Archive for December, 2009
Dec
30
How Do I Handle Bond Premiums And Bond Discounts?
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Stephen Nelson asked:
Bond premiums
If you buy a bond that pays an interest rate over and above the market interest rate, implicit in your purchase price is something called the bond premium. The bond premium is just the market’s way of adjusting the price of a bond that pays too high of an interest rate.
Bond premiums, unfortunately, present nightmarish difficulties for your record keeping.
Theoretically, what you should do is amortize the amount of the bond premium over the life of the bond. In effect, this premium allocation lets you chop up the amount of the premium and allocate it over the period that the bond pays its interest, thereby reducing the bond interest. For example, if you implicitly pay $100 of bond premium for a bond that will pay interest over ten years, it would make sense, roughly speaking, to reduce the amount of bond interest you actually record by $10 a year. The $10 amount equals 1/10th of the $100 bond premium. We say “roughly speaking” here because actually the calculations are more complicated than a simple straight line
allocation. You should use an effective interest rate to adjust the annual bond interest to an amount so that the interest rate stays equal to the bond’s yield to maturity. But that discussion is really beyond the scope of this book.
Because of this complexity, we recommend that you simply ignore the bond premium. By ignoring the premium, you will overstate the interest you will earn over the years that you hold the bond, meaning that you will pay more in income taxes on the bond interest over those years. (At the end of the bond life, you will show a capital loss on the bond equal to the bond premium that you didn’t record, but should have.) This strategy of ignoring the premium until the very end and then counting the bond premium as a loss, or better yet, as an adjustment to the bond interest paid in the final year, makes your record keeping much, much simpler.
NOTE The IRS allows U.S. taxpayers to ignore the bond premium in annual bond interest calculations. This makes sense because by ignoring, or postponing, the bond premium, you overstate the interest you earn on the bond investment.
Bond Discounts
Bond discounts work in a fashion similar to bond premiums-except bond discounts occur when a bond pays an interest rate that is lower than the interest rate the market requires.
Theoretically, if you buy a bond at a discount, you are supposed to allocate the bond discount over the years that you hold the bond as additional bond interest income. For example, if you buy a bond for $900 but will receive $1,000 upon redemption, the $100 profit you make amounts to interest. This interest is essentially like that paid by a zero coupon bond.
When dealing with a bond discount, you do need to record accrued interest. The amount of the accrued interest equals the amount of the bond discount that is allocated to the year. Earlier in the chapter, we described how to record accrued interest on a zero coupon bond. The recording of accrued interest for a bond discount works in the same way. (The accrued interest for a bond discount is actually called amortization.)
Although the IRS requires U.S. taxpayers to amortize bond discounts, there is a loop- hole that might save you from the necessity of doing so. When a bond discount results in a very small change in the effective interest rate paid by a bond, you might be able to skip recording the amortization of the bond discount. If you have more questions about this, consult your tax advisor.
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Bond premiums
If you buy a bond that pays an interest rate over and above the market interest rate, implicit in your purchase price is something called the bond premium. The bond premium is just the market’s way of adjusting the price of a bond that pays too high of an interest rate.
Bond premiums, unfortunately, present nightmarish difficulties for your record keeping.
Theoretically, what you should do is amortize the amount of the bond premium over the life of the bond. In effect, this premium allocation lets you chop up the amount of the premium and allocate it over the period that the bond pays its interest, thereby reducing the bond interest. For example, if you implicitly pay $100 of bond premium for a bond that will pay interest over ten years, it would make sense, roughly speaking, to reduce the amount of bond interest you actually record by $10 a year. The $10 amount equals 1/10th of the $100 bond premium. We say “roughly speaking” here because actually the calculations are more complicated than a simple straight line
allocation. You should use an effective interest rate to adjust the annual bond interest to an amount so that the interest rate stays equal to the bond’s yield to maturity. But that discussion is really beyond the scope of this book.
