Securing a Small Business Loan
Bundle your loan application the same way you bundle your services to get lenders to give you a bundle of cash or credit.
by Mark E. Battersby
When it comes to securing needed capital, few ISP owners can afford to leave any stone unturned. Whether your ISP is looking for startup funds or searching for money to expand an Internet operation, your ISP may be a bank manager's perfect candidate to be awarded a small business loan.
Although a small business loan may not be an ideal source for startup capital, banks can provide short-term funds that might be just the fuel your ISP needs to grow its business. Banks make money by selling their services. Remember, your ISP is the customer now ? there are many services that a bank can provide your fledgling business operation.
Banking on banks
Today's banks offer a wide-range of services and are continually pressing government regulators for the rights to offer even more. Banks can prepare the payroll for your ISP operation, buy your accounts receivable, collect your overdue bills, earmark a line of credit that you can draw on as needed, process your credit card receipts, rent you space or time on their computers, and a whole lot more.
Remember, banks charge fees for everything from checking accounts to excessive deposits. The bank's other services are no exception. Make sure you understand the details of outsourcing business operations to your bank.
At the same time, the very same banking services can also provide an excellent negotiating opportunity for an alert ISP owner. That's right, both interest rates and the terms of the funding you're seeking are negotiable regardless of the size of your business.
While the lowest interest rates and least restrictive terms are naturally reserved for the safest transactions and the biggest customers, any ISP that utilizes or can be expected to eventually utilize a bank's other services, possesses leverage that can be applied to lower interest rates on a small business loan and avoid many of the restrictions that could accompany the funding.
Finding funding online
The Internet not only offers online banking and bank services, it also provides an opportunity for every ISP owner to apply for the capital they require online. Better yet, the Web also offers the luxury of putting your financing needs out onto the Internet. Imagine having many banks, even "brick-and-mortar" banks bidding for the privilege of loaning you the money your ISP operation needs!
Online financial services are not limited to banking and lending. They can be a source of information about the many different types of financing available to your business. Online resource could help you decide which type of financing is right for your situation and even help you compare the "cost" of many financing alternatives ? all online. A full-service bank that is online probably has more technical expertise than the average small-town bank. An online bank may better understand your ISP business and grasp its financing needs. More importantly, only you can determine if an online bank can offer your ISP the funding and services that it requires at this stage of your growth.
Bundling business needs
The route most ISP owners are familiar with involves submitting a completed loan application and submitting it to a faceless clerk at a neighborhood bank. Unfortunately, the ISP business owner who dutifully completes a loan application is, at best, limiting the available options.
At worst, the ISP operation will either secure needed funds at a cost that can only be compared to as "paying retail." Or the application will be rejected and it will be necessary to start the entire application process over again. Not many small businesses have the time available to complete all required documentation, schedule an interview with the bank manager, cross the "T's" and dot the "I's," for bank, after bank, after bank.
Whether banking online or locally, today many experienced ISP owners ignore the loan application altogether ? often ignoring banks, too ? while getting the funding they need at a price that they can least afford.
The tool small businesses currently use to secure funding is known as a "loan package."
The loan package takes many different forms and shapes and contains widely varying amounts of information. Distilled to the lowest common denominator, the standard loan package provides all of the information usually contained on a typical loan application. Additionally, a packaged loan application presents basic business data, plus any relevant information designed to influence, reassure, and even educate the potential lender.
With a loan package in hand, the ISP owner can approach any banker with confidence that his or her request will receive the attention that it deserves ? even if the banker knows absolutely nothing about operating an Internet service.
Best of all, regardless of how exotic, unusual or risky, your business plan is, you are not limited to making your request at one bank ? or even a number of banks. Your packaged loan proposal is also portable ? it can be submitted electronically.
The secret to securing business loans is to understand the type of financing your business requires and who is best suited to provide that financing most economically. By using a loan proposal, you help any potential lender understand your business and its financing requirements. And remember, good things come in small packages.
5 Stupid Things ISPs Do to Screw Up Their AUPs
The contract between you and your customers is one of the cornerstones of your business. All too often, ISPs put them together without much thought?or awareness of the possible consequences.
Every ISP has one?whether they call it an 'Acceptable Use Policy,' 'Terms of Service,' a 'User Agreement,' or something else. It's the legal document that serves as the contract between you and your customer. And lots of ISPs undercut themselves by making mistakes with their AUPs and how they implement them. I am not a lawyer, so I'm not qualified to comment of the actual content of an AUP, but there's much more to a good, working AUP than legal correctness. Here are five common pitfalls you should avoid:
1. Legalese
More and more contracts today are being written in plain English. Yours should be too. If your find your AUP hard to read, your customer probably gave up and never even tried. Give your AUP to a non-technical friend and see if s/he can understand it. If s/he can't, rewrite it.
2. Add-On-itis
Some ISPs create separate billing policies, abuse and spam definitions, or break out other sections of their polices into separate documents. While one can make an argument for this, in general I think it's a bad idea. One three-page document is preferable to three one-page documents. The more places people have to go for information the more likely they'll either get confused or not read them all. Perhaps worse, you leave yourself open to creating loopholes or conflicting policies.
3. No Legal Input
A significant number of ISPs put together their original AUP by cutting and pasting sections from other ISP's AUPs, then changing the company name. (Yes, I did too). Then as they grow, expand their service offerings, and add new sections, they either write their own or again 'borrow' from others. How many of those ISPs had a lawyer review their AUP to make sure it's legally accurate and defensible? It usually costs just a few hundred dollars to get a lawyer to review your AUP for holes and flaws. This is not a place to cut corners. As the commercial says, "Just do it". It's worth it.
4. Hard to Find
This is a very common failing with ISPs. While preparing for this article, I went to about 20 different ISPs and web host's sites to look at their AUPs. It took me, typically, 3 to 6 clicks to get to the AUP on these web sites, not including the extra clicks spent following blind alleys or going in circles. Your AUP is too important to hide in a corner of your "Support" section, or worse, only be displayed when someone goes to sign up for an account online. Also, consider making a PDF or text-only version that customers can easily download.
5. No Follow Through
I know of one company that stipulated in its AUP that no account would be cancelled until 2 days after a certified letter was sent to the customer informing notifying them of the impending cancellation. Then they went ahead and cancelled some spammer's accounts without sending the notice. One of the spammers got his lawyer to complain that the AUP had been violated, and after checking with their lawyers in turn, the ISP had to turn the account back on until the cancellation was done the 'right' way. The moral of the story: the AUP binds you as much as it does your customers. If you set out a policy, you have to follow it. If a policy isn't working, don't ignore it?change the AUP instead.
Final Thoughts
All too often, AUPs are treated as an afterthought or a necessary evil. If you're lucky, you'll never get into a situation where you need to fall back on your AUP in a customer problem (or worse, a lawsuit), but don't make the mistake of thinking it won't happen to you. It doesn't take all that much time or money to do your AUP right. If you have any doubts about your AUP, make the time to re-read it and see whether it needs work.
Management 101: Creating Structures
The basic principles of management are the same, regardless of the organization. I learned a lot of what I know serving in the East Berlin, Conn. Volunteer Fire Department.
There are many facets to business management. For our 101 course, we'll concentrate on management structures.
Centralized vs. distributed
Most small business owners, ISPs included, start off small, with just about everyone answering to them. If the business survives and grows, this usually means?at some point?a shift jump from total control to a more distributed management scheme. This change can be difficult to get used to from a control and productivity standpoint?difficult for everyone involved.
