Business Loans - Qualifying

Business Loans - Qualifying
GETTING A BUSINESS LOAN
With few exceptions, most businesses require an influx of cash now and then.  Sometimes it is for maintaining growth; sometimes it is for maintaining the status quo.  From where does this money come?  Statistics show that 65% of small business funding comes from the owner.

But that means that 35% of the funding comes from other sources– either outside investors, or lenders. So, statistically speaking, the majority of businesses end up borrowing money some time or another. Getting a business loan, especially the first one, usually takes time and effort on the part of the borrower. This can be frustrating for a business owner who is used to "taking risks."  The business owner mistakenly assumes the lender is willing to take the same kind of "risk" with his business.  This is just not the case.

In fact, a lender is not in the business of "taking risks."  Rather, the lender is in the business of making money on the money being loaned.  So the main objective when you borrow money is to make the lender feel comfortable in loaning you money.

You do this by providing answers to all the questions in the lender's mind.  What are these questions?
They fall into the following categories:
1.  How much do you want to borrow?  This may sound obvious, but you would be surprised at how many business borrowers don't communicate this specific request properly.
2.  What do you plan to do with the money?  This determines the length of the loan needed, among other things.  A good business plan is important in this area.
3.  How and when do you intend to pay it back?  The lender's opinion as to your ability in this regard is a critical factor in the borowing game.  Thus, the cash flow analysis of the business takes center stage here.
4.  If your plans fail, what alternatives do you have to pay back the loan?  This is where the issue of collateral and liquidity come into play.
5.  For smaller businesses, especially those with limited collateral, what happens if you, the business owner, die or become disabled?  How will the loan be paid back then?  The lender wants to know about your life and disability insurance situation.
6.  What type of person are you?  A lender is very much concerned with the character of the borrower since this impacts all phases, including your ability to manage a business effectively.
7.  What is the outlook for your particular business, and the industry as a whole?  If you are in a declining field, it's a negative.  If your business is showing great growth, it is a positive.
8.  What has been your credit history to date?  This is where your "credit past" can either help you a great deal, or hurt you.  If you have a weak "credit past" you'd better be able to explain in a way that is acceptable to the lender.

All of these questions must be answered satisfactorily in the lender's mind or you will not get the loan.  It's that simple.  So, let's go through the process in more detail.  The bottom line is that, the more you understand what is expected of you as the borrower, the easier it will be to get the loan you want.

Start With A Good Business Plan
SBA has just launched a new “Build a Business Plan” online tool that guides small business owners through the process of creating a basic, downloadable business plan. To use the tool, you’ll need to be a member of the SBA Community (register here) and then log in.  

A business plan can be one of the best ways to promote yourself and your business to a lender.  It can serve as an outline for the entire process of borrowing money, and it can answer just about all of the lender's main questions.

What this plan does is to give the lender a realistic look at all phases of the business and its future possibilities.  It consists of 4 basic sections:  

1)  A description of the business activity, the industry as a whole, and its potential; 
2)  The marketing plan which tells about the potential market, and how you intend to communicate(advertise) your business to this market; 
3)  Management information which serves as a biography/resume of who runs the business; and, 
4)  Financial information in which various financial statements–both current and projected–are used to identify the business value from a dollars and cents perspective.

A well written, well presented business plan can go a long way toward providing a lender with much of the information that is needed in determining how to handle your loan request.

Providing Proper Financial Data Is Mandatory
From a "numbers crunch" standpoint, this is where it all starts.  The lender is looking to make a loan to a business that can pay it back; the business should have profit potential, growth potential, and solvency potential.

The lender will request a number of financial statements from you to help judge this, both from an individual perspective, and an industry comparative standpoint.  The most common ones are:  1) Profit and Loss Statement; 2)  Balance Sheet; 3) Cash flow analysis; and, 4) Sources of funds statement.  Projections as to future performance will also be used in the decision-making process.  

A brief description of these financials is as follows:
Profit And Loss Statement:  This report lists your income and expenses by various categories to arrive at your profit or loss for a given period of time.  It helps a lender determine various ratios to see how much of a loan you can afford.

Balance Sheet:  This identifies your assets, liabilities, and capital to show what the business "net worth" is.  It does several things for a lender.  First, it identifies all your outstanding debt.  Second, it lets the lender know your liquidity.  These are two very critical pieces of information a lender needs.

Cash Flow Analysis:  This report is being used more and more, even with smaller businesses.  It shows what actual cash you have coming in, and going out. This gives the lender a very clear idea of whether you will be able to make the loan payments out of current revenues adjusted for expenses.

Sources Of Funds:  This schedule is pertinent especially for new businesses, or new acquisitions since it basically shows where you get various funds with which to capitalize or acquire various items.

There may be other reports requested for different types of businesses, or business characteristics,  such as:

Accounts Receivable:  If accounts receivable are an important factor in your business, then the lender will want an analysis of these receivables.  Are any of the receivables already pledged to another creditor?  What is your average turnover ratio?  What is the average age of the receivables?  How much does your largest single account owe you, and what percentage does this represent of the total accounts?

Inventory:  If your business sells a product where inventory is maintained, the lender will want to know the salable condition of this inventory.  Will it have to be marked down?  Is inventory rising proportionately higher than your gross sales?  What is the inventory turnover rate?

Assets:  The condition of the business assets is very important to a lender since these would be used for liquidation purposes if you default on the loan.  So a listing of the assets, age, and condition are usually required.

Long Term Contracts:  Contracts that you already have with customers provide a stream of assured revenue, so a lender looks for this, if the contracts are favorable ones.

Types and Terms Of Loans
The purpose for which you borrow and the amount you borrow often affect the type of loan you'll get, and the term of the loan.  Insofar as the term of the loan, there are basically two types of terms: short term, and long term.

The short term loans are usually reserved for specific purposes such as financing seasonal inventory, or financing accounts receivable.  They are normally expected to be repaid within a year; many times within months.  Short term loans are expected to be paid from the liquidation of the current assets they have financed.

Long term borrowing is for the opposite situation where the loan will be in existence for a longer period.  These can be intermediate loans where the payout time is up to 5 years; and long-term where it is expected to last more than 5 years.  Longer term loans are usually expected to be paid from the business earnings, or cash flow.

The type of loan is either a secured loan or an unsecured loan.  The secured loan requires pledging assets as collateral.  The unsecured loan relies more on your credit reputation and is usually for a short-term loan.  In addition, most unsecured loans are "demand loans." That means the lender can ask for payment of the entire loan balance when they deem it appropriate.

Issues Of Collateral And Other Limitations Lenders Set
A lender is always looking to make the loan terms as risk-free as possible, so the issue of collateral usually comes up.  This is a pledge of security the lender is asking from you.  The kind and types of security pledges will vary with the lender, your credit worthiness, and the type of loan.  

Listed below are some of the most commonly-requested types of collateral:
Co-maker:  The lender asks for someone other than just the borrower to guarantee the debt. If the borrower defaults, the lender can make the co-maker pay instead.

Chattel Mortgages:  The lender places a lien on the equipment of the business; you cannot dispose of it so the bank can liquidate it if you default on the loan.

Real Estate:  Property and buildings fall into this category. The lender can put a lien on the real estate to serve as collateral for the loan.