Because of this complexity, we recommend that you simply ignore the bond premium. By ignoring the premium, you will overstate the interest you will earn over the years that you hold the bond, meaning that you will pay more in income taxes on the bond interest over those years. (At the end of the bond life, you will show a capital loss on the bond equal to the bond premium that you didn’t record, but should have.) This strategy of ignoring the premium until the very end and then counting the bond premium as a loss, or better yet, as an adjustment to the bond interest paid in the final year, makes your record keeping much, much simpler.
NOTE The IRS allows U.S. taxpayers to ignore the bond premium in annual bond interest calculations. This makes sense because by ignoring, or postponing, the bond premium, you overstate the interest you earn on the bond investment.
Bond Discounts
Bond discounts work in a fashion similar to bond premiums-except bond discounts occur when a bond pays an interest rate that is lower than the interest rate the market requires.
Theoretically, if you buy a bond at a discount, you are supposed to allocate the bond discount over the years that you hold the bond as additional bond interest income. For example, if you buy a bond for $900 but will receive $1,000 upon redemption, the $100 profit you make amounts to interest. This interest is essentially like that paid by a zero coupon bond.
When dealing with a bond discount, you do need to record accrued interest. The amount of the accrued interest equals the amount of the bond discount that is allocated to the year. Earlier in the chapter, we described how to record accrued interest on a zero coupon bond. The recording of accrued interest for a bond discount works in the same way. (The accrued interest for a bond discount is actually called amortization.)
Although the IRS requires U.S. taxpayers to amortize bond discounts, there is a loop- hole that might save you from the necessity of doing so. When a bond discount results in a very small change in the effective interest rate paid by a bond, you might be able to skip recording the amortization of the bond discount. If you have more questions about this, consult your tax advisor.
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Dec
29
How Does a Bank Look at Your Financial Statements?
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Nathan Brim asked:
As a business owner, there may be times when you need a loan or a line of credit to help purchase new materials or improve a temporary cash flow situation. Banks will require copies of your financial statements to determine whether or not you are credit worthy. Here’s what the bank will look for in your statements:
Is Your Business Established?
One of the factors a bank will consider before lending money to a business is how established that business is. Did you just start your business last month, or have you been operating for the last four years? A business that has successfully been operating for several years will have a better chance of securing funding than a newly born business – most businesses fail within their first year of operation, and are considered high risk by lenders.
A key issue for businesses trying to obtain financing is related to your timing. If you wait until you are in a cash flow crunch – you lose your negotiating power with the potential lender, and your overall financial position is weaker than if you look for capital before the cash flow situation arises.
How leveraged are you?
Banks will look over your income statement and balance sheet to come up with financial ratios. They’ll run numbers and generate predictions to see whether or not you have the ability to make loan payments, and how likely you are to continue having the ability to make loan payments in the future.
One of the common tools to asses a business is their debt-to-equity ratio which is simply the total amount of your business debts divided by the equity in the business. The equity is determined by subtracting all of your debts from your assets. A quick example:
Assets
Cash $10,000
Inventory 50,000
Liabilities
Accounts Payable $40,000
Equity would be $20,000 ($60,000 in assets less the $40,000 in debts) and the debt-to-equity ratio would be 2:1 ($40,000 in debts divided by $20,000 in equity).
Generally speaking, the higher the debt-to-equity ratio, the more risky a business is, but there are many other factors a bank will consider. One of those is the industry you are in. Some businesses are by nature more leveraged than others. It is a good idea to know where your company stands compared to its peers before you request a loan from the bank.
Are You Securing the Loan With Collateral?
When a business wants to take out a loan or line of credit, often they’ll be asked if they have any collateral that the bank can use to borrow against. This reduces your risk in the eyes of the lenders, since if you fail to keep up with your loan payments the bank has the right to take whatever you used as collateral to recover their money. Proof of value for items used as collateral will need to be established, and you may find the bank has a different idea of what the potential collateral is worth than you do!
Collateral for loans determines the terms of the deal. Generally, loans with collateral are viewed as less risky, and therefore have lower interest rates, and have longer repayment terms. Also, the more long term the collateral, the longer the term of the note, for instance, a real estate loan will have a longer repayment than one secured by accounts receivable.