The person who previously exercised full control needs to understand that s/he is going to have to relinquish that control and can no longer have her/his fingers in everything. (This is key. I've seen some rather large companies whose CEO/president still wanted to okay everything.) Employees, on the other hand, need to realize that they may not be able to get a decision as quickly as they might have in the past.
Good management is based on stable reporting relationships. On a day-to-day basis there should be no reason for an employee to go to his boss's boss for answers.
The point of departmentalization is to increase productivity, not decrease it. But if they're designed incorrectly, management structures can quickly put up too many hurdles, and slow a company down. Managers need to be empowered to make decisions?within defined limits?without checking with the next in rank.
Keeping the chain intact
It's important to respect the chain of command (responsibility, reporting). In a three-level chain of command, with Employee, Manager, and Manager's Boss, you want to make sure that any work that tasks Manager's Boss wants Employee to do are actually assigned to Employee by Manager, not Manager's Boss. Manager is responsible for Employee's time, and unless s/he knows what Manager's Boss wants to have Employee do, Manager's time lines and requirements may clash with Manager's Boss's projects. (Sound confusing? Point is, employees shouldn't take orders directly from their boss's boss, and the boss's boss shouldn't delegate directly to the employee. All of this is in an ideal world of course.)
Not too big, not too small
When you set up distributed management structures, you need to think about span of control. It has been proven that in most cases, management works best with a smaller span of control. ("Span of control" is how many people report directly to a given manager.) At upper levels of management, the optimal number is five to seven. That doesn't mean that people can't manage more then that, but we're talking textbook theory here.
Functional organization
Companies need to be split into logical groups. It doesn't (in most cases) make sense for someone in IT to report to someone in sales. Logical groups in most ISPs would be: Tech, Sales/Marketing, and Customer Service. The larger you get, the more you have to break down the groups.
Of course, business functions never divide up perfectly. You will always have some cross over, and consequently, some leeway in organizing them into logical groups. For example, Technical Support could go under Tech or Customer Service. If the company is large enough, Tech Support would probably become a group on its own. In smaller companies they would probably go under Tech but close to Customer Service.
Management 101: Creating Structures - continued
A title is a title?.?.?. is a title
Titles are cheap. People like them. So, bestow them freely. Make them up if you like. Regardless of whether or not there are management responsibilities associated with them, its a morale thing. For example, "CTO" of a four-person company may not mean much to the world, but it probably means something to the person bearing the title. (I once remember giving someone the title "Director of Geeks")
In the corporate world titles and hierarchies are more serious business. But then, how many levels of Vice President can a company have? VP, EVP, SVP, who knows what else. But in most people's minds, and most situations, real-world hierarchies go (from bottom up) manager, director, VP, CEO/President.
So, in a small to medium size ISP, what you end up with is the head of Tech, head of Sales/Marketing, and head of Customer Service reporting to the Supreme Being. That builds a span of control of 3 for the supreme being. You can then break the groups in half and have Tech Support, Sales, Marketing, Customer Service, Billing, etc. Which would give you the ideal span of control of five to seven or so.
Splitting headaches
Once you split your groups, ideally you would figure out who would head up the groups and enlist their help in deciding if those groups need to be further split. Always keep in mind the span of control. The farther down the ladder you go, the bigger it can be, but if the management position involves actually making decisions?as opposed to overseeing time cards and administration duties?a large span of control can be unwieldy.
Two-headed calf
The typical independent ISPs is founded by by two people, a geek, and a salesperson. That automatically splits the company into two groups?with two heads. With two people running the company, either one has to have one more vote than the other, or they must agree on some other type of tie-breaking mechanism.
Early on, the two heads, Sales and Tech, need to put their heads together to designate some type of General/Office Manager. The General/Office Manager takes care of administration and day to day operations. The General Manager may report to either of the two heads, but usually to the one with more control. Tech and customer support could then answer to either of the heads, or if it is a small group, to the General Manager. Network engineers and higher level techs answer to the Tech head, and Sales/Marketing answer to the Sales head.
This might be clearer with an org chart?it certainly would be a lot easier to explain?but that's Management 101.
Protect Your ISP With A Strong AUP (Acceptable Use Policy)
When you sell a service, you have the right to define the terms on which that service is provided. Doing this properly is a key to a relatively headache-free ISP experience.
Your Acceptable Use Policy (AUP), also referred to as Terms of Service (TOS), is not a luxury or an optional document, but rather a critical building-block of your business. It is the basic textbook educating your subscribers about the realities of life as users of your Internet service.
There's an ongoing debate in the ISP community as to whether you need to get this document signed in ink for it to be legally binding. These days, most ISPs have abandoned that approach in favor of a button on their sign up page-like a software license validation, which states that the subscriber-to-be accepts the AUP terms as stated and agrees to be bound by them as part of the sign-up process.
Here are the components of a strong AUP, along with brief explanations of why each is included:
Introduction: Explains why the AUP exists, how it protects your subscribers and protects your ability to run a fast, high availability network without hassles. In this section, you also outline what will happen to subscribers who abuse or violate any of your standard policies.
Warranties/Disclaimers: This is where you establish that anyone who uses your service, is doing so "as is" with no guarantees, no warranty of any kind. It also points out that you have no intention of being financially liable to any customer for any harm that may occur through their use of your services, regardless of whose fault it might be. Your total economic obligation to your client should never exceed the total amount of dollars paid to you by your client.
Security: Here we talk about customer passwords and how you are not guaranteeing that any communication or use of your services is truly secure, that although confidential information will be kept as secure as possible, the customer has no enforceable right to total privacy from a data packet standpoint. From a customer/vendor standpoint, they do have a fundamental right: that you will not disclose any confidential information that they give you. But this section is more about how your network runs, from a data standpoint.
Personal Files: This section establishes that the ISP is not responsible for back ups of subscribers' personal files and other information, and that you have a right to delete their information after they are no longer a customer of your ISP.
Nontransferability of Account: A customer may not have more than one login session per account at any time, unless they have paid for multiple login accounts. Nor may customers transfer or give out their dialup ID and password for use by friends or others. Account sharing is a violation of the terms of this section.
Network Address Ownership: Any IP addresses assigned to your customers are considered loaned to your customers, and not given. They will revert back to the ISP, after the customer leaves.
Compliance with All Laws: This paragraph states that customers will not violate any laws while using the services of your ISP, and that customers will "hold the ISP harmless" in any claim against same.
Unacceptable Conduct: This is a deep section, in which you will list many items that constitute unacceptable conduct-such as: excessive posting or otherwise abusing USENET sending unsolicited emails (spam) using your ISP to do anything with spam harassing other individuals mail bombing impersonating or falsifying any information violating anyone's privacy use of IRC bots network-unfriendly activity or hacking that causes interference with normal network operations attempts to gain unauthorized root access to the ISP's servers participating in chain letters any other attempt to use your ISP as a staging ground to hurt others in any way.
Right to Disconnect Nondedicated Accounts: This gives you the right to shut down connections that are idle for a specified period, or where subscribers are in any way attempting to use a nondedicated account as if it were their own personal dedicated 24x7 account.
Excess Utilization of System or Network Resources: This is a policy from "yesteryear" that gives you the right to disconnect someone who is "overusing" your services for any reason you deem as unacceptable.
Compliance with Rules of Other Networks: Your subscribers agree to not hurt other folks' networks, so that you can keep good relations with your competitors.