Accounts Receivable:  Especially true for short-term loans, the value of the accounts receivable can be used as a form of an asset.  The money from the receivables will go to the lender directly if it is a "notification plan."

Investments:  Whether it be stocks, bonds, savings accounts, etc., the lender can request you pledge these assets, and put a "hold" on them while the loan is outstanding.  Rarely does a lender use a 100% value for stocks or bonds as insurance against market declines.

Lease Assignments:  This is used in franchise situations or closely-held business relationships.  The lease or rent payments become automatically assigned to the lender in the event of default, thus the lender gets an income stream to cover the loan payments.

Warehouse or Trust Receipts:  The lender takes specific business inventory items as collateral, and you agree to pay back the loan or a portion of it when these specific items are sold.  This is used in businesses such as automobile dealers, boat and appliance sale businesses, and manufacturing businesses where readily marketable merchandise is produced.

Lenders frequently place limitations on the borrower, depending on the credit risk associated with the loan.  Sometimes business owners react emotionally toward these limitations.  They feel "tied down." Unfortunately, the lender tends to be adamant about them, and this area tends to be one of the biggest "sore spots" in borrowing.

Some of the more common limitations have already been alluded to: loan repayment terms, and use of collateral.  The other two main types of limitations concern periodic reporting requirements, and restrictive covenants.

Periodic reporting:  The lender requires the business to furnish various reports to monitor the progress of the business, and, therefore, its ability to handle the current and/or future loan payment.  Reports such as periodic profit and loss statements, balance sheets, cash flow analysis, aged accounts receivables, and asset acquisition/disposition statements are frequently requested.  This can be a burden to the business owner, especially if these reports have not been prepared on a regular basis previously.  It may require more time–and money–spent in the accounting/recordkeeping areas than ever before.

Restrictive covenants:  This is one area that ruffles more business owner feathers than all the others.  These covenants are lender's controls over what a business can and can't do without approval from the lender.  The lender can place restrictions or have a say in various activities the business owner previously had total control in, such as:  borrowing more money; increasing the owner's wages, bonuses, dividends; pledging or selling assets; giving credit to customers; buying inventory; and required insurance coverages.

Can You Negotiate Lender's Terms?
The answer to this depends on a number of issues, not the least of which are:  the borrower's credit worthiness; the amount and terms of the loan; the future potential of the business; and the relative "independence" of the lender. 

The more credit worthy you are, the more in demand you will be with lenders.  They know this more than you, so they would be willing to negotiate some of the terms and restrictive covenants to get a good customer like you.

Many lenders will try to "scale you back" from the original amount you are requesting to borrow.  Some do it because they feel you are putting too much fluff in the request.  Others do it because they genuinely feel you don't qualify for the requested amount.  You can negotiate with the former; not with the latter.  The same applies to the length of the loan.  It is in the lender's best interest to get you to pay the money back as quickly as possible.  You may be trying to stretch out the terms for a smaller monthly payment.  There can be room to negotiate in this regard with most lenders.

If your business is on a "fast track" to success, with great potential, the lender may be willing to negotiate more with you in hopes of getting the bigger business down the road.  They know their profits will increase with you as time goes on.  So if your business is showing good, controlled growth potential, you have a decent bargaining chip in your pocket.  You may be able to get the interest rate knocked back; or you can try to negotiate out some of the restrictive covenants and/or reporting requirements.

The more a lender is independent, the more the terms can be modified.  Independence means the lender internally finances the loans, and/or keeps the loans instead of selling them off to another company.  If the lender is selling off loans, then the terms may be dictated by another source besides the lender, and the chance for bending some of the rules lessens.

Some Tips On Dealing With Loan Officers
Remember that you are dealing with someone who makes a living out of making loans.  If they are experienced, then they have made a career out of sizing up the good, the bad, and the ugly.  So here are some suggestions:

1.  Get an introduction from someone who knows the loan officer if possible.  It really is a "Who you know" world out there.
2.  Be thoroughly prepared and/or briefed about the lending company before you go in.  First impressions are lasting ones, especially with lenders.
3.  Have a business plan when you walk in, AND have a brief summary of this plan as well. Don't expect this busy person to want to read a 50 page plan right away.  Lead with a well-written 2 page summary first.
4.  Dress for success.  It shouldn't matter, BUT IT DOES.
5.  Your demeanor should be confident-hopeful, not conceited, nor desperate.
6.  Get your business advisors involved early with the loan process, especially a large loan request.  Your accountant will almost certainly be needed to assist you in preparing the required financials, and your attorney should read the loan documents for your protection.
7.  Don't moan and groan every time the lender requests more information from you.  If it were your money you were lending, you'd be cautious too.
8.  Follow-up the meeting with the loan officer with manners. A thank-you note sent to the loan officer after the first visit for their advice and assistance is a nice touch.
9.  After you get the loan, keep in touch with the loan officer. You have started a relationship that may last for the life of your business activities. The more the loan officer knows about the positive things in your business, the easier it will be in the future to borrow more money.

Conclusion
Obtaining a loan for a business is usually more complicated than one originally thinks.  It is one part disclosure and one part sales.  The stronger your business compares to the loan ratios, the less you need to sell yourself to the lender.  The weaker your business ratios are, the more you should sell "the future potential" to the lender.  This is because the lender is providing money to you for future sustainment and/or growth of the business as much as current needs.

By doing your homework ahead of time, and making a memorable presentation of yourself, the business, and its financials, the easier it will be to get a quality loan.

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SBA Loans
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Reference: Practice Enhancers, Able & Co.

Fringe Benefit Write-Offs

Fringe Benefit Write-Offs
A LOOK AT FRINGE BENEFITS
From a tax savings perspective, fringe benefit planning can achieve considerable results.  The business would be able to deduct the cost of these qualified benefits to save on taxes; yet the recipient would not have to pay current taxes on the value of the benefits received.  A "two for one savings" results, especially for an owner who is also a qualified employee.  So a business owner should have an overview of some of the options in regard to fringe benefits, and potential limitations or caveats.

By definition, a fringe benefit is a form of compensation–other than cash–given to a qualified recipient.  Generally speaking, the bulk of the tax-free fringe benefits can be granted to a qualified recipient who is an employee or to an owner who can also be set up as a qualified employee.

An Overview Of The Possible Fringe Benefit Options
While there are limitations, compliance issues, and non-discrimination rules that can vary according to the particular fringe benefits being set up and the type of business structure you have, it's important to get an idea of the major fringe benefits that may be available.  The following list gives a brief synopsis of the main ones:

Health & Accident Insurance: The cost of this tax-free benefit for employees, their spouses and dependents may be deducted by the business.  If provided, employer generally must also follow COBRA rules upon employee termination.

Life Insurance: Group-term up to $50,000 in coverage for employee, and up to $2,000 coverage for employee spouse or dependents is a tax free benefit.  Beyond that limit, a portion of premium cost may be taxable, but usually at far lower rates than if privately obtained.  Certain other types of life insurance arrangements (such as split dollar) may be set up with some limited tax-free or tax-deferred benefits.

Disability Insurance: The premiums paid by the business for the policy are a tax-free benefit to employee.

