 years.
“We’ll continue to market the property. Some people though will never even look at a site unless it’s KOZ,” Mr. Burke said. “I think they’ve done a disservice to the City of Scranton.”
Contact the writer: cschillinger@timesshamrock.com
To see more of The Times-Tribune or to subscribe to the newspaper, go to http://www.thetimes-tribune.com/ . Copyright (c) 2009, The Times-Tribune, Scranton, Pa. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com , call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
Energy Innovation Should Trump Job Creation
June 22nd, 2009 | Posted by innovAcross the country, it is hard to find an elected official who hasn’t jumped on the green economy bandwagon. So many stump speeches marry the policy objectives of saving the environment and creating jobs. It starts at the top: President Barack Obama has promised to spend $150 billion over 10 years to create 5 million green-collar jobs. Like a human wave at a sporting event, Americans are cheering for the green economy to bring us out of our economic funk and solve global warming and foreign energy dependence, all at the same time.
Of course, we have serious work to do in these important policy areas. The threat of climate change is real and we must act now. Transforming our national energy system will require broad public support and collaborative innovation across sectors. The current economic crisis is a wakeup call for our country to become more competitive by strengthening our education and workforce development systems and committing ourselves to a national innovation agenda. While there is overlap and potential synergy between energy and economic policies, I worry we will accomplish neither if we treat them as one big policy mashup.
Our national energy conversation has been subsumed by the frenzy over green jobs. That’s understandable considering our unemployment rate of 9.4% and the many middle- and lower-income people who see no upside in the global-warming and energy-independence causes. A narrative that claims we will replace all of the lost blue-collar jobs with new green-collar jobs plays much better. But it is important to ask whether these millions of green jobs are real and whether a jobs argument can enable the transformations we need on the energy front.
Replacing all of the country’s lost industrial jobs with green jobs is unrealistic, but a less-wasteful energy system will create opportunities. Retrofitting buildings and homes, constructing a “smart electric grid,” increasing wind and solar capacity, improving mass transit, and increasing research for new energy platforms all have job creation potential. What is not clear is how many of these jobs will be new.
In any paradigm shift there are job gains that are offset by losses. And the adoption of new technologies often results in systems that require less labor to operate and maintain. Most likely there will be a job shift as companies align their offerings to serve the new energy market and workers learn additional skills to stay relevant. The transition will create at least a temporary increase in job opportunities due to the enormity and speed of the system change being contemplated.
It is also important to distinguish between transitory work, such as rehabbing a building or erecting an offshore wind farm, and longer-term jobs created by companies designing and manufacturing the required technologies and components. Initially, there will be good jobs related to assembly of wind farms, but the turbines won’t necessarily be built in the U.S. Manufacturers will produce them wherever they can find the best deals. While every country salivates over these high-wage opportunities, the market is global and the U.S. has a late start. The fighting over jobs will be intense.
The problem with overplaying the promise of green jobs to win more backing for “decarbonizing” our economy is twofold. First, it threatens to turn people off to needed environmental actions if jobs don’t quickly materialize. Second, the pain of averting global warming and reducing our dependence on foreign oil is greater than we are being told. We need to build a broad consensus across America that transforming our energy system is imperative. We’ve already seen what happens to support for new energy policies when the price of gasoline at the pump goes down. Expect the same thing to happen if green jobs become the measuring stick for important energy policies like capping carbon dioxide emissions and concurrently creating a market to buy and sell exemptions.
I hope the U.S. will compete as an innovator and global leader for green-collar work. We need all of the jobs that we can get to help us out of this economic downturn. But the driver for energy policy should not be the labor intensity of alternative approaches. If the best way to address global climate change and energy independence is to employ technology that doesn’t create significant numbers of jobs, that is the path we should take.
Energy innovation is now playing a supporting role to economic policy and job creation. It is time to give it center stage.
Does Silicon Valley Still Matter?