Monitoring and Privacy: How your ISP takes your subscribers privacy seriously, and to what extent your subscribers should realize the privacy protection that you deliver.
Cooperation with Authorities: This is more of a warning section that states you are serious about getting the law involved for any illegal egress or transaction that your subscribers may attempt while using your services.
ISP's Right to Suspend or Cancel Accounts: While you know that your ISP is a private business, your customers may think you are required to provide them service whether you like it or not (as you would be if you were a telecom carrier). This simply is not the case. In addition to clarifying that point, this section covers a number of collateral issues:
Your policies regarding folks who don't pay on time late paying or nonpaying customers.]
That your subscribers are responsible for informing you of address changes or other new contact information
Your termination policy
(A key point): That refunds from cancellation of prepaid account are only available on a prorated basis, as if they were month-to-month clients, rather than based on the discount they received for prepaying their account.
Rights to Damages: This states that you, the ISP, have a right to claim economic damages from your subscribers if they violate your AUP and cause your ISP significant economic harm.
Right to Modify or Change Service: Establishes your right to update and change this AUP as you need or see fit. It essentially says that if your customer ever disagrees with your AUP, then their sole recourse is to cancel service with you.
Note that whenever you do change your AUP, you have an obligation to promptly inform your subscribers about any such changes. (You know, credit card companies do this all the time.) Any customer who has not written within 30 days to protest the change has tacitly agreed to abide by your new rules.
Lastly, put this at the end of your AUP?.?.?.
"If you've got questions, email them to: ceo@your-isp-name.net."
.?.?.?so that if anyone has any questions or suggestions about your AUP, they can get them answered or give their input.
Self-Rental, a Tax Strategy
Here's how those who own their own business draw rents from that business without incurring the tax penalties that apply to dividend payments. The strategy works for businesses of all sizes.
by Mark E. Battersby
[December 28, 2000]
Are you concerned about getting the profits out of your ISP business without paying the double-taxation that dividends are subjected to, once at the corporate level and again when they are included on your personal tax return? Afraid of incurring the penalty tax that underpaid Internal Revenue Service auditors often impose on the "excessive compensation" of many ISP business owners?
Or perhaps your ISP business could profit from an infusion of badly-needed cash? Are you reluctant to invest additional money in your business? Are the tax benefits from the business wasted because of the operation's low or nonexistent profits?and its low tax bracket?
One transaction cures many problems and may be the solution for you. That transaction is the often neglected and little understood, sale-leaseback.
At its most basic, your ISP business sells its assets, the building that houses the operation, the equipment used in that operation or even the computers, servers and routers, that are the business. In return, the business receives an infusion of working capital. The buyer of those assets (who usually uses borrowed funds) could be the operation's owner or principal shareholder?you.
The basic share-leaseback
When the owner or principal shareholders of an ISP business also own the assets of the operation, the business pays fully tax-deductible lease payments for the right to use those assets. An unprofitable ISP business is exchanging depreciable equipment or property for badly needed capital and immediate tax deductions for the lease payments.
The new owner of that equipment, whether the business's owner, chief shareholder or, perhaps, a trust established for the benefit of the owner's children, will receive periodic lease payments. Thus, with one transaction, the owner has found a way to get money from the business without the double-tax bite imposed on dividends or fear of the excessive compensation penalties the IRS levies where they feel the operation's profits may be paid out as compensation.
Those lease payments are, of course, taxable income to the recipient. Fortunately, tax deductions offset much of that income before it reaches the recipient's bottom-line taxable income.
Depreciation write-offs or deductions cost the owner of those assets nothing out-of-pocket. Somewhere down the road, those depreciation deductions will have to be paid back or recovered, usually as ordinary income, but that is at some distant date.
The owner or owners of the ISP business's equipment and assets are also entitled to deductions for the expense of borrowing the money used to purchase them. Additional tax deductions such as management fees, maintenance, insurance and the like, further reduce the tax bill on lease payment received from the ISP operation.
As a result of a sale-leaseback you, the owner, are receiving a steady-stream of lease payments that, unlike dividends, are tax deductible by the business. Plus, as the owner of those assets or equipment, you are entitled to take advantage of all of the tax deductions associated with it.
Except where the assets of the ISP business are already subject to restrictions imposed by lenders or other investors, you, the owner of those assets are enjoying tax write-offs that might not fully benefit the ISP business entity with its small or nonexistent profits and correspondingly lower tax bracket.
The mechanics of a sale-leaseback
You'll probably want to be able to treat the sale as a capital gain instead of income. Capital gains are taxed at a fixed rate, while income is taxed at a "progressive" rate that takes a larger percentage from rich people than poor people. However, you'll probably have to treat the sale as income rather than capital gains.
The tax rules of the United States are quite clear when it comes to the sale of any depreciable asset between so-called "related" taxpayers. Capital gains treatment is denied when depreciable property is sold or exchanged between related taxpayers. This rule covers sales or exchanges between a person and all entities that are controlled by that person and between a taxpayer and any trust in which that taxpayer or spouse is a beneficiary unless that beneficiary interest is a remote contingent interest.
Any business selling it assets to its owner or principal shareholder may run afoul of the restrictions preventing capital gain treatment for the proceeds from those sales. However, only your accountant or banker can advise you whether that restriction applies and, if so, its impact on the transaction.
Benefiting from a sale-leaseback
It should be obvious that the sale-leaseback of your ISP business's assets, equipment or building can be the cure for any number of problems facing you and the business. However, the complexity of the rules, the requirement that the transaction be conducted at "arm's length," have a bona fide economic purpose rather than mere tax avoidance, and be properly structured as both a "sale" and subsequent "lease," all require professional assistance.
Be sure to consult the appropriate financial and legal advisors.
Tax-Saving Tax Strategies for ISPs
Learn how to make the most of a taxing element on your Internet business and transform painful possible losses into gainful planned profits.
Developing an overall tax strategy will impact not only your Internet businesses' annual tax bill, but also that of its principals, investors and shareholders. A strategic tax plan will also have a noticeable effect on non-tax areas including financial opportunities from insurance plans, licensing agreements, compensation programs, among operational issues.
Under federal tax rules, the predominant classifications of business enterprises are:
Regular or C Corporation
S Corporation
Partnership
Limited Liability Company
Sole Proprietorship
The most common choice of ISP owners is C or S Coporation, so I'll focus my attention on the subtle differences between the two classifications.
Since most ISP owners want or need outside investment or financing, external factors once again impact your decision as to which business classification will provide the best tax strategy for your Internet operation.
Good fit
Of all the classifications of business organizations, C Corporations are subject to the toughest tax laws that could take the biggest bite out of your business because C Corp earnings are also taxed twice.
First, C Corps pay a corporate income tax as levied against the ISP's earnings. After the earnings are distributed to shareholders as dividends, each shareholder must pay taxes separately on his or her share of the premium. Since a C Corp cannot claim a tax deduction for distributing dividends, there is no opportunity to decrease the tax drain on earnings.
Of course, if earnings distributions are not an issue for your Internet service-based business, then C Corp status is fine and commonly the tax classification of choice for much of the industry.
Necessary evil
Why not avoid the corporate classifications of doing business altogether?
Truth be known, many banks will not lend to individuals or partners. Also, venture capitalists and investors usually demand that ISP owners grant them partial ownership or a share of the business. The need for financing creates the obligation to incorporate your Internet business.
A S Corporation is a regular corporation that has chosen to be treated as a partnership for Federal income tax purposes. S Corp classification could pass along the business operation's profits without being levied a "double-tax."