Conditional Meals & Lodging: If meals provided to employee on business premises, and lodging provided as a condition of employment–both for the employer's convenience–these are tax-free to the employee.  Business deducts the full cost of lodging, and 50% of the cost of meals.   

Day Care Services: Up to $5,000 per year of cost of these services may be tax-free to employee.  Must be either provided by employer, or paid to a qualified outside day care provider.

Qualified Retirement Plan: Contributions made by employer and/or employee may be deducted.  Various limitations on amount of contributions depending on type of plans and participation percentages.  Examples of such plan: SEP, Sar-SEP, SIMPLE, Keogh, 401(k), Customized Defined Benefits and/or Defined Contribution plans.

Working Condition Fringes: If primarily for benefit of employment conditions, tax-free to employee.  Examples: parking costs, professional association dues, business publications, business equipment (including computers, telephones, etc.) for required use at home, entertainment and travel/transportation expenses, convention expenses, required qualified office in home expense reimbursement, etc.

Vehicle Expenses: Cost of vehicle used for business purposes and/or as required by employer for business use may be tax-free to employee and deductible by business.

Transportation Benefits: Qualified commuter transportation expense, transit passes, commuter parking costs may be tax-free to recipient.

On-premises facilities: Eating facilities, daycare facilities, and athletic facilities available to all employees can be provided tax-free.

De Minimus Benefits: Occasional personal use of business equipment such as copiers, faxes, phones are tax free to employee, and fully deductible by business.  Similar rules for such things as coffee, doughnuts, soda, occasional tickets to shows, office parties and picnics, small gifts to employees.

Outplacement Assistance: This can be a very valuable fringe to a terminated employee.  Costs associated with finding another job may be fully tax-free: secretarial services, use of business facilities, counselling and resume services, etc.

Moving Expense Reimbursements: Subject to various dollar cost limitations, certain costs associated with a qualified job-related move would be tax-free to employee and tax-deductible by the business.

Achievement Awards: Tax-free up to certain dollar limitations ($400 for non-qualified plans; $1,600 for qualified plans) for actual gift or cash award instead.

Spousal Travel Costs: If the business requires an employee's spouse to travel with the employee for business purposes, these costs can be paid by the business and not taxable to employee.

Educational Costs: Up to $5,250 of educational costs for graduate level work is tax-free.  Other types of education costs to meet continuing job requirements are tax-free to employee and deductible by business.

Interest Rate Advantaged Loans: If set up properly, employee can get lower rate loans (in some cases NO interest charges) than on the outside without paying taxes on the differential costs.

Various Stock Options: Depending on the types, and employee status, the value of these options may be tax-free, or tax-deferred.  Overall goal of these options is to create opportunity to buy stock at a price lower than its actual worth.  

• Incentive Stock Options: Employee buys at reduced value, benefit not normally taxable when exercised, but when stock is sold.  
• Restricted Stock Option: Given subject to forfeiture rules if employee leaves prematurely.  Not taxable until forfeiture period elapses, then taxed at fair market value.  Provides possible capital gains tax savings. 
• Non-qualified Option: Taxable when exercised.

Stock Grants: Business grants employee actual stock, not just options.  The fair market value of the stock is taxable to employee.  But if stock appreciates this hidden value is tax deferred, and may be taxable at reduced capital gains rates later on when sold.  This can be a substantial tax benefit to people in high tax brackets.

Deferred Compensation Plans: Allows business to defer paying an employee for current work until a future date.  Can be a good tax saving tool in situations where the expectation exists that the tax bracket for the recipient will be lower at the future date vs the current date and/or vice versa for the business paying it.  This is primarily a tax-deferring benefit, and the business takes the deduction for the paid compensation at the future date as well.

Cafeteria Plans: A benefit plan in which the employee has a choice of either receiving cash or two or more qualified benefits in lieu of cash.  The allowable benefits that can be included in this plan are: disability, accident, health, dental insurance premiums, medical costs not covered by insurance, dependent care costs, and qualified 401(k) pension plans.

In addition, under Code Section 125, a special flexible spending account can be set up for the employee to directly pay for dependent care or various health care costs.  Up to $5,000 per year of this benefit cost can be deducted "off the top" of the employee's compensation.  This FSA provision has two main caveats for an employee.  First, the cost for these qualified expenses must be established in advance and paid for currently, not after the fact.  Second, if the employee fails to use up the pledged amount of expenses for the stated purposes, the unused portion cannot be given back.  It is a "use it or lose it" restriction.

The Cafeteria-type plans thus allow employees to be able to customize their benefits package and/or coordinate it with a working spouse's benefits to maximize the tax-free/tax-deferred benefits.

This can be ideal for smaller businesses that can't pay for the total cost of these benefits, but still want to offer employees some tax advantages.  The flexible spending account arrangement benefit can do this.

Compliance & Qualifying Issue #1: Type Of Business Entity
To be deductible by the business and tax-free/tax-deferred by the recipient, most fringe benefits must meet certain compliance and qualifying requirements.  These requirements fall into two main categories for this purpose: 1) The type of business entity, and 2) the so-called highly compensated/non-discriminatory tests.

In regard to category #1, the type of business entity may limit which fringe benefits are allowable from a qualified position.  For this form of limitation, the four types of business entities are: Sole Proprietorship, Partnership, C Corporation, and Subchapter S Corporation.  Certain qualified fringe benefit plans may not be allowed for the owners/controllers of some of these business types, but allowed for other employees.

In this regard, sole proprietors, owners of partnerships, and employee/shareholders who own more than 2% of a Subchapter-S corporation do not usually get to share in all of the potential tax free benefits available.  There are some that they cannot get 100% tax free, most specifically for the current year: health insurance, group term life insurance, death-benefit exclusion, and employer-furnished meals and lodging for on premises containment.

There is a tax-deductible allowance for health insurance, in that the taxable premiums may be deducted by these individuals on their own tax returns. 

The bulk of the other fringe benefits that may not be allowed for the owners or controllers of the business entity types are summarized as follows:

Sole Proprietors: Cannot get tax-free status in on-premise facilities, outplacement assistance, deferred compensation, disability insurance, death benefits, achievement awards, transportation benefits, moving expense, cafeteria plans, interest rate advantaged loans, stock options, stock grants.   

Partner/owners: Cannot get tax-free status in outplacement services, cafeteria plans, deferred compensation, disability insurance, stock options, stock grants, interest rate advantaged loans.

2% owner/shareholders of Sub Chapter S Corporation: Cannot get full tax-free/tax-deferred status in disability insurance, and cafeteria plans.

Be advised that these restrictions mostly apply to owners or controllers of these business entities.  They usually do not restrict general employees from the tax-free/tax-deferred status of the above-mentioned fringe benefits.

Compliance & Qualifying Issue #2: Tests To Pass
The IRS attempts to reduce possible discriminatory use of certain fringe benefits so that businesses can't show favoritism among different levels of employees.  In effect, the intent of these compliance tests is to prevent the "stacking of fringe benefits" in favor of owners and key personnel at the expense of other employees.

Two areas of qualification must be dealt with for setting up some of the tax-free/tax deferred fringe benefits.  First, if a business wishes to EXCLUDE certain employees, it can only do so based on a limited number of parameters such as: full-time vs part-time status, age of employee, seasonal nature of the job, vesting periods, citizenship/residency status, and collective bargaining coverage.