June 22nd, 2009 | Posted by innovIt’s a truism in tech that entrepreneurs who want to build the next Google must come to Silicon Valley. The area’s importance as a tech hub was reinforced earlier this month by a Milken Institute report saying that Silicon Valley remains “the largest and most influential high-tech center in the world.”
I’ve gotten a close glimpse of why Silicon Valley matters through my research on some of tech’s most successful entrepreneurs, including Evan Williams, co-founder and CEO of Twitter; Mark Zuckerberg of Facebook fame; and Marc Andreessen, co-founder of Netscape, Opsware, and Ning. They and thousands like them could never have gotten their ideas off the ground had it not been for the concentration of ideas, talent, mentoring, and funding they found in Silicon Valley.
Williams moved here from Nebraska in the late 1990s before founding pioneering blog site Blogger, which he later sold to Google (GOOG). As he noted in a blog commemorating his 10th year in the Valley, “Andreessen says if you want to do technology in the U.S., you need to be in the Valley…Marc is completely right. In my case, anyway, Silicon Valley (or thereabouts) was exactly where I needed to be.”
What’s Wrong with Wisconsin?
But the southern region of California’s Bay Area isn’t necessarily where others believe they need to be. Wisconsin-based entrepreneur Penelope Trunk argued in her blog that starting a company in the Valley is “stupid,” in part because of the expense of living and doing business here and because much of the work needed to start many small businesses, including raising money from angel investors, can be done wherever you are.
Trunk’s argument may be harsh considering she hasn’t lived in Silicon Valley, but I, too, have found myself questioning the importance of this unique region to the creation of tomorrow’s tech titans. I’ve spent about two weeks of each of the last several months traveling to China, Europe, and Africa and will continue globe-trotting for the next year or so. I’m working on a book about global entrepreneurship, and I’m no longer convinced you really do need to be in Silicon Valley if you’re looking to build the Next Big Thing in tech.
Some of the very qualities that make Silicon Valley singular threaten the area’s status as the high-tech innovation hub. Because it is so much easier to start a company here, the region has become a magnet for entrepreneurs and investors who play it safe. “There are too many people trying to avoid risk; too many people trying to deploy capital, as opposed to invest in risk and invest in breakthroughs,” venture capitalist Vinod Khosla of Khosla Ventures recently told me in an interview for Yahoo’s (YHOO) TechTicker.
Spreading the Wealth
He’s got a point. Consider two of the area’s biggest success stories, Facebook and Twitter. For all the hand-wringing about whether either company will ever make money, neither is all that risky a venture. The same observation could be made about many of the thousands of applications being built for Twitter, Facebook, Apple’s (AAPL) iPhone, and other platforms.
It’s great that these companies have opened their platforms to outside developers, who in turn can build downloadable games, entertainment applications, and business productivity tools designed to make smartphones and social networks more fun and useful. The resulting venture capital-fed ecosystems create a much needed avenue for developers to make money and get product out the door quickly—sometimes in a matter of days.
But if you can start a company, build a product, and get it to market in about a week, you’re probably not building a high-risk, swing-for-the-fences business. Silicon Valley’s infrastructure can remove obstacles, but it still won’t give you something for next to nothing.
Focus on the Short Term
Some entrepreneurs are being lured more by the startup lifestyle than they are by the ideal of solving the world’s big problems or meeting fundamental human needs. They’re wooed by the ease of starting a Web business, combined with the allure of a Digg-influenced geek-chic subculture—even if they don’t have a great idea or the fortitude to work around the clock to build a great business.
At the same time, venture capital is becoming more institutionalized. Some investors, Khosla and others argue, have become infected by Wall Street’s emphasis on short-term results, losing sight of the need for hands-on guidance and patience that’s essential to fostering a promising idea over the long haul.
There’s also a great deal of soul-searching going on in Silicon Valley as venture capitalists and entrepreneurs alike peer past the end of an era in high-growth computing and networking. Homes and businesses are flush with machines that are more than adequate for most users’ computing needs. The information superhighway is built, and plans are in place for networks capable of providing nearly ubiquitous high-speed wireless coverage. Sure, there’s always a need for technology that makes our computers and networks deliver results more quickly and reliably, and for the Web-delivered applications that make them more useful.