So, why not opt for S Corp status for your ISP? Unfortunately, both the number of shareholders and the types of stock an S Corp may issue limit the ability of this tax classification to protect your businesses profits. A good accountant will provide you with the proper guidance to determine if S Corp status is right for your ISP.
Counting matters
Even the choice of the method of accounting employed by your ISP will have a significant effect on your tax bill. There are two common methods of accounting for overall income ? the cash basis and the accrual basis. Most individuals use the cash basis of accounting based on cash receipts and disbursements. Income is generally reported for the year in which it is was actually or constructively received. Deductions or credits are generally taken for the year in which the related expenditures were actually paid.
Under the accrual method of accounting, income is reported when the right to receive it comes into being -- i.e., when all the events that determine the right have accrued. It is not the actual receipt, but the right to receive that governs this method of accounting. Expenses are deductible on the accrual basis in the year incurred ? i.e. when all the events have occurred that fix the amount of the item and determine the liability of the taxpayer to pay it.
Accounting methods should be part of your ISP's tax strategy because it is relatively simple to switch from the user-friendly cash accounting method to the more complex accrual basis ? or vice versa. Plus, if it's time to sell your ISP operation, those using the cash method can report the capitol gain from the sale on an installment basis, which has some interesting benefits.
Bottom line building
In the past, selling a business in exchange for agreed-upon installment payments usually produced a higher selling price. Installment payments also allowed buyers to acquire ongoing operations with less out-of-pocket expenditures.
Currently, selling any business could result in having a large portion of profits whittled away by taxes. As a result, sellers are often quite receptive to receiving a lower price for the business because installment payments take a sip out of the profits from the sale, rather than a big gulp.
In December of 1999, federal lawmakers forbid all users of the accrual method of accounting to utilize installment sales. The tax-breaks associated with installment sales were an important factor in the sales price ? and the sale itself ? of many Internet services.
In an effort to alleviate some of the sting inflicted by the new law, the Internal Revenue Service issued a Revenue Procedure that allowed any business with an average gross income of less than $1 million a year to use the cash method of accounting ? and employ installment sales ? regardless of whether inventories accruement schedules were used, without question.
The bottom line? If your ISP business generates income less than $1 million a year, you're selling your Internet business, and using the accrual method of accounting, switch to the cash method now to produce the best possible tax benefits on a transaction utilizing installment payments. If you're a buyer, the opposite scheme may be best.
Cash in pocket
The best tax strategy for your ISP business is one that produces a lower tax bill ? unfortunately no tax strategy involves taxes only.
For example, leasing necessary capital equipment rather than purchasing hardware may involve other considerations that could provide substantial tax benefits for your ISP business.
On the other hand, your Internet operation might not have funds available for a down payment on capitol equipment purchases and you may have no choice but to lease hardware though a vendor program.
Just make sure your accounting method and business classification fulfill the goal of your ISP's business plan. Do you want cash in pocket, and investor-friendly firm, or a buyer?
Obviously, tax strategies should not govern the day-to-day operations of any ISP-related business. A good game plan for taxes may not help your ISP operation add new subscribers or grow profits. But a well-planned tax scheme could insure that more profit remains in your pocket - rather than going to the "Tax Man."
Tax-Saving Tax Strategies for ISPs
Learn how to make the most of a taxing element on your Internet business and transform painful possible losses into gainful planned profits.
Developing an overall tax strategy will impact not only your Internet businesses' annual tax bill, but also that of its principals, investors and shareholders. A strategic tax plan will also have a noticeable effect on non-tax areas including financial opportunities from insurance plans, licensing agreements, compensation programs, among operational issues.
Under federal tax rules, the predominant classifications of business enterprises are:
Regular or C Corporation
S Corporation
Partnership
Limited Liability Company
Sole Proprietorship
The most common choice of ISP owners is C or S Coporation, so I'll focus my attention on the subtle differences between the two classifications.
Since most ISP owners want or need outside investment or financing, external factors once again impact your decision as to which business classification will provide the best tax strategy for your Internet operation.
Good fit
Of all the classifications of business organizations, C Corporations are subject to the toughest tax laws that could take the biggest bite out of your business because C Corp earnings are also taxed twice.
First, C Corps pay a corporate income tax as levied against the ISP's earnings. After the earnings are distributed to shareholders as dividends, each shareholder must pay taxes separately on his or her share of the premium. Since a C Corp cannot claim a tax deduction for distributing dividends, there is no opportunity to decrease the tax drain on earnings.
Of course, if earnings distributions are not an issue for your Internet service-based business, then C Corp status is fine and commonly the tax classification of choice for much of the industry.
Necessary evil
Why not avoid the corporate classifications of doing business altogether?
Truth be known, many banks will not lend to individuals or partners. Also, venture capitalists and investors usually demand that ISP owners grant them partial ownership or a share of the business. The need for financing creates the obligation to incorporate your Internet business.
A S Corporation is a regular corporation that has chosen to be treated as a partnership for Federal income tax purposes. S Corp classification could pass along the business operation's profits without being levied a "double-tax."
So, why not opt for S Corp status for your ISP? Unfortunately, both the number of shareholders and the types of stock an S Corp may issue limit the ability of this tax classification to protect your businesses profits. A good accountant will provide you with the proper guidance to determine if S Corp status is right for your ISP.
Counting matters
Even the choice of the method of accounting employed by your ISP will have a significant effect on your tax bill. There are two common methods of accounting for overall income ? the cash basis and the accrual basis. Most individuals use the cash basis of accounting based on cash receipts and disbursements. Income is generally reported for the year in which it is was actually or constructively received. Deductions or credits are generally taken for the year in which the related expenditures were actually paid.
Under the accrual method of accounting, income is reported when the right to receive it comes into being -- i.e., when all the events that determine the right have accrued. It is not the actual receipt, but the right to receive that governs this method of accounting. Expenses are deductible on the accrual basis in the year incurred ? i.e. when all the events have occurred that fix the amount of the item and determine the liability of the taxpayer to pay it.
Accounting methods should be part of your ISP's tax strategy because it is relatively simple to switch from the user-friendly cash accounting method to the more complex accrual basis ? or vice versa. Plus, if it's time to sell your ISP operation, those using the cash method can report the capitol gain from the sale on an installment basis, which has some interesting benefits.
Bottom line building
In the past, selling a business in exchange for agreed-upon installment payments usually produced a higher selling price. Installment payments also allowed buyers to acquire ongoing operations with less out-of-pocket expenditures.
Currently, selling any business could result in having a large portion of profits whittled away by taxes. As a result, sellers are often quite receptive to receiving a lower price for the business because installment payments take a sip out of the profits from the sale, rather than a big gulp.
In December of 1999, federal lawmakers forbid all users of the accrual method of accounting to utilize installment sales. The tax-breaks associated with installment sales were an important factor in the sales price ? and the sale itself ? of many Internet services.
In an effort to alleviate some of the sting inflicted by the new law, the Internal Revenue Service issued a Revenue Procedure that allowed any business with an average gross income of less than $1 million a year to use the cash method of accounting ? and employ installment sales ? regardless of whether inventories accruement schedules were used, without question.
The bottom line? If your ISP business generates income less than $1 million a year, you're selling your Internet business, and using the accrual method of accounting, switch to the cash method now to produce the best possible tax benefits on a transaction utilizing installment payments. If you're a buyer, the opposite scheme may be best.