Thus, many of the fringe benefits can be set up in such a way as to exclude part-timers vs full-timers, employees under age 21, seasonal jobs that last less than 12 months, employees who have worked for you less than 1-3 years, non-resident aliens, and employees covered under certain collective bargaining agreements.  So if your business has employees that fit into these categories, or you have a very high turnover rate of employees, you may be able to set up various fringe benefit plans to selectively cover certain people or groups.  This could result in maximizing your own fringe benefits and minimizing the business expense of covering others.

The second area of qualification to deal with involves meeting the IRS tests for "highly compensated" individuals.  In a nutshell, the purpose of this test is to insure that the dollar value of contribution amounts or benefit amounts do not discriminate in favor of highly compensated individuals.  It's not always enough to cover all the employees with a particular benefit.  The dollar value of the benefit must also be spread out in such a way that the "lower compensated" employees are given a calculated fair share portion of the overall benefit according to IRS guidelines.

What is the IRS definition of a "highly compensated" individual?  It can get quite complicated from a calculation standpoint.  Normally, however, it is an owner, a shareholder(with 2%-5% or more of the holdings), an officer, or a key employee–or spouse or dependent of said individuals–whose earnings are such that they are in the top 20 percentile for the company.

Further, these tests can vary according to the particular type of fringe benefit plan, and can be very complicated in some instances, especially for fringes such as 401(k) plans, stock options and grants, cafeteria plans and qualified customized retirement plans.  A benefits specialist is often used in the planning, implementation, and calculation of the benefit deductibility amounts when a question of this qualification test comes into the picture.

Now, what happens if the business doesn't meet this "highly compensated" test?  It means part, or all of the particular fringe benefit may become taxable(or not available) to these highly compensated individuals.  If this is a possibility, the options for the business owner are:

1. Rearrange the fringe benefit amounts so it does qualify
2. Don't make that particular fringe benefit available
3. Accept the consequences of not realizing the full amount of the potential tax savings for the highly compensated group so the other employees can still benefit.

Reporting Requirements
With few exceptions (such as a SEP plan) most fringe benefit plans require some form of reporting to appropriate government agencies, such as the IRS or Department Of Labor.  This falls under the auspices of the Employee Retirement Income Security Act Of 1974, commonly abbreviated "ERISA." Failure to file timely and/or properly may result in civil or criminal penalties if willful failure to file is proven.

The two major categories of benefit plans to which most of this ERISA reporting applies are Employee Pension Plans, and Employee Welfare Plans.

The Welfare Plans refer to other than pension plans, so they may run the gamut from insurance to cafeteria plans.  The Pension Plans comprise the obvious: tax-qualified retirement plans such as Keoghs, 401(k) plans, etc.

The reporting requirements can be quite simple, or quite complex depending on the type and nature of the fringe benefit plan, whether or not the "highly compensated" test is required, how many employees are being covered, and whether any allowable discrimination restrictions are in place, to name a few.

There are a few common denominators among the various reporting requirements.  Most of these plans must be written, and a Summary Plan Description must be distributed to all covered employees.  This Summary must contain a number of specific disclosures, and be filed with the Department Of Labor.  An annual report or return (Form 5500) is usually required to be filed with the IRS.  Any modifications to existing plans must also be filed in the year these changes occur.

If your business uses a professional benefit plan specialist (such as an insurance company, brokerage house, or mutual fund company), most of these reporting/filing/disclosure requirements are taken care of for you.

Conclusion
Fringe benefits can be a very valuable aspect of a business.  First, the potential tax-savings can be substantial.  The business may be able to deduct the entire cost of these benefits, yet the recipients (business owner, employees) may be able to enjoy these fringes tax-free.  Second, offering fringe benefits can help to attract better employees, and reduce employee turnover.  This can save a business a considerable amount of money since employee turnover is so expensive to deal with, and higher quality employees usually translate into higher business profits.

But it may require some advance planning for some of the potential fringe benefits, especially if there is any possibility of a problem meeting the highly compensated/non-discrimination tests for certain fringe benefits.

Finally, the administration and reporting requirements make some of the fringes a chore to maintain, while for others it is relatively simple.  So an analysis of the risk to rewards in this area is always recommended before plunging in.  Nevertheless, the business environment in regard to providing fringe benefits is getting more and more commonplace.  So it is an area in which you, the business owner, should at least have a rough idea of the options and pitfalls.

Reference: Practice Enhancers, Able & Co.

10 Ways to a Stress-Free Tax Season

10 Ways to a Stress-Free Tax Season

1. Keep one day a week for you and your family
This takes determination but is worth every bit of planning it takes. Don't let your wife or husband be a tax season widow or widower. When you return to your office you will be refreshed and more productive.

2. Appeal to a higher power
People who prayed before performing a taxing task had lower blood pressure and felt less anxious that those who did not. Researchers theorize that prayer creates the sense of peace to have a nonjudgmental and powerful support network.

3. Exercise
Spend at least 30 minutes everyday taking a walk, jogging, playing with your kids.

4. Don't eat at your desk
Take a break everyday, get outside and enjoy at least 10 minutes in the sunshine; it will do miracles for your attitude and focus when you return.

5. Take an Afternoon Break
Leave it to the Brits to prove that drinking tea reduces your level of the stress hormone cortisol. Create a calming ritual by pouring a cup every day at around the same time.

6. Grab a snack that gives you a real boost
Enjoy the health benefits of raw almonds and fruit.

7. Take time for you; do what you love
Go to the gym, go dancing, ride your bicycle, meditate 20 minutes, read a favorite book enjoy yourself when you have the time.

8. Eat more fish
Top your lunch salad with canned salmon or tuna. Both contain cortisol-regulating magnesium, which can get depleted during hectic moments, resulting in headaches. These fish are also a great source of omega-3 fatty acids, which prevent surges in stress hormones.

9. Drink Water

Drink water like it's your job. Alcohol is dehydrating, causing you to function at less than your best. Being under pressure can lead to dehydration as well. Always keep a glass or pitcher of water on your desk.

10. Distract Yourself
A study shows playing a brainteaser could improve your mood and heart rhythms. Scrabble, word searches and sudoku work just as well to counteract the stress response.

"Happiness is a state of activity." -- Aristotle

... In other words, you've got to keep moving forward.

• Express yourself. 
• Spend time with family. 
• Focus on others. 
• Hydrate yourself. 

"Any man is as happy as he chooses to be." -- Abraham Lincoln

“Build a Business Plan” Online Tool

“Build a Business Plan” Online Tool
Having a business plan is a must for small business owners, but finding the time to put pen to paper often means putting them on hold until the very last minute, such as right before that big meeting with a loan officer or bank manager.

Every smart entrepreneur and business owner should already have a firm grasp of key information about their business and on what will influence the path they take and decisions they make over the course of 1-3 years.

Putting this information together into a concrete plan is essential if you want to secure a business loan or outside financing, of course. But the planning and mental exercise of writing it down is just as important to the success of your business. Writing a plan will not only help you succeed, but it will open your eyes to what it’s going to take to get there.