Some commonly used collateral include:
real property equipment accounts receivable inventory intellectual property
Personal Guarantee for Small Businesses
Many small businesses will be asked to sign a personal guarantee on a business loan. Your signature indicates that you will be personal responsible for assuming the debts of the business if the business defaults on the loan and is unable to pay back the money. It reduces the risks to the bank lending the money to a business, because they have another avenue (you) to pursue if the original borrower (the business) does not keep up with payments. Sometimes the business owner will be asked to assign a portion of their personal assets or property over to the bank in order to secure the business loan.
Cash Flow and Profitability
A well established business can sometimes obtain financing if they show a good history of cash flow and profitability. Banks will determine this information through your financial statements, including your income statement and balance sheet – and will probably want to view at least three years of records. It is important to consider the impact of the new loan. Often times, the bank will “pro forma” the financial information you give them to see if the new loan can be serviced by the existing profits of a company. Many times a business owner will want to consider the profits that will be made with the loan (additional inventory or new equipment), but a bank takes a more conservative approach to see if the historical profits will support the new debt.
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As a business owner, there may be times when you need a loan or a line of credit to help purchase new materials or improve a temporary cash flow situation. Banks will require copies of your financial statements to determine whether or not you are credit worthy. Here’s what the bank will look for in your statements:
Is Your Business Established?
One of the factors a bank will consider before lending money to a business is how established that business is. Did you just start your business last month, or have you been operating for the last four years? A business that has successfully been operating for several years will have a better chance of securing funding than a newly born business – most businesses fail within their first year of operation, and are considered high risk by lenders.
A key issue for businesses trying to obtain financing is related to your timing. If you wait until you are in a cash flow crunch – you lose your negotiating power with the potential lender, and your overall financial position is weaker than if you look for capital before the cash flow situation arises.
How leveraged are you?
Banks will look over your income statement and balance sheet to come up with financial ratios. They’ll run numbers and generate predictions to see whether or not you have the ability to make loan payments, and how likely you are to continue having the ability to make loan payments in the future.
One of the common tools to asses a business is their debt-to-equity ratio which is simply the total amount of your business debts divided by the equity in the business. The equity is determined by subtracting all of your debts from your assets. A quick example:
Assets
Cash $10,000
Inventory 50,000
Liabilities
Accounts Payable $40,000
Equity would be $20,000 ($60,000 in assets less the $40,000 in debts) and the debt-to-equity ratio would be 2:1 ($40,000 in debts divided by $20,000 in equity).
Generally speaking, the higher the debt-to-equity ratio, the more risky a business is, but there are many other factors a bank will consider. One of those is the industry you are in. Some businesses are by nature more leveraged than others. It is a good idea to know where your company stands compared to its peers before you request a loan from the bank.
Are You Securing the Loan With Collateral?
When a business wants to take out a loan or line of credit, often they’ll be asked if they have any collateral that the bank can use to borrow against. This reduces your risk in the eyes of the lenders, since if you fail to keep up with your loan payments the bank has the right to take whatever you used as collateral to recover their money. Proof of value for items used as collateral will need to be established, and you may find the bank has a different idea of what the potential collateral is worth than you do!
Collateral for loans determines the terms of the deal. Generally, loans with collateral are viewed as less risky, and therefore have lower interest rates, and have longer repayment terms. Also, the more long term the collateral, the longer the term of the note, for instance, a real estate loan will have a longer repayment than one secured by accounts receivable.
Some commonly used collateral include:
real property equipment accounts receivable inventory intellectual property
Personal Guarantee for Small Businesses
Many small businesses will be asked to sign a personal guarantee on a business loan. Your signature indicates that you will be personal responsible for assuming the debts of the business if the business defaults on the loan and is unable to pay back the money. It reduces the risks to the bank lending the money to a business, because they have another avenue (you) to pursue if the original borrower (the business) does not keep up with payments. Sometimes the business owner will be asked to assign a portion of their personal assets or property over to the bank in order to secure the business loan.