Cash in pocket
The best tax strategy for your ISP business is one that produces a lower tax bill ? unfortunately no tax strategy involves taxes only.
For example, leasing necessary capital equipment rather than purchasing hardware may involve other considerations that could provide substantial tax benefits for your ISP business.
On the other hand, your Internet operation might not have funds available for a down payment on capitol equipment purchases and you may have no choice but to lease hardware though a vendor program.
Just make sure your accounting method and business classification fulfill the goal of your ISP's business plan. Do you want cash in pocket, and investor-friendly firm, or a buyer?
Obviously, tax strategies should not govern the day-to-day operations of any ISP-related business. A good game plan for taxes may not help your ISP operation add new subscribers or grow profits. But a well-planned tax scheme could insure that more profit remains in your pocket - rather than going to the "Tax Man."
Tax-Saving Tax Strategies for ISPs
Learn how to make the most of a taxing element on your Internet business and transform painful possible losses into gainful planned profits.
Developing an overall tax strategy will impact not only your Internet businesses' annual tax bill, but also that of its principals, investors and shareholders. A strategic tax plan will also have a noticeable effect on non-tax areas including financial opportunities from insurance plans, licensing agreements, compensation programs, among operational issues.
Under federal tax rules, the predominant classifications of business enterprises are:
Regular or C Corporation
S Corporation
Partnership
Limited Liability Company
Sole Proprietorship
The most common choice of ISP owners is C or S Coporation, so I'll focus my attention on the subtle differences between the two classifications.
Since most ISP owners want or need outside investment or financing, external factors once again impact your decision as to which business classification will provide the best tax strategy for your Internet operation.
Good fit
Of all the classifications of business organizations, C Corporations are subject to the toughest tax laws that could take the biggest bite out of your business because C Corp earnings are also taxed twice.
First, C Corps pay a corporate income tax as levied against the ISP's earnings. After the earnings are distributed to shareholders as dividends, each shareholder must pay taxes separately on his or her share of the premium. Since a C Corp cannot claim a tax deduction for distributing dividends, there is no opportunity to decrease the tax drain on earnings.
Of course, if earnings distributions are not an issue for your Internet service-based business, then C Corp status is fine and commonly the tax classification of choice for much of the industry.
Necessary evil
Why not avoid the corporate classifications of doing business altogether?
Truth be known, many banks will not lend to individuals or partners. Also, venture capitalists and investors usually demand that ISP owners grant them partial ownership or a share of the business. The need for financing creates the obligation to incorporate your Internet business.
A S Corporation is a regular corporation that has chosen to be treated as a partnership for Federal income tax purposes. S Corp classification could pass along the business operation's profits without being levied a "double-tax."
So, why not opt for S Corp status for your ISP? Unfortunately, both the number of shareholders and the types of stock an S Corp may issue limit the ability of this tax classification to protect your businesses profits. A good accountant will provide you with the proper guidance to determine if S Corp status is right for your ISP.
Counting matters
Even the choice of the method of accounting employed by your ISP will have a significant effect on your tax bill. There are two common methods of accounting for overall income ? the cash basis and the accrual basis. Most individuals use the cash basis of accounting based on cash receipts and disbursements. Income is generally reported for the year in which it is was actually or constructively received. Deductions or credits are generally taken for the year in which the related expenditures were actually paid.
Under the accrual method of accounting, income is reported when the right to receive it comes into being -- i.e., when all the events that determine the right have accrued. It is not the actual receipt, but the right to receive that governs this method of accounting. Expenses are deductible on the accrual basis in the year incurred ? i.e. when all the events have occurred that fix the amount of the item and determine the liability of the taxpayer to pay it.
Accounting methods should be part of your ISP's tax strategy because it is relatively simple to switch from the user-friendly cash accounting method to the more complex accrual basis ? or vice versa. Plus, if it's time to sell your ISP operation, those using the cash method can report the capitol gain from the sale on an installment basis, which has some interesting benefits.
Bottom line building
In the past, selling a business in exchange for agreed-upon installment payments usually produced a higher selling price. Installment payments also allowed buyers to acquire ongoing operations with less out-of-pocket expenditures.
Currently, selling any business could result in having a large portion of profits whittled away by taxes. As a result, sellers are often quite receptive to receiving a lower price for the business because installment payments take a sip out of the profits from the sale, rather than a big gulp.
In December of 1999, federal lawmakers forbid all users of the accrual method of accounting to utilize installment sales. The tax-breaks associated with installment sales were an important factor in the sales price ? and the sale itself ? of many Internet services.
In an effort to alleviate some of the sting inflicted by the new law, the Internal Revenue Service issued a Revenue Procedure that allowed any business with an average gross income of less than $1 million a year to use the cash method of accounting ? and employ installment sales ? regardless of whether inventories accruement schedules were used, without question.
The bottom line? If your ISP business generates income less than $1 million a year, you're selling your Internet business, and using the accrual method of accounting, switch to the cash method now to produce the best possible tax benefits on a transaction utilizing installment payments. If you're a buyer, the opposite scheme may be best.
Cash in pocket
The best tax strategy for your ISP business is one that produces a lower tax bill ? unfortunately no tax strategy involves taxes only.
For example, leasing necessary capital equipment rather than purchasing hardware may involve other considerations that could provide substantial tax benefits for your ISP business.
On the other hand, your Internet operation might not have funds available for a down payment on capitol equipment purchases and you may have no choice but to lease hardware though a vendor program.
Just make sure your accounting method and business classification fulfill the goal of your ISP's business plan. Do you want cash in pocket, and investor-friendly firm, or a buyer?
Obviously, tax strategies should not govern the day-to-day operations of any ISP-related business. A good game plan for taxes may not help your ISP operation add new subscribers or grow profits. But a well-planned tax scheme could insure that more profit remains in your pocket - rather than going to the "Tax Man."
Extremely Affordable Worker Magnets
Recruiting and retaining talent isn't always about paying premium salaries. Sometimes, intangibles address specific needs important to members of your staff.
How can any ISP owner hope to compete when the number of workers available in today's marketplace are ever-dwindling ? How can anyone afford the unprecedented compensation packages being offered today? Or, more importantly, how can your ISP operation retain essential workers that are are a big part of its success and still afford to recruit new talent to help your ISP continue to grow?
Surprisingly, survey after survey shows that it is not money alone that attracts new workers and keeps existing employees on the job?it's the benefits.
Sure bet benies
While stock options and big salaries may be needed to lure high-level executives, the average ISP owner can get good mileage out of some inexpensive perks. A few common benefits that consistently get high marks from employees are:
Flex-time scheduling.
Company discounts.
Free food and free beverages.
Casual dress Fridays?or full time.
Education or personal development training?on or after company time.
Notice that among the perks most often chosen by employees only one program?education or personal development?actually costs the employer a dime. Even with educational benefits, our current tax rules step in to provide a helping hand.
Peripheral benefits
When education is offered as a fringe benefit by an ISP business, the payments received by an employee for tuition, fees, books, supplies, etc., under the employer's educational assistance program may be excluded from the employee's income up to $5,250 each year. Although the courses covered by the plan need not be job related, courses involving sports, games or hobbies may be covered only if they involve the employee's business or are required as part of a degree program.
And best of all, the ISP business may claim a full tax deduction for the amounts paid. Drawbacks include the necessity of a formal tuition reimbursement plan and, obviously, sufficient cash flow to fund that program.
Benefit benedictions
While each employee has different needs, the recent trend points toward health insurance as the most important and highly valued benefit for employees.