One of the big challenges for smaller businesses is actually building a business plan. What format should it take? What numbers should you pull together to demonstrate that you have a rock solid financial foundation? To simplify the process, SBA has just launched a new “Build a Business Plan” online tool that guides small business owners through the process of creating a basic, downloadable business plan. The great thing about this tool is you can build a plan in smaller bites, save your progress and return at your leisure.

To use the tool, you’ll need to be a member of the SBA Community (register here) and then log in. The tool offers a tab-based step-by-step guide that lets you enter information into a template for each section of the business plan, including market analysis, company description and financial projections. The tool is secure and confidential and will keep your plan on record for up to six months. You can also save, download or email the plan at any time.

Coutesy:  Building a Business Plan – New SBA Online Tool Can Help You Get Started
by Caron Beesley, Community Moderator 

Checklist for Corporations - Start-up Issues for New Business

Checklist for Corporations
Start-up Issues for New Business
Below is a checklist of actions that should be considered for the organization and operations of your corporation.
♦ Determine Corporation Name
♦ Determine Corporation Directors
♦ Determine Corporation Officers
♦ Apply for state corporate charter
♦ Adopt bylaws, seals
♦ Set up issued and outstanding stock
♦ Establish appropriate 'Minutes'
♦ Set up shareholder agreements (if more than one active owner)
♦ Set up buy/sell stock redemption agreement
♦ Arrange for any asset / liability transfers to corporation
♦ Consider plan to establish section 1244 Small Business Stock
♦ Do necessary assumed (fictitious) business name registration
♦ Apply for required operating permits, licenses, bonds, etc.
♦ Apply for Subchapter S, if applicable
♦ Request transfer of existing state experience rates (if incorporating existing business)
♦ Register for Federal SS-4 Tax ID#
♦ Register for State Income Tax ID#
♦ Register for State Sales Tax ID#
♦ Register for State Unemployment, Withholding Tax ID#
♦ Establish appropriate accounting methods (tax year, cash vs. accrual, inventory valuation, depreciation, etc.)
♦ Set up acceptable bookkeeping system (including auto use, home office, rental, etc.)
♦ Establish appropriate travel and entertainment procedures and record keeping reports
♦ Consider various fringe benefit plans (health insurance, life insurance, etc.)
♦ Set up bank / checking accounts
♦ Contact insurance company regarding various coverages needed (business liability, key person, medical, buy/sell, errors and omissions, workers comp)
♦ If Employees will be hired: Consider a personnel manual
♦ If Employees will be hired: Have W-4's, I-9 forms, state employee registration forms ready

Notes:

Reference: Practice Enhancers, Able & Co.

Taking Money out of a Corporation

TAKING MONEY OUT OF A CORPORATION
With few exceptions, the overall plan is to have a successful corporation in which you can eventually enjoy the fruits of your labor.  Part of this enjoyment may involve taking money out of the corporation for your use. You want or need the money to live a certain lifestyle.  That's one of the two main reasons for taking money out.

The second main reason for taking money out is for tax planning purposes:  to reduce potential corporate tax liabilities, and/or to try to reach an "equilibrium" between the corporate tax bracket and your personal tax bracket.  Obviously if the corporation is showing profits, it normally pays income taxes.  By taking money out of the corporation in such ways that the corporation can deduct the payouts, the corporate tax liability is reduced.  Within this context, if the corporate tax bracket is at a different level than your personal tax bracket, the most effective overall tax minimization involves planning the corporate payout amounts at a level which will make the corporate and individual tax brackets reach parity.

This tax planning technique notwithstanding, there is even a third reason for taking money out of a corporation at a certain developmental level–due to a nasty provision in the IRS tax code involving an "accumulated earnings tax/penalty" (an income tax assessed on accumulated profits (see retained earnings) that exceed the limit specified in taxation regulations, unless justified by the firm's 'reasonable' needs.  The onus is on the management to prove the reasonableness of its high reserves.)
  
Because determining the reasonable needs of a business involves considerable judgment, companies have been known to pay excessive dividends or even to make merger decisions out of fear of the accumulated profits tax.  Also called accumulated earnings tax.  Believe it or not, the IRS can impose some stiff penalties on corporations that have an "unreasonable" accumulation of earnings.  In effect, the tax code does not encourage corporations to retain too much in profits or earnings without justifiable cause for this retention.  The Code wants earnings distributed.
IRC §532 - Corporations subject to accumulated earnings tax.  

The accumulated earnings tax has been referred to as "a penalty on success itself."1  Of all the taxes imposed upon business, this is probably one of the most unpopular, involving an after the fact verdict on management's business judgment.  As long as substantial differences exist in the tax rates imposed upon the corporation on the one hand and upon the individual on the other, however, there will continue to be a need for such tax "as a barrier to . . . tax avoidance."2  IRC §533(a) creates a presumption that the purpose of avoidance is present if earnings are accumulated beyond the reasonable needs of the corporation's business.  IRC §535(c) provides a credit in computing accumulated taxable income for "such part of the earnings and profits for the taxable year as are retained for the reasonable needs of the business."3  How much is too much depends on a number of factors.4 

The IRS can assess a corporate accumulated earnings tax penalty on companies that accumulate excessive amounts of earnings and profits. This penalty is 15% in 2012. It’s scheduled to rise to 39.6% (the same as the top individual marginal tax rate) in 2013. If your corporation has built up significant earnings and profits, distributing excess cash as dividends in 2012 may be advantageous since shareholders are taxed on qualified dividends at no more than 15%. (Requirements apply.)  Absent further legislation, dividends will be taxed at ordinary rates as high as 39.6% in 2013.  A distribution may also help the corporation avoid the accumulated earnings tax penalty in 2012 and the higher penalty rate currently scheduled for 2013.  But be sure a thorough analysis has been performed before making a decision.

So the overall goal is to find ways to take money out of a corporation with the least possible tax consequences for both the owner and the corporation.  That's why there sometimes comes a time when just taking a salary isn't the most effective way to take money out.  It may reduce or eliminate the corporation's tax liability, but it may then increase your personal tax liability too much.

Ironically, there even exists a situation where your corporation could be held accountable for paying "excess compensation" to you as an officer, or closely held participant.  In other words, there could be significant penalties for taking too much out in compensation!

So why not just take out a big dividend instead of salary to get around this?  You could.  Except that most dividends–especially those to closely held participants like owners–are not deductible to the corporation, but they are taxable to the recipient.  While this could relieve the potential problem of an accumulated earnings tax, it could create a serious tax liability issue for you personally, and it could create some tough cash flow problems for the corporation.  It would have to pay tax on the profits that paid for the dividend distribution, but it wouldn't have the money for the tax–since it paid it out to you.  That's one of the so-called double taxation issues of closely held corporations.

Taking Money Out:  Option #1-- Nondeductible By Corporation
The way that the money is taken out of a corporation largely determines whether or not the corporation can deduct this payout.  As we have just seen, a dividend is a way of taking money out, but the corporation cannot deduct it.  There are several other possibilities to be noted:

Loans From Corporation to You:  If done properly, this is one way to take out money that is not currently taxable to you.  However, nor is it deductible by the corporation.  But if the corporation is not showing any significant profits to worry about tax-wise, and your personal tax bracket is high, this is a viable option to enhance your temporary cash flow needs at the personal level.  You must make sure the loan meets all necessary standards of legitimacy such as:  a good reason for borrowing, especially for temporary needs; a qualified loan agreement and payout schedule is adopted according to proper corporate bylaws; for  loans in excess of $10,000, an appropriate interest rate should be paid.