Cash Flow and Profitability
A well established business can sometimes obtain financing if they show a good history of cash flow and profitability. Banks will determine this information through your financial statements, including your income statement and balance sheet – and will probably want to view at least three years of records. It is important to consider the impact of the new loan. Often times, the bank will “pro forma” the financial information you give them to see if the new loan can be serviced by the existing profits of a company. Many times a business owner will want to consider the profits that will be made with the loan (additional inventory or new equipment), but a bank takes a more conservative approach to see if the historical profits will support the new debt.
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Dec
29
Discount Bank Notes For Sale – How to find Bank Notes – All the Bank Contacts You need.
Posted by: | CommentsDiscount Bank Notes For Sale – How to find Bank Notes – All the Bank Contacts You need.
ihbkep64 asked:
www.notebuyingprofits.com No-nonsense How-to-Buy-Defaulted-Morgages Information. Up-to-date! Hours of FREE Defaulted Mortages Training Videos, Free 1-on-1 Coaching Session! Click or Call 718-783-7605
Dec
24
When the Bank Says No!
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Cassandra Ingraham asked:
Factoring has been practiced for centuries. The Romans sold promissory notes at a discount as did the Phoenicians. The word “factor” comes from Latin, the language of Rome. It means “to do” or “to make.” The Pilgrim’s journeys to America were financed by advances from a Factor who provided the funds to pay for the journey. The Pilgrims repaid the money with earnings from America. Factoring to this day is an extremely common business practice in Europe whereas many American business men have never heard of it.
Factoring is the selling of your accounts receivable for cash versus waiting 30-60 or 90 days to be paid by your customer. When you provide a Factoring company with copies of your invoices, the Factoring Company uses your invoices to make a loan to your company. It is a simple process and can be automated after the first transaction. Credit is not an issue when providing Accounts Receivable Loans or Financing. The Financial Companies looks at the credit history of the vendor not yours! This is exceptional good for small to medium size business that have been in business for less then two years.
My first experience with Factoring came when one of my Tax clients ending up with a sizable Tax liability one year. He ran a small Trucking company and had very few tax problems in the pass. However, because of a sudden burst in growth he was doing 2 to 3 times more business in the last half of the year. Because he did not have sufficient tax write offs, his tax liability really hit hard. He was actually having serious cash flow problems because of unplanned growth!
We talked about the situation, his taxes were completed and because he had rented a couple of trucks to keep up with the work load, we were able to use the rental cost as a write off. But there was still the self-employment tax and there was no doubt he had an increase in business income.
I didn’t say anything, but I was worried about his payment for the Tax preparation. I knew he was having cash flow problems and the tax bill did not help. Then he told me about the $30,000 worth of Invoices. Because the invoices had not been paid they were not included in his income for that year so I had no idea that he had invoices in that amount. In fact the invoices where crumbles up and scattered over his desk.
I went on the Internet and started to research “invoices”. I had never really understood Factoring before that time, but I had heard of it. We did not factor my client’s Invoices because he called the company he worked with, explained the situation and they paid him 50% of the Invoice immediately and the balance shortly after.
I had already researched “Factoring” or Accounts Receivable Financing and being a Tax person I was always looking for ways to help my clients pay their taxes as soon as possible, especially if they owed employee taxes.
I put an ad online and within days a CPA called. He had a client who imported culinary products from overseas. They needed to factor a fairly large invoice. I called one of the Factoring Companies explained the situation. The Factoring Company arranged for his company to do a Purchase Order from his supplier overseas. Once the Purchase Order was in place, we factored the Invoice. The client received over 90% of the Invoice amount within days. He then went on to repeat the deal 3 or 4 more times!
Purchase Order Funding is slightly harder to get then Accounts Receivable Financing, however, PO Funding is very helpful for Business who makes large purchases and resells to a third party.
Caffeinated Content
Factoring has been practiced for centuries. The Romans sold promissory notes at a discount as did the Phoenicians. The word “factor” comes from Latin, the language of Rome. It means “to do” or “to make.” The Pilgrim’s journeys to America were financed by advances from a Factor who provided the funds to pay for the journey. The Pilgrims repaid the money with earnings from America. Factoring to this day is an extremely common business practice in Europe whereas many American business men have never heard of it.