Health insurance is tax-deductible to the employer and tax-free for the employee. What's more, an ISP business can frequently purchase it at a lower cost than the employee would ordinarily pay for an individual policy.
Some ISP operators have discovered that, especially if they employ a lot of part timers, health benefits may not be that important because the employee is getting health benefits from another source. Whether its from another full-time job, through a spouse's employer or through a parent's health insurance, insurance is not a factor in the employees decision to work for you.
When it comes to benefits for part-time help, a smart ISP operator should consider focusing on offering other, less expensive benefits, that would still be considered valuable by employees. Or, you may find that employees would prefer more cash compensation rather than any particular benefit package.
Keep in mind, however, that cash paid in lieu of fringe benefits remain a legitimate, tax deductible business expense for the ISP operation, the employee is going to have to include the amount in his or her income and pay taxes on it.
This illustrates the often-overlooked value of fringe benefits programs offered by employers. In addition to the ISP operation's tax deduction for the expense of providing fringe benefits, those benefits are usually tax free to the recipient.
Caution, cheap could cost you
Bonuses and awards must, as mentioned, be included in an employee's taxable income. Should the bonus or award be in the form of goods or services, employees must include the fair market value of the goods or services in their income. The same applies to holiday gifts.
However, employees who receive turkeys, hams or other similar items of nominal value from their employers at Christmas or other holidays may exclude the value of the gift from their income.
On a similar note, so-called de minimis benefits may worth little or nothing in the eyes of our lawmakers, but can go a long way toward making an employee happy?without an accompanying bill.
De minimis fringe benefits mean any property or service that is so small in value that accounting for it is unreasonable or administratively impractical. Examples of de minimis fringe benefits include:
Occasional meal money or local transportation fare
Occasional personal use of an employer's copy machine
Coffee, doughnuts and soft drinks, or even local telephone calls
The bottom line
After you have decided which benefits you want for yourself and calculate in what your employees would prefer, figure out which benefits your ISP business can really afford. Wouldn't it be ironic in this day and age if the benefit package you build for you ISP turns out to be the ones that cost your operation the least?
Extremely Affordable Worker Magnets
Recruiting and retaining talent isn't always about paying premium salaries. Sometimes, intangibles address specific needs important to members of your staff.
How can any ISP owner hope to compete when the number of workers available in today's marketplace are ever-dwindling ? How can anyone afford the unprecedented compensation packages being offered today? Or, more importantly, how can your ISP operation retain essential workers that are are a big part of its success and still afford to recruit new talent to help your ISP continue to grow?
Surprisingly, survey after survey shows that it is not money alone that attracts new workers and keeps existing employees on the job?it's the benefits.
Sure bet benies
While stock options and big salaries may be needed to lure high-level executives, the average ISP owner can get good mileage out of some inexpensive perks. A few common benefits that consistently get high marks from employees are:
Flex-time scheduling.
Company discounts.
Free food and free beverages.
Casual dress Fridays?or full time.
Education or personal development training?on or after company time.
Notice that among the perks most often chosen by employees only one program?education or personal development?actually costs the employer a dime. Even with educational benefits, our current tax rules step in to provide a helping hand.
Peripheral benefits
When education is offered as a fringe benefit by an ISP business, the payments received by an employee for tuition, fees, books, supplies, etc., under the employer's educational assistance program may be excluded from the employee's income up to $5,250 each year. Although the courses covered by the plan need not be job related, courses involving sports, games or hobbies may be covered only if they involve the employee's business or are required as part of a degree program.
And best of all, the ISP business may claim a full tax deduction for the amounts paid. Drawbacks include the necessity of a formal tuition reimbursement plan and, obviously, sufficient cash flow to fund that program.
Benefit benedictions
While each employee has different needs, the recent trend points toward health insurance as the most important and highly valued benefit for employees.
Health insurance is tax-deductible to the employer and tax-free for the employee. What's more, an ISP business can frequently purchase it at a lower cost than the employee would ordinarily pay for an individual policy.
Some ISP operators have discovered that, especially if they employ a lot of part timers, health benefits may not be that important because the employee is getting health benefits from another source. Whether its from another full-time job, through a spouse's employer or through a parent's health insurance, insurance is not a factor in the employees decision to work for you.
When it comes to benefits for part-time help, a smart ISP operator should consider focusing on offering other, less expensive benefits, that would still be considered valuable by employees. Or, you may find that employees would prefer more cash compensation rather than any particular benefit package.
Keep in mind, however, that cash paid in lieu of fringe benefits remain a legitimate, tax deductible business expense for the ISP operation, the employee is going to have to include the amount in his or her income and pay taxes on it.
This illustrates the often-overlooked value of fringe benefits programs offered by employers. In addition to the ISP operation's tax deduction for the expense of providing fringe benefits, those benefits are usually tax free to the recipient.
Caution, cheap could cost you
Bonuses and awards must, as mentioned, be included in an employee's taxable income. Should the bonus or award be in the form of goods or services, employees must include the fair market value of the goods or services in their income. The same applies to holiday gifts.
However, employees who receive turkeys, hams or other similar items of nominal value from their employers at Christmas or other holidays may exclude the value of the gift from their income.
On a similar note, so-called de minimis benefits may worth little or nothing in the eyes of our lawmakers, but can go a long way toward making an employee happy?without an accompanying bill.
De minimis fringe benefits mean any property or service that is so small in value that accounting for it is unreasonable or administratively impractical. Examples of de minimis fringe benefits include:
Occasional meal money or local transportation fare
Occasional personal use of an employer's copy machine
Coffee, doughnuts and soft drinks, or even local telephone calls
The bottom line
After you have decided which benefits you want for yourself and calculate in what your employees would prefer, figure out which benefits your ISP business can really afford. Wouldn't it be ironic in this day and age if the benefit package you build for you ISP turns out to be the ones that cost your operation the least?
Reward Yourself With Fringe Benefits
Ownership has its privileges, make sure you are taking your fair share of perks and perquisites. But don't overdo it?when it comes to fringe benefits, greed is not good.
Paying the fixed overhead costs of an ISP business is all that some operators, particularly those just starting out, could ever hope for. However, as your ISP business grows?and prospers?the subject of employee benefits is sure to arise.
If your ISP business is going to reward employees, why deny yourself the benefits you are offering those employees?the same benefits that you would expect if you were an employee?
Defraying double-dipping
As the owner or shareholder in an ISP business that is profitable, you'll want to avoid the double tax that applies when the business pays you dividends. The business pays those dividends from income on which it has already paid the tax (there is no deduction for dividends paid) and the recipient pays tax when that dividend is added to his or her tax bill.
While trying to avoid the double tax on dividends, many ISP owners often run afoul of the accumulated earnings tax. That penalty tax is levied when profits are left in an incorporated business in amounts that exceed the reasonable needs of that operation.
Rather than pay the double tax on dividends or risk leaving too much money in the business, many ISP operators attempt to take the profits from their business in the form of compensation.
Remember, regardless of the amount, the sum you pay yourself may be viewed as excessive by the IRS?especially if your business pays no dividends to you or the other shareholders.
Paying yourself "excessive compensation" regardless of the amounts involved, means that an IRS examiner may recharacterize it as dividends paid and, once again, expose you and your ISP to that dreaded double tax.
Border boons
While every ISP operation must generally treat fringe benefits as a part of employees' taxable wages, there are certain fringe benefits that are exempted from this rule. In fact, the major advantage to offering many fringe benefits is that the your ISP operation can claim a business deduction for the cost even though employees?or you?aren't required to pay tax on them.