Seeking Startups in China
Investors see great promise in such fields as cloud computing, three-dimensional graphics, and so-called business intelligence software that helps companies better use digital data. Many see cleantech as the future. And throughout Silicon Valley, breakthroughs and funding are coalescing in all these areas.
Yet, venture capitalists—many of them U.S.-based—are increasingly eager to find and fund technological innovations the world over. For instance, in China, where I traveled extensively in May, there’s as much as $20 billion in VC funding in search of startups, experts say. The amount may be twice as high when you include angel investors and more informal financing sources. Unlike in the past, when investments overseas typically morphed into cross-border companies with a headquarters in the Valley, some Silicon Valley VCs for the first time are funding companies that don’t aim to tap the U.S. market.
Put off by heightened restrictions on H-1B visas in the U.S., and attracted by the prospect of landing funding at home, many of the country’s engineering graduates are quickly returning to their native countries after receiving their degrees abroad. Some never leave in the first place.
Move Over, America
Silicon Valley remains a hub of tech innovation, no question. But as Fareed Zakaria explains in his excellent new book of the same title, we’re on the precipice of The Post-American World. Emerging economies like those in China, India, and Brazil are entering the modern age and luring billions of dollars from investors ready to back smart, high-growth ideas. The center of entrepreneurship is shifting eastward, and many VCs are looking abroad.
In the western world the Valley is still king, but for entrepreneurs in emerging markets who want to create the Next Big Thing in tech, the idea that you have to move to Silicon Valley may no longer hold true. Before long, Silicon Valley may move to you.
And the Winner for Corporate Expenditure Cuts Goes to…
June 19th, 2009 | Posted by stockPosted by: Howard Silverblatt on June 19, 2009
Last year’s race was between commodities to see which would hit $4 a gallon first – milk or gas. Milk won, and is still over $4 a gallon, but while gas is down it’s making a comeback and is up 66% year to date – it’s not over till it’s over.
This year’s race was between buybacks and dividends; for a few days it looked like executive pay might join the race, but it didn’t. Dividends payments were down 18% in the first quarter and I expect the second quarter to be down 20%, with no improvement until ‘sometime’ in 2010. Buybacks, which had easily outspent dividends for the past four and half years, and peaked in Q3 2007 at almost three times more than dividends, have fallen off 82% from that mark, with the Q1 2009 expenditure of $31 billion down 72% from the Q1 2008 expenditure of $114 billion. And the numbers are actually worse than they first appear. First, Exxon Mobil, the poster child for buybacks with 35 consecutive quarters of share count reduction, accounted for over 25% of the total Q1 buybacks – it’s always good to have money. Second, many companies only made token purchases, which were most likely used to cover options or prior agreements. And third, 83 of the issues that repurchased shares during the fourth quarter of 2008 didn’t buy any shares in the first quarter of 2009.
What’s happening here is that the need to conserve capital in the current recession, combined with the uncertainty of future cash flow, has made buybacks too high risk for most corporations. While companies may want to buy back shares to support their stock and increase EPS, their priority is insure that they have enough resources to run the business, just in case the recovery is delayed a bit.
I expect buybacks to remain weak for the foreseeable future, even as earnings improve. Buybacks are now well behind dividends in corporate priorities, and dividends are declining. The reality of buybacks is that are gone as we knew them, at least until the bad memories fade from our minds and portfolios.
For more details see my buyback release chick here
P.S. – Without buybacks supporting stocks it’s going to be hard to gain that 60.2% advance needed to break even for the decade
5 Year-End Tax Strategies for Small Businesses
June 19th, 2009 | Posted by taxATTENTION SMALL-BUSINESS OWNERS it’s not too late to make some smart moves and slash your business’ 2009 taxes. To start with, some soon-to-expire tax breaks are too good to ignore if your operation is healthy enough to need and be able to pay for equipment and software. And there’s more. Here’s my list
of the best year-end tax-saving moves.