Factoring is the selling of your accounts receivable for cash versus waiting 30-60 or 90 days to be paid by your customer. When you provide a Factoring company with copies of your invoices, the Factoring Company uses your invoices to make a loan to your company. It is a simple process and can be automated after the first transaction. Credit is not an issue when providing Accounts Receivable Loans or Financing. The Financial Companies looks at the credit history of the vendor not yours! This is exceptional good for small to medium size business that have been in business for less then two years.
My first experience with Factoring came when one of my Tax clients ending up with a sizable Tax liability one year. He ran a small Trucking company and had very few tax problems in the pass. However, because of a sudden burst in growth he was doing 2 to 3 times more business in the last half of the year. Because he did not have sufficient tax write offs, his tax liability really hit hard. He was actually having serious cash flow problems because of unplanned growth!
We talked about the situation, his taxes were completed and because he had rented a couple of trucks to keep up with the work load, we were able to use the rental cost as a write off. But there was still the self-employment tax and there was no doubt he had an increase in business income.
I didn’t say anything, but I was worried about his payment for the Tax preparation. I knew he was having cash flow problems and the tax bill did not help. Then he told me about the $30,000 worth of Invoices. Because the invoices had not been paid they were not included in his income for that year so I had no idea that he had invoices in that amount. In fact the invoices where crumbles up and scattered over his desk.
I went on the Internet and started to research “invoices”. I had never really understood Factoring before that time, but I had heard of it. We did not factor my client’s Invoices because he called the company he worked with, explained the situation and they paid him 50% of the Invoice immediately and the balance shortly after.
I had already researched “Factoring” or Accounts Receivable Financing and being a Tax person I was always looking for ways to help my clients pay their taxes as soon as possible, especially if they owed employee taxes.
I put an ad online and within days a CPA called. He had a client who imported culinary products from overseas. They needed to factor a fairly large invoice. I called one of the Factoring Companies explained the situation. The Factoring Company arranged for his company to do a Purchase Order from his supplier overseas. Once the Purchase Order was in place, we factored the Invoice. The client received over 90% of the Invoice amount within days. He then went on to repeat the deal 3 or 4 more times!
Purchase Order Funding is slightly harder to get then Accounts Receivable Financing, however, PO Funding is very helpful for Business who makes large purchases and resells to a third party.
Caffeinated Content
Dec
24
Discount Bank Notes For Sale – Using Real Estate Notes and Installment Sales to Legally Lower Taxes
Cassandra Ingraham asked:
You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to $250,000 if single and $500,000 if married.
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years (the ownership test) and lived in the home as your main home for at least 2 years (the use test)
For many parts of the US a half million dollars in exclusion per married couple every 2 or 3 years is more then enough. However, if you live in California and few other places within the US; you can easily max out your exclusion and end up paying capital gains taxes on $100,000 to $300,000 easily.
Example: Mary and Joe bought a home in 1980. They had upgraded from a smaller home and the new home was in a very nice neighborhood. The area, over the years increased in value and now the home is worth $850,000. Mary and Joe only paid $129,000 for the property. That is a gain of $721,000 – The house is paid for.
In order to avoid paying capital gains on the amount over $500,000 -Mary and Joe decided to carry a note for $221,000. The new owners will pay Mary and Joe principal and interest each month. The note is for 20 years; (Mary and Joe will use the income as monthly retirement income) Interest rate of 7%
For those of you who are into numbers you will, understand that Mary and Joe will earn a substantial amount of money on the real estate note of $221,000 over time. But more importantly, Mary and Joe will lower their taxes by not having to pay capital gains on the $221,000; the amount over the $500,000 exclusion.
IRS Tax Code: Installment Sale of Your Primary Home; Sales made under arrangements that provide for part or all of the selling price to be paid in a later year. These sales are called “installment sales.” If you finance the buyer’s purchase of your home yourself, instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. You may be able to report the part of the gain you cannot exclude on the installment basis.
To take this plan a step further; if Mary and Joe decide that they want to cash out the $$221,000 note once they are age 65 or older and their annual income is much lower, they can do so. The note will be discounted; however, they can still walk away with a sizeable amount of cash.
For more information you can go to irs.gov; keywords Publication 523