An example of one nontaxable fringe benefit is a company car. The cost of owning or renting the vehicle along with its upkeep, gas, oil, insurance, and the like is a legitimate income tax deduction for most ISPs. An employee?or the operation's owner?who uses the company car for business purposes doesn't realize taxable income.
Under our tax rules, many other fringe benefits can also be ignored for tax purposes. Benefits such as air fare, cars, computers, educational benefits, entertainment, seminars, or travel are often excluded from the recipient's income as working condition fringe benefits?even when the recipient is the ISP operation's owner. Of course, some of those benefits may constitute income, at least to the extent that they are used for personal purposes.
One personal benefit that many employers provide employees?and themselves?is insurance. The ISP operation's employees?or owner?is required to include the cost (or what the IRS says the cost should be) of more than $50,000 of group term life insurance provided by the ISP business. That means the premiums for up to $50,000 in life insurance are tax-free to the business's owner and employees. The premiums can also be deducted by the ISP business.
Fair play caveat
Any ISP that offers employees or the owner an employee welfare benefit plan?like health insurance or a retirement program?must be fair. It is illegal to discriminate in favor of the operation's owners, its key employees, or any group of employees. In fact, the Employee Retirement Income Security Act (ERISA) is a federal law that affects the administrative aspects of employee benefit and retirement plans.
Legitimate tax deductible expenses permitted for travel, meals, entertaining, automobile expenses, and the like, if properly claimed and documented, can give any ISP business owner many advantages not enjoyed by regular employees. Unfortunately, many business owners are often tempted to go too far?and that's where trouble arises.
There will be big problems for the the ISP operator who fails to differentiate between personal and business income and plunders the company's assets at will.
Even though it is your business, it's also your business's money and you may not spend it on yourself, willy-nilly as you choose. You have worked hard to build your ISP business, but that does not mean it's time to reap the rewards and abuse your position.
Be smart and be fair?the IRS is looking for any ISP operator who abuses tax-advantaged fringe benefits with reckless abandon. Take only your fair share of legitimate, non-taxed benefits, and report the correct amounts on your taxable benefits.
Fringe benefits may be a valuable business edge for you on a private level, but that's no reason to abuse personal benefits and take your ISP business to the brink of a taxing disaster.
Reward Yourself With Fringe Benefits
Ownership has its privileges, make sure you are taking your fair share of perks and perquisites. But don't overdo it?when it comes to fringe benefits, greed is not good.
Paying the fixed overhead costs of an ISP business is all that some operators, particularly those just starting out, could ever hope for. However, as your ISP business grows?and prospers?the subject of employee benefits is sure to arise.
If your ISP business is going to reward employees, why deny yourself the benefits you are offering those employees?the same benefits that you would expect if you were an employee?
Defraying double-dipping
As the owner or shareholder in an ISP business that is profitable, you'll want to avoid the double tax that applies when the business pays you dividends. The business pays those dividends from income on which it has already paid the tax (there is no deduction for dividends paid) and the recipient pays tax when that dividend is added to his or her tax bill.
While trying to avoid the double tax on dividends, many ISP owners often run afoul of the accumulated earnings tax. That penalty tax is levied when profits are left in an incorporated business in amounts that exceed the reasonable needs of that operation.
Rather than pay the double tax on dividends or risk leaving too much money in the business, many ISP operators attempt to take the profits from their business in the form of compensation.
Remember, regardless of the amount, the sum you pay yourself may be viewed as excessive by the IRS?especially if your business pays no dividends to you or the other shareholders.
Paying yourself "excessive compensation" regardless of the amounts involved, means that an IRS examiner may recharacterize it as dividends paid and, once again, expose you and your ISP to that dreaded double tax.
Border boons
While every ISP operation must generally treat fringe benefits as a part of employees' taxable wages, there are certain fringe benefits that are exempted from this rule. In fact, the major advantage to offering many fringe benefits is that the your ISP operation can claim a business deduction for the cost even though employees?or you?aren't required to pay tax on them.
An example of one nontaxable fringe benefit is a company car. The cost of owning or renting the vehicle along with its upkeep, gas, oil, insurance, and the like is a legitimate income tax deduction for most ISPs. An employee?or the operation's owner?who uses the company car for business purposes doesn't realize taxable income.
Under our tax rules, many other fringe benefits can also be ignored for tax purposes. Benefits such as air fare, cars, computers, educational benefits, entertainment, seminars, or travel are often excluded from the recipient's income as working condition fringe benefits?even when the recipient is the ISP operation's owner. Of course, some of those benefits may constitute income, at least to the extent that they are used for personal purposes.
One personal benefit that many employers provide employees?and themselves?is insurance. The ISP operation's employees?or owner?is required to include the cost (or what the IRS says the cost should be) of more than $50,000 of group term life insurance provided by the ISP business. That means the premiums for up to $50,000 in life insurance are tax-free to the business's owner and employees. The premiums can also be deducted by the ISP business.
Fair play caveat
Any ISP that offers employees or the owner an employee welfare benefit plan?like health insurance or a retirement program?must be fair. It is illegal to discriminate in favor of the operation's owners, its key employees, or any group of employees. In fact, the Employee Retirement Income Security Act (ERISA) is a federal law that affects the administrative aspects of employee benefit and retirement plans.
Legitimate tax deductible expenses permitted for travel, meals, entertaining, automobile expenses, and the like, if properly claimed and documented, can give any ISP business owner many advantages not enjoyed by regular employees. Unfortunately, many business owners are often tempted to go too far?and that's where trouble arises.
There will be big problems for the the ISP operator who fails to differentiate between personal and business income and plunders the company's assets at will.
Even though it is your business, it's also your business's money and you may not spend it on yourself, willy-nilly as you choose. You have worked hard to build your ISP business, but that does not mean it's time to reap the rewards and abuse your position.
Be smart and be fair?the IRS is looking for any ISP operator who abuses tax-advantaged fringe benefits with reckless abandon. Take only your fair share of legitimate, non-taxed benefits, and report the correct amounts on your taxable benefits.
Fringe benefits may be a valuable business edge for you on a private level, but that's no reason to abuse personal benefits and take your ISP business to the brink of a taxing disaster.
Turn Your ISP's Business Losses into Tax Benefits
Tough-times may require ISP owners and operators to get tough-minded when it comes to tax-time. Learn how to make the most out of a bad situation by utilizing existing tax laws to your advantage.
Fortunately, many types of losses encountered by the average ISP operator can be eased or reduced by simply taking advantage of current tax regulations. Under present tax rules, any loss sustained during the taxable year or a loss not covered or "made good" by insurance?can be claimed as a tax deduction.
Would a refund on taxes paid by your formerly profitable ISP business from year's past help ease the pain of operating losses you report this tax year? What if last year's business losses could offset next year's profits and reduce your tax bill for years to come?
Allowable takeaways
A net operation loss?or NOL?is the total excess of allowable deductions over gross income, with required adjustments. In other words?if all of your ISPs expense deductions exceed your ISPs income shown?on either your tax return or your ISPs tax return?you may report a NOL.
That is if, after making some slight adjustments to that loss such as ignoring your dependency amounts, the loss remains and if it is a loss from a trade or business, your could claim the net operating loss for your ISP business.