While buying a big SUV may not be politically correct, the fact is these vehicles are very useful if you need to haul people and stuff around. They also have a big tax advantage for businesses. Specifically, new and pre-owned “heavy” SUVs used over 50% for business qualify for a first-year Section 179 depreciation write-off of $25,000. You then depreciate the rest of the SUV’s cost using the general rules, which include 50% first-year bonus depreciation for new (not used) SUVs. (I’ll tell you more about bonus depreciation in Section 3.)
To collect the $25,000 first-year deduction, you must buy an SUV with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. Only these heavyweights qualify for the privilege. First-year depreciation deductions for lighter SUVs, passenger cars and light trucks are much skimpier. You can usually find a vehicle’s GVWR specification on a label on the inside edge of the driver’s side door where the hinges meet the frame.
Example: Say your small business uses the calendar year for tax purposes. You buy a new $65,000 Cadillac Escalade and use it 100% for business between now and Dec. 31. On your 2009 business tax return or form, you can claim the $25,000 Section 179 deduction. Then you can write off another $20,000 under the 50% first-year bonus depreciation break explained in Section 3 [($65,000 - $25,000) x 0.5 = $20,000]. Finally, you can generally write off another $4,000 under the normal depreciation rules [($65,000 - $25,000 -$20,000) x 0.2 = $4,000]. Your first-year depreciation deductions add up to a whopping $49,000.
There’s a much larger first-year Section 179 depreciation deduction for things that are not SUVs. The write-off – a whopping $250,000 — is available for the cost of most new and used items of business equipment and software.
That includes computer systems, office furniture, machinery, and (as I said) software that is put to use during tax years beginning in 2009 (which means calendar-year 2009 if your business uses the calendar year for taxes, as most do).
The $250,000 Section 179 deduction privilege is also available for heavy pickups and vans (meaning those with GVWRs above 6,000 pounds) that are not classified as SUVs under the tax law. These include the following:
* Pickups with a cargo area that is at least six feet in interior length. Many pickups with full-size cargo beds will meet this description (but pickups with shorter beds will fail this test and be classified as SUVs).
* Closed load-carrying vehicles with no seating behind the driver’s seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield. Delivery vans will qualify.
* Vehicles designed to seat more than nine passengers behind the driver’s seat. Shuttle vans and minibuses will qualify.
Your business can also claim 50% first-year bonus depreciation for qualifying new (not used) equipment and software placed in service by December 31, 2009. New real estate land improvements (sidewalks, drainage systems, and so forth) and certain leasehold improvements qualify too (most other real estate costs do not). For a new asset that’s also eligible for the Section 179 depreciation write-off, the 50% bonus depreciation deduction is based on the cost remaining after the Section 179 deduction. Any cost remaining after claiming the Section 179 and 50% bonus depreciation deductions is depreciated under the normal tax rules.
Warning: The December 31, 2009 deadline for 50% first-year bonus depreciation applies whether your business’s tax year is based on the calendar year or not.
Example: Before the end of this year, your business buys new equipment costing $350,000. On your 2009 business tax return or form, you can generally write off the first $250,000 thanks to the Section 179 deduction privilege.
Then you can write off another $50,000 under the 50% bonus depreciation deal [($350,000 - $250,000) x 0.5 = $50,000]. Finally, you can generally write off another $10,000 under the normal depreciation rules [($350,000 - $250,000 -$50,000) x .2 = $10,000]. Your first-year depreciation deductions add up to a whopping $310,000.
Should You Wait Until Next Year?
That could be dicey. All the first-year depreciation breaks that I’ve talked about in this column might be eliminated or seriously cut back next year.
* The $25,000 Section 179 depreciation deduction for heavy SUVs is endangered because many Congressional Democrats hate big SUVs. However, the dire state of the nation’s auto industry could dictate in favor of leaving this break on the books.
* The $250,000 Section 179 depreciation deduction is scheduled to drop back to only $134,000 for tax years beginning in 2010. While you would think the existing $250,000 allowance would be extended through 2010 as additional life support for the economy, I haven’t heard much discussion about it.
