Contractor Corner

Got kids? They may have an impact on your tax situation. Here are eight tax credits and deductions that can help lower your tax burden.

  1. Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let us know if your family increased this year and we’ll take a look at whether you can claim the child as a dependent this year.
  2. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
  3. Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 while you work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.
  4. Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.
  5. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.
  6. Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.
  7. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.
  8. Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.

As you can see, having children can make a big impact on your tax profile. Make sure that you’re getting the appropriate credits and deductions by speaking to a tax professional today.

I was ready to crawl into bed after a long day when my phone rang. The call was from a contractor named Marty whom I’d worked with several years earlier. He didn’t sound good. In fact, he was calling from his hospital bed following a bad accident in his company truck. His truck had been totaled, and he’d been in intensive care for several days.

“If I’m hard to understand,” he said, “it’s because my jaw is wired shut. On top of that, my leg’s broken, I have back problems, and it looks like I’ll be laid up for a while. I can’t work. I’ve lost my company. I’ve lost everything.”

I remembered this contractor as being a man of high integrity. He was good at what he did, and his customers liked him. I think he called me because he just needed someone to talk to. His wife had had to take a second job in an effort to save their home. I felt horrible for Marty.

I asked him about insurance. He was fortunate that his health insurance would cover his medical expenses, and his vehicle insurance would pay off the truck. But there was no cash for the mortgage, the utilities, or the groceries.

Marty had three employees: a part-time office helper, a young contractor-in-training, and a trained technician. In the first few days of Marty’s hospitalization, no one knew what to do or where to find anything. Although his wife tried, she didn’t know enough about the business to be of much help.

Marty had to resort to sending calls to a competitor. I asked if he thought he could get his old customers back once he had recovered.

“Doubt it,” was his reply.

Marty’s business evaporated.

He Owned a Job

Some of you reading this know beyond a doubt that if this happened to you, you’d be in the same spot. It’s not a pretty picture.

Here’s the upshot: Marty didn’t own a business; he owned a job. And a crappy job, at that. He worked long hours, rarely took a vacation, charged too little, had no retirement plan, had no help with government and supplier paperwork and hassles, and had no margin for error.

What could Marty have done differently? There are several parts to the answer.

Running a Business

Most contractors are great at what they do. They’re reliable, trustworthy, fair, and they truly care about their customers. They do a great job in the field. In fact, it’s in the field that they shine.

The problem is, most have not invested the same amount of time, energy, commitment, and education into becoming a smart business owner. It takes just as much skill to run and operate a successful business as it does to repair faucets and unplug toilets.

If you’re like most contractors I’ve known, you started out with your pickup truck and a few tools, applying your knowledge in the best way you knew how. Because you did a good job and because customers relied on you and told friends and neighbors about you, your business grew. It grew gradually until one day you realized you needed help, more and better equipment, and possibly added financing to get it all done.

So, what’s the problem?

No Plan

The problem is, the business is not operating based on a plan. The practical side of the business was flourishing, while the other side (planning, management, and communication) was lacking.

This was Marty’s main problem.

Marty never thought about future goals. He had just taken one day at a time and hoped everything would turn out okay in the end.

Where are You?

Where are you in that spectrum? Do you know where you’re going? Do you know how to get there?

Let’s back up for a minute. You may be saying, “Hey Lynn, what does any of this have to do with communication?”

Glad you asked!

The crux of the matter is this: you cannot communicate what you don’t know. You cannot communicate what you have not identified and clarified for yourself. You cannot communicate fuzzy thoughts and ideas. It’s time to pay attention to the core elements of what it takes to create an asset – not just a go-to-work-everyday job.

Being a good businessperson is no harder than being a good contractor. Both have to do with learning and commitment. Realize that the effects of poor management can be devastating to the performance of a company. Many business owners blame employees for poor service, financial losses, and low-quality products, when the fault lies in poor management, poor planning, and poor communication.

You need a Business Plan that will guide you in your daily, quarterly, and annual business. It is the basis of building a business that will deliver you a return on your investment in your business but also drive the behaviors to build a team, drive financial performance, market and sell to differentiate your company from competitors, document and use processes that are teachable and trainable, and become a leader that communicates goals and the vision of your company.

A Business Plan should include the following content:

  • An Executive Summary: Your executive summary is a snapshot of your business plan as a whole and touches on your company profile and goals.
  • A Company Description: Your company description provides information on what you do, what differentiates your business from others, and the markets your business serves.
  • A Market Analysis: It is essential for you to research your business industry, market and competitors.
  • Organization & Management: Every business is structured differently. Find out the best organization and management structure for your business.
  • Service & Products: What do you sell? How does it benefit your customers? What is the product lifecycle?
  • Marketing & Sales: How do you plan to market your business? What is your sales strategy?
  • Financial Projections: This section is usually recommended if you are looking for funding, however it is a healthy exercise to estimate sales, expenses, overhead, and budgets. This becomes a measurement against actual performance and can be adjusted over time as part of the updating process of the plan.

Is your business making money or profit? I want to clarify that increasing sales does not equal profit. Contractors operate on thin profit margins, and one unforeseen issue on a job can mean you are working for NO PROFIT!

As a business owner, you need to at least make a return on the financial investment in your company that is equal to any other financial vehicle in the marketplace. Profits are essential for funding growth and to build cash assets to protect the company from economic and market downturns.

Let’s start with the Return on Sales (ROS) ratio. ROS provides insight into how profitable company sales are.   It is the Net Profit divided by Gross Sales. The Plumbing & HVAC service contractor’s ROS average is 2% according to First Research®.   Essentially for every $100,000 in sales, contracting businesses generate on average $2,000 in Net Profit.

The Return on Investment (ROI) ratio shows how much owners are making on investments in a business. The owner should compare this ratio to other market investments, such as mutual funds, stocks, bonds, etc., to see if your investments are better left in the company or put into other market investments. This ratio is the Net Profit of a current period divided by the Net Worth at the beginning of a year. The First Research® Industry Profile dated February 2014 shows the industry average is 15.8% for Plumbing & HVAC Service Companies. The goal of monitoring this ratio is to make sure the current return is comparable to or better than any other investment. The Dimensional Matrix Book 2012 and 2013 from Standard & Poor’s shows the S&P 500 return on investment was 16% and 32.4% respectfully. A good benchmark is the S&P 500 to understand how your investment in your company is measuring against the market as a whole. Your goal is to achieve or exceed the market if possible. If you do not achieve the target consistently, you need to understand the reason for not making the grade. This tells the owner if the business investment is eroding or increasing in returns.

In addition to having your bookkeeper give you a P&L statement and a balance sheet, you need a monthly KPI Dashboard report. It’s the key ratios of your financial statements that provide historical and current insight into your business health. As the company owner, you need to become familiar with the performance-to-drive cash flow, pay debt, finance capital investments, as well as management of assets and profitability.