Entertainment Expenses:  If you do a significant amount of legitimate business entertaining for which the corporation pays, under the present rules it can deduct only 50% of these expenses.  For people who enjoy entertaining, it is a legitimate way of taking money out of the corporation even though the corporation cannot deduct all of it on its tax return.

Constructive Dividend Payouts:  These are payments the corporation makes that the IRS deems to be primarily for the benefit of a shareholder and no significant corporate business purpose can be proved adequately. It is a very inefficient way to take money out of a corporation, since it is taxable to the shareholder, and usually not deductible by the corporation.  Some examples are:  improper loans paid out, bargain rentals or sales of corporate property to shareholders, personal expenses of the shareholder paid by the corporation, certain types of life insurance premiums, and various related-party transactions.  Although these payouts from the corporate checkbook will certainly reduce its profits, it is not necessarily a good or recommended option.  In fact, if the IRS could prove it was willfully and continually done, it could even lead to possible fraud charges.

Taking Money Out:  Option #2--Deductible By Corporation
Salaries, Bonuses, Commissions:  In one of the more commonly known options, you have the corporation pay you just like any other employee.  Income taxes are withheld, and appropriate federal and state payroll taxes are paid. The income is taxable to you, and deductible by the corporation (mindful of the excess compensation rules).  Within reason it also can be used as a good tax rate equalization technique by using year end bonus or commission payouts.  If you know the corporation will have too high of a profit, pay yourself a nice bonus.

Directors' Fees:  You may be able to pay yourself or other family members for directors' fees as board members of the corporation.  This is taxable to the recipient and deductible by the corporation.

Rental Income:  If you structure it properly, you may be able to charge the corporation rent if it is using any of your property for qualified business purposes:  storage, inventory, office space, etc.  This may give you a partial tax sheltering since you may then be able to offset this income in part with depreciation deductions, utility, insurance, repairs and maintenance costs associated with the property.  The corporation gets to deduct the rental payment and you get money out of the corporation that is not subject to social security, medicare tax, and state payroll tax.   This can save upwards of 15.3% in payroll-related taxes alone.

Family Members on Payroll:  The corporation pays other members of your family besides you for services rendered.  The corporation takes a deduction, and the family member in question reports the income.  This may have personal income tax advantages if the family member in question is in a much lower tax bracket than you are.

Travel Expense:  If you can coordinate business purpose travel with personal enjoyment use in an acceptable way, this is a good option to get money out that is deductible to the corporation but non-taxable to you.  Could a business convention or trade show be attended in an area you would love to visit?  Could a legitimate board of directors' meeting be held in a vacation-like setting?

Reimbursements for Use of Home:  Under certain circumstances, a corporation can require an employee to maintain an office in the home and reimburse the employee for the costs. These costs could include the business-use portion of such expenses as utilities, maintenance, insurance, taxes, repairs, and depreciation on the building.  This is a possible way for you to get a significant amount of tax-sheltered income out of the business.

Use of Vehicle Reimbursement:  If planned correctly, a significant portion of your vehicle expenses can be reimbursed by the corporation for business use.  Especially if you are running the business out of your home, the possibility may even exist that the entire cost of at least one of your vehicles could be written off.  The corporation gets a deduction for transportation expense, and it is not taxable to you.

Lease Various Business Assets to Corporation:  If you or a member of your family does a proper lease arrangement for various assets (such as computer equipment, furniture, tools, etc.), the corporation can deduct these lease payments.  While these payments are taxable to the recipient, some possible offsetting depreciation and operating deductions may shelter a portion–or all–of the income leading to a tax advantaged arrangement.

Set Up Various Employee Benefit Plans:  If it can be handled under IRS qualifying standards, there are a number of fringe benefits you could realize–tax free, or tax reduced–and the corporation could deduct the cost of providing them.  Life insurance, medical insurance, medical reimbursements, educational costs, cafeteria plans, flexible spending accounts, retirement plans, and parking fee reimbursements to name a few.  Note that these are not monies coming out of the corporation so much as a direct payment plan, but the results are essentially the same.

Conclusion
The most effective, efficient, and tax-saving ways of taking money out of a corporation can sometimes involve serious planning and foresight.  The more current and future knowledge you have about such issues as the corporate vs personal tax brackets, cash flow, budgetary needs, income and expenses, and fringe benefits you want for you and your employees, the better the choice of options becomes.
______________________________________________________
1.  Lang, Section 531-The Burden of Success, U. So. CAL. 1968 Tax Inst. 279.
2.  J. HALL, Small Business and the Nonintegrated Income Tax Structure: STUDY PREPARED FOR THE JOINT COMMITTEE ON THE ECONOMIC REPORT, 84th Cong., 1st Sess. 682 (1955).
3.  IRC §535(c)
4.  What is "Accumulated Earnings Credit"?
Accumulated earnings credit is the greater of the following two amounts:
   (1)  $250,000 (or $150,000 for personal service corporations) less the amount of accumulated earnings and profits at the end of last tax year; or
   (2)  The amount of current year earnings and profits that are retained for reasonable business needs in excess of dividends paid to the shareholders, less the net capital gains deducted in calculating accumulated taxable income.

Reference: Practice Enhancers, Able & Co.

Tax Rates for NH Businesses

Tax Rates for NH Businesses

The information contained below was compiled in most part from 
Does NH have an Income Tax or Sales Tax? | Frequently Asked Questions.

Payroll Related Taxes:

• Self-Employment Tax (Federal)
  15.3%, which is a total of 12.4% for social security and 2.9% for Medicare.  Maximum earnings subject to the social security tax is $110,100 in 2012. All net earnings of at least $400 are subject to the Medicare.
• Matching Social Security Tax (Federal)
  6.2% of Gross Pay on first $110,100 in 2012 of Gross Pay per employee.  For old-age, survivors, and disability insurance.
• Matching Medicare Tax (Federal)
  1.45% x Gross Pay per employee (no limit on covered wages)  For hospital insurance.
• NH Unemployment Tax (SUTA)
  0.05%-7% of the first $10,000 effective January 1, 2010, $12,000 effective January 1, 2011, and $14,000 effective January 1, 2012 of Gross Pay per employee (State sets rate:  3.2% if no prior experience)
• Federal Unemployment Tax (FUTA)
  6.2% (Less up to 5.4% of SUTA paid) of the first $7,000 of Gross Pay per employee
• NH Business Enterprise Tax
  See below

NH State Income Tax:

NOTE:  NH does have a State Income tax, in spite of what is often claimed.  Businesses pay 8.5% income tax on profits; individuals, partnerships, and LLCs pay 5% income tax on interest and dividend income; and employers pay 0.75% income tax on employee wages, salaries, bonuses, commissions, interest expense and dividends paid.