* The 50% first-year bonus depreciation break is scheduled to expire on Dec. 31, 2009. Once again, you would think it would be extended through 2010, but who knows?
Bottom Line: If your business has lots of vehicle, equipment, and software needs, it makes sense to take advantage of the depreciation breaks available for 2009 acquisitions. Then you can add more stuff next year and take advantage of whatever breaks are available then. For more details, see my August column on SmallBiz tax perks.
If Business Income and Expenses Go on Your Personal Return
If you run your operation as a sole proprietorship, S corporation, LLC, or partnership, the net income generated by your business will be reported on your Form 1040 and taxed at your personal rates. The scheduled 2010 individual federal income tax rate brackets are virtually the same as this year’s, so they remain taxpayer-friendly. Therefore, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year still makes sense if you expect to be in the same or lower tax bracket next year. In that case, deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2009 until 2010. It could even cause some income to be taxed at a lower rate next year.
On the other hand, if your business is healthy, and you expect to be in a significantly higher tax bracket in 2010 (say 35% vs. 28%), take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2010. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.
If Your Business Is a C Corporation
If you run your business as a regular C corporation, the 2010 corporate tax rates are scheduled to be the same as always. So if you expect your corporation to pay the same or lower rate in 2010, postpone income into next year while accelerating deductible expenditures into this year. If you expect the opposite, try to accelerate income into this year while postponing deductible expenditures until next year.
How to Do It
Most small businesses are allowed to use cash-method accounting for tax purposes. Assuming your business is eligible, cash-method accounting gives you flexibility to manage your 2009 and 2010 taxable income to minimize taxes over the two-year period. Here are some specific cash-method moves if you expect business income to be taxed at the same or lower rate next year.
* Before year’s end, charge up recurring expenses that you would otherwise pay early next year on credit cards. You can claim 2009 deductions even though the credit card bills won’t be paid until next year. However, this favorable treatment doesn’t apply to store revolving charge accounts. For example, you can’t deduct business expenses charged to your Sears account until you actually pay the bill.
* Pay expenses with checks and mail them a few days before the end of the year. The tax rules say you can deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, send checks via registered or certified mail. That way you can prove they were mailed this year.
* Prepay some expenses for next year. As long as the economic benefit from the prepayment lasts 12 months or less, you can claim a 2009 deduction. For example, you could prepay the first three months of next year’s office rent or the premium for property insurance coverage for the first half of next year.
* Delay invoices. On the income side, the general rule for cash-basis taxpayers says you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, put off sending out some invoices so you don’t get paid until early next year. Of course, you should never do this if it puts you at risk of not collecting your dues.
When to Take the Opposite Approach
If you expect to pay a significantly higher tax rate on next year’s business income, try to do the opposite of these things to raise this year’s taxable income and lower next year’s.
With the exception of the Section 179 depreciation deduction, the business tax breaks and strategies I’ve discussed here can be used to create or increase a 2009 net operating loss (NOL). As I recently explained, you can then choose to carry a 2009 NOL back for up to five years in order to recover taxes paid in those earlier years.
What’s Your Leadership Mindset?
June 19th, 2009 | Posted by innovDuring my term as superintendent of the U.S. Naval Academy, I enjoyed dropping in on classes from time to time to learn from our world-class faculty and to chat with students. Whenever I asked, “How many of you want to be leaders?” everyone in the room instantly raised their hands.
A few years later, as an administrator at a large state university, I frequently asked students the same question. But usually fewer than half of those in the room put up their hands.
What explains the difference? Talent wasn’t the issue. Both institutions are blessed with bright, hard-working young men and women. Nor was instruction a problem. Both institutions employ top-notch faculty. The difference, I’m convinced, was rooted in mindset.
At the Naval Academy—and I speak from experience as an alumnus—you learn from the very first day that leadership is a journey, and it’s to be undertaken by everyone. Leadership is not the province of the select few; you can work at it, and you can get better. While you’re not expected to take charge when you first set foot on campus, the expectation is you will become an effective leader—and your entire four years at the Academy are designed to develop you, step by step, into one.