Remember, a substantiated NOL is a loss that can be carried back two years, often producing refunds of taxes paid in those years. If two years ago your ISP business was not profitable enough to negate this year's NOL, the potential deduction may be carried forward for up to 20 years?until it is used up.
Inauspicious obligations
Business bad debt, regardless of whether it arose from an operator's loans to his or her ISP business or loans to others?so long as they are business related?can be deducted to the extent of their worthlessness.
Note that business bad debt that is worthless can occur anytime the debt becomes partly or totally worthless. However, a non-business bad debt can only be deducted when it becomes completely worthless.
Unfortunately, business bad debt deductions are not available to shareholders who have advanced money to a corporation as a contribution to capital, or to creditors who hold a debt that is confirmed by a bond, note or other evidence of indebtedness.
Justified disasters
Losses occurring from fire, storm, shipwreck or other catastrophic events are clearly tax-deductible. Of course, casualty losses must be due to a sudden, unexpected or unusual event in order to qualify as a tax deduction for your ISP business.
Casualty losses, at least if they have are the result of a legitimately declared "disaster" can be utilized to recoup taxes paid in the previous tax year. In essence, a casualty loss resulting from a declared disaster may be claimed as a tax deduction in the year preceding the tax year in which the disaster occurred.
Purloined privation
The tax rules clearly state that theft losses are actually "sustained" in the year when the ISP operator discovers the loss. In other words, a business loss due to theft or embezzlement is not normally deducted in the tax year in which the theft actually occured?unless the theft revelation also happens to occur during the same year in which the your discover the loss.
There is one condition; if in the year of discovery a reasonable possibility of reimbursement for the theft loss exists, the deduction cannot be taken until reimbursement is either made or ruled out as a probability. Remember, the basic rule states that in order for losses to be deductible, there must be a "closed transaction."
Forsaken capital
Finally, there are those losses that every ISP operator can control. Quite simply, a loss is allowed for the abandonment of an asset. According to tax guidelines, all the operator must do is "manifest an intent to abandon the asset and make some affirmative act of abandonment." The resulting loss is generally reported on an adjusted basis, or book value of the abandoned property.
If a depreciable business asset or income-producing asset loses its usefulness and is subsequently abandoned, the loss is equal to its adjusted basis. Obviously, an abandonment loss must be distinguished from anticipated obsolescence of capital equipment.
If a non-depreciable asset is abandoned following a sudden termination of its usefulness, a loss is also allowed in an amount equal to its adjusted basis. This type of loss applies to the abandonment of a business, as well as the abandonment of intangible assets, such as contracts for services.
For example, if your ISP abandoned DSL services this year and terminated contracts for those services, it could be considered a non-depreciable asset impacting this year's tax benefits. You should seek professional counsel if you think your ISP business could benefit for abandoning a non-depreciable asset.
Sheltered relief
In today's economy, many ISP owners are experiencing more than their share of losses. Fortunately, whether those losses result from the economy, Mother Nature or other factors, current tax rules can help.
There are tax rules are in place that could help your recoup business losses for your ISP operation?whether it's a basic tax deduction for bad debt losses, an adjusted loss for abandoned equipment, or business conditions that produce a net operating loss.
Are you prepared to take all the tax benefits you rightfully deserve from reporting your businesses' losses this year?
Turn Your ISP's Business Losses into Tax Benefits
Tough-times may require ISP owners and operators to get tough-minded when it comes to tax-time. Learn how to make the most out of a bad situation by utilizing existing tax laws to your advantage.
Fortunately, many types of losses encountered by the average ISP operator can be eased or reduced by simply taking advantage of current tax regulations. Under present tax rules, any loss sustained during the taxable year or a loss not covered or "made good" by insurance?can be claimed as a tax deduction.
Would a refund on taxes paid by your formerly profitable ISP business from year's past help ease the pain of operating losses you report this tax year? What if last year's business losses could offset next year's profits and reduce your tax bill for years to come?
Allowable takeaways
A net operation loss?or NOL?is the total excess of allowable deductions over gross income, with required adjustments. In other words?if all of your ISPs expense deductions exceed your ISPs income shown?on either your tax return or your ISPs tax return?you may report a NOL.
That is if, after making some slight adjustments to that loss such as ignoring your dependency amounts, the loss remains and if it is a loss from a trade or business, your could claim the net operating loss for your ISP business.
Remember, a substantiated NOL is a loss that can be carried back two years, often producing refunds of taxes paid in those years. If two years ago your ISP business was not profitable enough to negate this year's NOL, the potential deduction may be carried forward for up to 20 years?until it is used up.
Inauspicious obligations
Business bad debt, regardless of whether it arose from an operator's loans to his or her ISP business or loans to others?so long as they are business related?can be deducted to the extent of their worthlessness.
Note that business bad debt that is worthless can occur anytime the debt becomes partly or totally worthless. However, a non-business bad debt can only be deducted when it becomes completely worthless.
Unfortunately, business bad debt deductions are not available to shareholders who have advanced money to a corporation as a contribution to capital, or to creditors who hold a debt that is confirmed by a bond, note or other evidence of indebtedness.
Justified disasters
Losses occurring from fire, storm, shipwreck or other catastrophic events are clearly tax-deductible. Of course, casualty losses must be due to a sudden, unexpected or unusual event in order to qualify as a tax deduction for your ISP business.
Casualty losses, at least if they have are the result of a legitimately declared "disaster" can be utilized to recoup taxes paid in the previous tax year. In essence, a casualty loss resulting from a declared disaster may be claimed as a tax deduction in the year preceding the tax year in which the disaster occurred.
Purloined privation
The tax rules clearly state that theft losses are actually "sustained" in the year when the ISP operator discovers the loss. In other words, a business loss due to theft or embezzlement is not normally deducted in the tax year in which the theft actually occured?unless the theft revelation also happens to occur during the same year in which the your discover the loss.
There is one condition; if in the year of discovery a reasonable possibility of reimbursement for the theft loss exists, the deduction cannot be taken until reimbursement is either made or ruled out as a probability. Remember, the basic rule states that in order for losses to be deductible, there must be a "closed transaction."
Forsaken capital
Finally, there are those losses that every ISP operator can control. Quite simply, a loss is allowed for the abandonment of an asset. According to tax guidelines, all the operator must do is "manifest an intent to abandon the asset and make some affirmative act of abandonment." The resulting loss is generally reported on an adjusted basis, or book value of the abandoned property.
If a depreciable business asset or income-producing asset loses its usefulness and is subsequently abandoned, the loss is equal to its adjusted basis. Obviously, an abandonment loss must be distinguished from anticipated obsolescence of capital equipment.
If a non-depreciable asset is abandoned following a sudden termination of its usefulness, a loss is also allowed in an amount equal to its adjusted basis. This type of loss applies to the abandonment of a business, as well as the abandonment of intangible assets, such as contracts for services.
For example, if your ISP abandoned DSL services this year and terminated contracts for those services, it could be considered a non-depreciable asset impacting this year's tax benefits. You should seek professional counsel if you think your ISP business could benefit for abandoning a non-depreciable asset.
Sheltered relief
In today's economy, many ISP owners are experiencing more than their share of losses. Fortunately, whether those losses result from the economy, Mother Nature or other factors, current tax rules can help.
There are tax rules are in place that could help your recoup business losses for your ISP operation?whether it's a basic tax deduction for bad debt losses, an adjusted loss for abandoned equipment, or business conditions that produce a net operating loss.
Are you prepared to take all the tax benefits you rightfully deserve from reporting your businesses' losses this year?
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