• NH Business Profits Tax (NH BPT)
  8.5% on Income from business conducted in NH (If Gross Sales > $50,000)
• NH Interest and Dividend Tax
  5% tax assessed on interest income and dividend income of resident individuals, partnerships, limited liability companies, and fiduciaries
• NH Business Enterprise Tax
  See Below (includes 0.75% tax on employee wages, salaries, fees, bonuses, commissions, other compensation, interest expense and dividends paid).

Other State Taxes:

• NH Business Enterprise Tax (NH BET)
  0.75% of Total Enterprise Base (Total Compensation, Interest Expense, and Dividend Expense) (If Sales > $150,000 or Enterprise Base > $75,000)
• Effective January 01, 2013 - [If Sales > $200,000 (previously $150,000) or Enterprise Base > $100,000 (previously $75,000)] must file an NH enterprise tax return on or before March 15.
• NH Workmen's Compensation
  Every employer who has any employees, full or part-time, is required to cover these employees with workers' compensation insurance written by a carrier. 
• NH Education Property Taxes
  $1.78 to $3.30 per $1,000 (for FY-2009) of total equalized valuation
• Local Property Taxes
  Includes Town, Local Education, and County property taxes.  Refer to local taxing jurisdiction
  

Retirement Plan Options

Retirement Plan Options
Qualified Retirement Plans
For business owners, the funding of a qualified retirement plan is possibly the best deduction that exists.   You get immediate tax savings benefits since the dollar amount funded can be written off against your other income. Also, any income made while in the retirement plan is not subject to current taxes, so the tax-deferral effect on the compounding of this money over the years can be quite significant compared to saving outside the retirement plan.

There are approximately 25 million businesses in the United States, but only one out of 12 of these businesses have set up a company retirement savings plan.  If you are one of the business owners without a retirement plan, you should probably consider creating one.  Business owners are often reluctant to set aside money for retirement because they make investing in their business their first priority.  However, investing solely in one of anything – even your own business – can be a risky strategy.  It may be wise to strike a balance between setting aside capital for personal and retirement goals and fueling the business.

Researchers using a 1992-2010 Health and Retirement Study found that small-business owners expect to retire later than employees.  In 2010, small-business owners reported an expected retirement age that averaged 72.6;, compared to 68.4 for employees.  Older small-business owners also reported thinking about retirement less frequently than employees.

The secret is to view a retirement plan as a required business expense (like rent, insurance, supplies) instead of an optional one. Otherwise, the tendency is to "put it off" until the cash flow situation improves. The problem with this thinking is that it seems to be inherent in human nature to put most optional decisions off forever!

In any event, it's important for a business owner to have a working knowledge of the qualified retirement plan options that may be available. Note that we are discussing "Qualified" plans as opposed to non-qualified plans. A qualified plan is one that has met a series of IRS guidelines so as not to be discriminatory in favor of certain employees/employers.

What Is A Qualified Plan?
This is a written plan which allows contributions for you and your qualified employees to be deducted when funded, and not taxable until they are distributed according to IRS definitions of taxable distributions. 

There are numerous qualification rules within this general guideline, some of which are:

• How the contributions and benefits must be calculated
• Investment guidelines within the plan
• Who must be covered under the plan
• The nature of the vesting requirements
• Non-discrimination rules within the plan and involving related, controlled companies

Prototype Plans:  The rules to ensure a qualified plan can be quite complex–and ever changing. However, you may elect to use a prototype plan to make it easier. This is a pre-approved plan by the IRS.  These are available through a number of financial service establishments such as banks, brokerage houses, trade organizations, insurance companies, mutual funds, etc.  In effect, these "off the shelf" plans have already been qualified under IRS rules and regulations. As long as you follow the plan rules, you have a qualified retirement plan to use. Setting one up is merely a matter of filling out a few documents.

You have a right to set up your own "customized" plan as well. There are specialists in this field who can advise you on the advantages and disadvantages of using a customized plan instead of a prototype. Two of the main reasons for going to a customized plan are: First, it may allow for a bigger retirement plan deduction, hence larger current tax savings; Second, it may create more benefits for the highly compensated individuals than the other employees.

Types of Qualified Plans
According to IRS classification, qualified plans fall into two main categories: 

defined contribution plans, and 

defined benefit plans.

A defined benefit plan is more complicated, especially for the firm.  In this type of plan, an employer will pledge to make periodic payments to the employee during retirement.  These payments can be based on a number of factors, including time  spent with the company and salary received over a given period.  Since the firm is responsible for delivering a set pension amount to its employees during their retirement, the entirety of the investment risk falls squarely with the firm.

The contributions to the plan must equal a certain amount in order to achieve that future benefit goal. This is based on IRS approved actuarial calculations. Normally, the defined benefit plan can result in larger contributions on behalf of the recipients, especially if the recipients are closer to retirement age. In addition, these plans usually require the continuing services of professionals such as actuarial consultants and attorneys.

Because defined benefit plans are usually quite complex, involve customization, and are not used by the vast majority of small businesses, we will focus on the more commonly used options under the defined contribution plan guidelines.

Defined contribution plans base the benefits to the recipients on the amount contributed in their individual behalf. In effect, you end up getting a retirement distribution which depends on the amount of contributions and accumulated earnings made within the plan over the pertinent time frame. The more contributions and accumulated earnings, the more you'll get. The less contributions and accumulated earnings, the less you'll eventually get. In effect, the exact dollar amount of your future retirement benefit is not guaranteed in advance.

There are three basic types of defined contribution plans: 

profit sharing; 

money purchase; and 

stock bonus plans.

Profit Sharing:  This is the most common type from a statistical standpoint.  The contributions to the plan are based on a percentage of the profits of the business. You can set the profit percentage within allowable guidelines.   If there are no profits for any given year, there are no retirement fund contributions.  In fact, for most profit-sharing plans, even if there are profits, you can usually "elect out" of making retirement plan contributions anyhow.  So this type of plan affords the small business owner more flexibility than most others.  In effect, you can fund the plan or not in any given year at your discretion.

Money Purchase:  With this plan, the contribution is a stated amount, or a stated formula amount that is not so discretionary as the profit sharing.  It is not based on profits so much as it is on compensation or earnings.  Therefore, retirement plan contributions must usually be made on a regular basis whenever any qualified earnings and compensation occur for the given year.  In short, this type of plan locks you in much more so than the profit sharing plan.

Stock Bonus Plan:  This is similar to a profit sharing plan except that company stock is used to fund the retirement plan instead of money.  This option is primarily only available to corporations.

The Most Common Retirement Plans
Once you have established the kind of qualified plan–defined contribution vs defined benefit–you select the particular retirement plan vehicle to implement the plan. This choice depends in part on the type of business you have (unincorporated vs incorporated), and how complicated you elect the plan to be. Listed below is an overview of the three most commonly-used qualified retirement plan choices.

Keogh Plan (H.R. 10)
This is available to sole proprietorships (unincorporated businesses) and partnerships.  Corporations cannot use a Keogh plan. You do not have to have employees to set this up. In the eyes of the IRS a sole proprietor is both an employer AND an employee, so the Keogh can be used whether or not you have employees.