Cultural Assumptions
The state university I served, like most universities and colleges in the U.S., invests heavily in equipping students with the knowledge and practical skills they need to succeed in the workplace. And indeed, it does a very good job of that. Less emphasis, however, is placed on developing leadership skills across the entire student body.
Looked at from that perspective, the divergent ways in which students reacted to my question becomes more understandable. If you live in a culture where your colleagues believe you can be a leader and help you develop the skills you need, you will enthusiastically embrace the mantle of leadership. It might not be your goal to become a CEO or a top politician. But, regardless of your occupation, you will view yourself as a leader at home, at work, and in your community. But if you live in a culture that assumes leadership is not for everyone, is dependent on whether you have innate leadership skills, and that leadership is defined by your job title rather than your actions, you will have an entirely different view.
Unfortunately, that’s the culture that most of us live in, not just in the U.S. but around the world.
Helpful Distinction
Recently I’ve enjoyed reading about the work of Stanford University psychology professor Carol Dweck, author of Mindset: The New Psychology of Success. Her research explores and explains questions that have interested me for years as a leader. Essentially, she has found that people generally exhibit what she calls either “growth mindsets” or “fixed mindsets.” Those with growth mindsets believe they can get better at what they do, that they have reservoirs of untapped potential. They realize that promise by working hard and making incremental improvements over time, whether they are athletes, or writers, or surgeons.
Those with fixed mindsets, however, believe they can only go as far as their natural abilities will take them. They think talent, rather than hard work, is the fundamental component of success. They are often scared to challenge themselves because they are terribly afraid of failure—which, in their minds, is an indictment of their abilities rather than an opportunity to learn and do better next time.
This notion of fixed and growth mindsets, which I’ve seen on display not only in universities but in virtually every social and professional setting in my 40-year career, has crucial implications for leaders. There are three questions, in particular, we must ask ourselves:
First, how effectively are you managing your organization’s talent? In the rush to get things done, especially during a severe recession, it’s tempting to single out your top 10% for development and forget about everyone else. But from the standpoint of a growth mindset, you’re letting a lot of potential throughout your organization go untouched.
Obviously, that’s not good for those men and women, many of whom probably crave opportunities to develop but are languishing instead. In the long run, it won’t be good for your organization’s leadership pipeline or your bottom line either.
Second, does your organizational culture permit risk taking and mistakes? We of course don’t want the kind of egregious mistakes and completely irresponsible gambles that helped lead to our current economic crisis. But innovation does require making some strategic bets, some of which will pay off and some of which will fail. A growth mindset sees those failures as great opportunities to learn. When resources are tight, it’s natural to conserve them. But taking a defensive stance now might short-circuit your long-term efforts to move into new markets and develop new products. Many influential organizations, from Hewlett-Packard (HPQ) to CNN, flourished because of bold moves made during tough times.
Finally, are you resting on your laurels as a leader? It can be hard to stay hungry over time. The more experience you gain and the more successes you have, the more likely you are to believe there’s not much left to learn.
A growth mindset, of course, calls for exactly the opposite. Arizona State University invited President Obama to deliver its commencement address last month. But it declined to give him an honorary degree, noting that his professional body of work is not yet extensive enough to merit one. A media flap predictably followed. Obama handled the situation skillfully, however, acknowledging the hard work that still lies ahead of him and encouraging the graduating class always to focus on “the daily labor, the many individual acts, the choices large and small that add up over time, over a lifetime, to a lasting legacy.”
It’s incumbent upon all of us as leaders to do the same.
June 17th, 2009 | Posted by taxPublication: Investor’s Business Daily
Byline: JEFF SCHNEPPER ** Schnepper
Allison Whitney just inked a contract on a foreclosed San Diego condo. She’s paying less than half what it sold for two years ago, and thinks the troubled housing environment is a great place to find bargains.
“People can get up to a $10,000 tax credit from California, and the IRS wants to give me $8,000 I’ll never have to pay back,” said Whitney, a document-management account executive at Copy Link, in Chula Vista, Calif. “There’s never been a better time to buy real estate.”
Prices have rolled back to pre-boom levels, interest rates are near historic lows and tax subsidies are proliferating. That spells opportunity to those with the cash and courage to selectively buy homes despite ongoing overall house-price declines.
“It’s a tangible asset. Everybody has to have a place to live,” said Susan Einemo, a San Diego area real estate agent. “Depressed real estate has always rebounded.”
Only some deals made today stand to be winners. But the reasons why real estate purchases are worth considering now are many.
Taking the long view, some buyers see a hedge against inflation. Congress, with bailouts, is spending trillions of dollars it doesn’t have — a classic formula for runaway prices.
“Investments in real property have always been an excellent hedge against inflation,” Einemo said.
On the plus side, government spending can greatly help buyers in today’s market, subsidizing property investments with tax deductions, credits and special programs.
Tax adviser David Goldhirsch, in Brooklyn, N.Y., thinks this is anopportune time for real estate — especially given its tax advantages, some of which are new and improved.
For one thing, itemizers can deduct interest on a primary home up to $1 million in principal, plus $100,000 on home equity borrowing.
“In addition, there’s no limit to the deduction for real estate taxes paid,” he said. “You can have a primary home and three or more vacation homes and deduct the taxes on all of them.”
Deductions Differ Now
Yet buying today isn’t apt to yield quite the tax deduction punch as did the boom, for three reasons: Prices and mortgage interest rates are lower, and the down payment required may be higher — so there’s less interest to deduct on a property.
Buying a Phoenix home in 2006 for $400,000, with 10% down and a 6%interest rate, the year’s deductible mortgage interest would reach about $21,600. Buying the same home for half the price today, with 5% interest and 20% down, deductible mortgage interest would reach only about $8,000. In the 35% bracket, that’s an extra $4,760 in taxes. Mortgage payments would be lower too — so despite the smaller deduction, the owner would have more money left in his pocket.
Homeowners get a break on real estate taxes even if they don’t itemize.
“For those who have paid off their mortgage and now take the standard deduction, that is increased by $500 ($1,000 on a joint return) for real estate taxes paid on a principal residence,” Goldhirsch said.
Consider protesting the amount of property taxes imposed. Given housing’s collapse, many homes are “overvalued” for assessment purposes. If assessment and taxes are based on comparative market value, the drop in that value should be reflected in the taxes one pays.
Interest and taxes are also allowable deductions on rental properties owned. But any losses on the rental activities may be deferred bypassive-loss-limitation rules.
Credits Boost Buyers
A credit, a dollar-for-dollar reduction in taxes owed, is always better than a deduction. In the 35% bracket, a $100 deduction saves $35, but a $100 credit reduces the tax by $100.
The federal first-time homebuyer credit is among the best government perks for home purchases now. But “first-time homebuyer” is reallya misnomer. Qualifying for this incentive simply requires a person (and spouse, if married) to have had no ownership interest in a principal residence for a three-year period prior to the date of purchase of the home.
Last year, Congress offered these homebuyers a 10% credit on the first $75,000 paid on the purchase of a home. It was really an interest-free loan, to be paid back over 15 years.
Congress upped the ante for homes bought in 2009 through November.The 10% rate now applies to the first $80,000, for an $8,000 refund that no longer must be paid back, if one uses the home as a principalresidence for 36 months.
** The money is paid even if there’s no tax liability.
** The credit phases out at adjusted gross income of $75,000 to $95,000 ($150,000 to $170,000 for joint filers).
** One can own a vacation home and still qualify.
** One can claim the credit on a 2009 return or by amending 2008′s.
** The credit can be allocated between multiple buyers in any “reasonable” way.
Credits keep coming. The American Recovery and Reinvestment Act of2009 increased the energy tax credit for homeowners’ energy-efficient improvements. It raised the credit to 30% of the cost of all qualifying improvements, and to a maximum $1,500 for those made in 2009 and2010. It applies to things like insulation and energy-efficient heating, air conditioning and windows.