Basically you can put a percentage of the net earnings from the business into the plan for yourself, and a matching percentage of your employees taxable compensation.  This contribution becomes a tax deduction for you, and the money earned from the contributions to the Keogh plan escapes current income taxes. What are these "net earnings" that are used in the calculation? According to the IRS definition, net earnings are the gross income minus allowable deductions from a business in which your personal services are a "material income producing factor." Thus, in the case of a partnership, to take a Keogh deduction you must be a "working partner" as opposed to a limited partner.

Keogh Contribution Amounts: The amount you can contribute for each plan participant varies according to the type of plan–defined contribution vs defined benefit. For a defined contribution (the most common type) the maximum deferral amount per year (employer/employee combined) you can fund is $50,000 in 2012 (see Employee Benefits Legal Resource Site Maximum Benefits).  This is subject to further limitations depending on if the plan is a profit sharing or money purchase and depending on the compensation/net earnings for the year.

In 2012 a profit sharing Keogh allows for a maximum of 15% (before adjustments) of up to $250,000 in compensation adjusted for inflation.  A money purchase allows for a maximum contribution of 25% of up to $250,000 in compensation.

A defined benefit plan may allow for higher retirement plan contributions depending on the actuarial calculations set forth within the plan and the other customized features. However, the contribution is usually limited to a calculation based on a maximum defined benefit, per year, of $200,000 in 2012.

A Keogh plan usually requires an annual filing of the details of the plan and its activities with the IRS. This is a 5500 series filing, and it can be quite simple or quite complex depending on the type of plan, and the participants covered.

SEP: Simplified Employee Pension (Previous to the "SIMPLE" Plan)
As the name indicates, this is a simpler plan than the Keogh in several ways.  First, it is usually simpler to set-up.  Second, you do not have to file complicated annual IRS returns similar to the 5500 return required for a Keogh.  In addition, a SEP is available for corporations as well as unincorporated businesses.

The drawbacks to this plan center around three main issues compared to a Keogh: The SEP has a more limited allowable contribution amount per employee; it has stricter rules on which employees can be excluded from the plan, and how much must be contributed on behalf of the qualifying ones; and, certain lump-sum income tax averaging methods are not available like they are in a Keogh. Like the Keogh, you contribute a percentage of the net compensation/earnings from the business on behalf of each participant. In this case, however, the maximum amount you can contribute is limited to the smaller of either 15% (before adjustments) of the employee compensation/earnings amount.  Like the Keogh, this annual compensation amount is further limited to a maximum of $250,000. The net result is that the maximum SEP contribution per year is $50,000.

Similar to a Keogh profit sharing plan, employer contributions are not required each year; they can be at the discretion of the business owner.  So this gives some flexibility from a cash flow standpoint.

SAR-SEP: Salary Reduction Plan (Previous to the 1997 enacted "SIMPLE" Plan) 
This is an interesting feature that is not available with a Keogh plan.  This is a form of salary reduction or elective income deferral in which employees can have a part of their pay contributed to the SEP–and not pay income tax on the amount contributed.  This is a voluntary contribution on their part–not yours as the business owner–and it can be a significant tax deduction for them. There are restrictions on this type of arrangement, most notably three: 

1) The business can have no more than 25 eligible employees; 

2) At least 50% of the employees make the election; and, 

3) highly compensated employees may be limited in this election depending on various calculations.

401(k) Plans
This is a form of a qualified profit-sharing plan that allows participants to make salary reduction or elective income deferral contributions of up to a maximum of 15% of their qualified compensation, subject to a cap of $17,000 (plus $5,500 catch-up for age 50 and older) in 2012.

The employer can then contribute as well, or not, depending on the plan. Your employer 401(k) contribution limit is entirely up to them – but the max on total contributions (employee plus employer) to your 401(k) in 2012 is $50,000 (or 100% of your salary, whichever is less).  This gives the employee a nice tax deduction in that the money contributed from the employee's compensation comes "off the top" for income tax purposes.   If the employee makes $50,000 for the year, and has $5,500 put into the 401(k) plan, then only $44,500 is subject to federal income tax for that year.

Some advantages:  The business is not restricted to 25 or fewer qualified employees for this plan.   Participants may be able to borrow a portion of their designated plan contributions and earnings for specific purposes such as buying a house, education, medical bills, etc.  They then pay themselves back at stated interest rates and stated time tables to avoid paying tax on this type of distribution.  It is available to nearly all forms of business organizations. Special 5 year and 10 year lump sum tax averaging methods may apply to distributions, saving taxes.

Some disadvantages: It is usually complicated to set up, and administer.  IRS reporting requirements can be quite complex. Highly compensated employees must meet strict non-discriminatory tests to participate equally.

"SIMPLE" Plan 
Effective from January 1, 1997, and on, this new option combines some of the features of a SEP with a 401(k) to provide what is supposed to be a simpler plan to set-up and administer, hence the acronym "SIMPLE".

Basically, it is available to a business with 100 or fewer employees. The employee can elect to defer from taxes up to $11,500 in compensation (plus $2,500 catch-up for age 50 and older) in 2012.  For the matching provision, the plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% of the employee's compensation (subject to certain rules that allow for lower contributions -- 
(see IRC §408 - Individual retirement accounts) 
or the employer may contribute a flat 2% of compensation for each 
employee with at least $5,000 in compensation for the year, regardless 
of the amount the employee contributes.

Supposedly, this SIMPLE plan is easier to set-up and administer than a 401(k) plan. It is supposed to have more selectivity for the employer as to which employees must be covered. Also, the "top-heavy" rules as to contributions and deferral amounts of owners and/or controlling shareholders/officers are supposed to be much more lenient than a 401(k) plan. This would be quite an advantage for owners of small businesses. 

Advantages and Disadvantages of Qualified Retirement Plans
As you can see, there may be a number of choices when you consider a retirement plan for your business. The goal is to try to match the plan choice to your individual business requirements and your cash flow, both current, and projected down the road.

First, some potential disadvantages, or caveats. The cash flow of the business is not always predictable, especially years down the road. Thus, the types of plans where you must commit a certain amount each year can become burdensome if your business hits some snags. The money put in retirement in not always available to withdraw for emergencies or unplanned cash flow problems without some heavy consequences. Premature withdrawals(if it is even possible) may create a stiff tax bill and/or tax penalties. Thus, it requires some serious "crystal ball" analysis, especially if you are young.  In addition, if your eventual tax bracket when you withdraw the retirement money is higher than when you made the tax deductible contributions, the tax saving benefits disappear.

However, a retirement plan can have tremendous advantages. It can create significant tax write-offs for you, thus reducing your tax liability. The earnings from the contributions once they are in the plan can accumulate tax deferred, which accelerates the compounding effects–and helps you to reach your retirement goal faster.

If you have employees, it is a fringe benefit that can keep you competitive with other employers, thus reducing your employee turnover which can be quite a drain on a business.

Finally, if it is handled with a certain attitude, it becomes a form of "forced savings" thus helping to insure you will have a retirement nest egg to fall back on. In fact, it is very rare that a business owner will look back at retirement and say "I wish I hadn't set up that retirement plan." It's usually just the opposite. Most retiring business owners lament the fact that they never set up an adequate retirement plan. After all, it can make a difference between very happy golden years, and frightening ones.

Reference: Practice Enhancers, Able & Co.