Don’t neglect looking into a variety of state credits and deductions. New Jersey, for instance, lets taxpayers deduct up to $10,000 forproperty taxes paid. And Kentucky on July 26 will start offering a credit of up to $5,000 on new-home purchases.
Don’t delay, either. Till early this month, buyers of new homes inCalifornia could apply for a credit of up to $10,000. Now that the state has reached its allotment of requests, the only ones who can getthe credit are those who’ve already asked for it. California expectsto finish processing those credit certificates in August.
is a New Jersey lawyer and CPA, personal finance columnist and theauthor of several books on tax strategies
Tax-shelter law taking toll on small business Lawmakers asking IRS to suspend penalty collections
June 16th, 2009 | Posted by taxWASHINGTON – Some small businesses are being hit with big fines for not disclosing the use of questionable tax shelters to the IRS, an unintended consequence of a law aimed at corporations that use the shelters to avoid taxes.
The penalties, which can reach $300,000 a year, are automatic under the law. But a bipartisan group of lawmakers asked the IRS Monday to temporarily stop imposing them while they work on legislation to reduce them.
A 2004 law setting up the automatic penalties was designed to stop large corporations from exploiting tax shelters known to be illegal. But the lawmakers said some small businesses have been penalized for using the tax shelters to reap tax savings that are smaller than the penalties.
The lawmakers, led by Sen. Max Baucus, chairman of the Senate Finance Committee, said the penalties are excessive.
“We’re asking the IRS to temporarily suspend the collection of certain penalties while we work on legislation,” said Baucus, D-Mont.
The lawmakers sent a letter Monday to IRS Commissioner Doug Shulman, asking him to temporarily suspend efforts to collect penalties that exceed the tax benefits achieved through the tax shelter.
The letter also was signed by Sen. Chuck Grassley of Iowa, the top Republican on the Senate Finance Committee; Rep. John Lewis, D-Ga., chairman of the House Ways and Means Subcommittee on Oversight; and Rep. Charles Boustany of Louisiana, the top Republican on the subcommittee.
“When I advanced the legislation to shut down tax shelters, I did not intend to bankrupt small businesses that had no ill intent,” Grassley said. “The penalty should be commensurate with the transgression.”
Internal Revenue Service spokeswoman Michelle Eldridge said the agency was reviewing the lawmakers’ request.
The existing law imposes reporting requirements on businesses and individuals who use tax shelters that the IRS has identified as abusive. The goal is to red flag these “listed transactions” so IRS agents could examine them.
The penalties for failing to disclose the transactions on tax forms are $100,000 a year for individuals and $200,000 a year for businesses. Taxpayers who use the tax shelters for both individual and business purposes face penalties of $300,000 a year.
The penalties cannot be appealed, National Taxpayer Advocate Nina Olson said in her 2008 annual report. Olson, an independent watchdog within the IRS, cited a case in which a small business owner saved $45,000 over three years from a tax shelter and was fined $900,000 by the IRS.
“The statute as written can impose unconscionable hardship on taxpayers,” she wrote. “In practice, the requirement that this penalty be imposed without regard to culpability may have the effect of bankrupting middle-class families who had no intention of entering into a tax shelter, an outcome that has dismayed even hardened IRS enforcement personnel.”
The Small Business Council of America recently submitted to Congress numerous examples of small business owners hit with large penalties.
One was Robert Mathew, who owns a small paving company in Indiana. Mathew purchased a type of life insurance policy for his employees in 2002 that was later added to the IRS list of abusive tax shelters. Mathew said he was unaware of the designation and did not disclose the plans to the IRS.
The IRS has since billed Mathew for $60,000 in taxes and interest, plus $600,000 in penalties.
“I trusted people, my adviser, to take care of this,” Mathew said in a statement issued by the Small Business Council of America. “If I had to pay these fees, I would actually have to go bankrupt.”
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