A while ago, someone came to me with some product, guaranteed to pay off my mortgage in 7 years, while not effecting my spending or raising my payment. They also said they could pay off credit cards lickety split as well, but that will add time to the 7yr estimate..
As a CPA, I am curious of any scheme that says (basically) "we can do a better job than you at managing your money," so I asked the tough questions. Naturally, my sales person was a sales person and not the crafter of the formula (had absolutely no idea how it worked). While I couldn't get actual amortization tables from her as to how it worked (mathwise), I could get information from physical data. It involved setting up (essentially) a home equity line against your home, and paying your bills from the line.
After analysing the data, excelling out a payment module I figured out she was right, and that it would work. It just requires a lot of work and discipline that most people don't have.
This is how to do it:
Now -- make a budget of how you are spending your money right now. You'd better make it accurate, because you can't really change it if it is going to work. You will have the illusion of more cash flow, but you won't actually be making more money.
Now comes the tricky part in this economy -- get a Home Equity Line Of Credit - or HELOC. I think the ideal HELOC would be a refinanced full HELOC (1st mtg), but it can be used from a normal HELOC, it just might take a little longer, as the interest rate is not usually as low. Be careful, as this account can't have restrictions as to how many payments are made, and checks written. Starting with your highest interest credit, roll it into your HELOC. If you don't have any credit cards, write a check to your mortgage holder. You don't want to use all your HELOC, leave a little room for interest posting, etc.
Now, deposit your paycheck into the HELOC when you get paid, and pay your bills out of the HELOC when you pay your bills -- that simple. When you have room for another bill on your HELOC (car, house) - pay it off. It will work - now I will tell you why it works.
Currently, your checking account probably doesn't give you interest. If you use a credit union, or savings account you might get a little, but generally not much at all. By depositing your paycheck into the HELOC, you are accomplishing two things: 1. it is in effect a payment. You will not have to make an additional payment on your HELOC for the month. and 2. You are receiving interest for the time your money is not being used (by paying down the principal). This interest will in effect increase your cash flow. The lack of payments on whatever bill was transferred into the HELOC, and the HELOC itself increases your cash flow. All the increased cash flow goes to paying down the HELOC (PROVIDED YOU DO NOT INCREASE YOUR SPENDING WITH THIS NEW FOUND CASH)
If you want to put in the work, you can do it yourself. I think the salesperson was just selling the 1st mtg HELOC, and the software to accomplish the most efficient way of doing it -- your choice!
Thursday, August 27, 2009
Wednesday, August 19, 2009
Purchase or Lease Vehicle - Decision Guide
Given this "Cash for Clunkers" program, there has been much debate that there is no better time than the present to get a new vehicle for your business. While you are taking advantage of this new program, you still have to make smart money decisions for your business. How exactly should you do it?
To make the decisions, you need to know several things. How many miles/year do you estimate the car will need? How much of that is personal? What kind of car are you looking for? How much do you plan on spending? What is the purpose of buying the vehicle -- what will it be used for?
Should I have my business buy the vehicle, or should I buy the vehicle? Granted there are limitations as to financing, business history, and the like so I'm going to assume that that is not the limitation. Everything is bought with cash in a perfect world anyway. We may determine a monthly value, but that is just the cost of money -- not necessarily a payment. Let's just look at a couple of types of cars, for example: A high mileage compact and a luxury sedan
Example 1: Toyota Prius (you're trying to take full advantage of the credit). MSRP of 22k, invoice of $20,900. Let's assume you negotiate half the difference between invoice & MSRP -- $21,450 less clunker rebate of $4,500 is $16,950 + 1017 tax (6%) + 100 title/lic. -- let's just say $18k. If you take a 60 mo amortization, 18k @ 6% is around $350/month value.
If the company buys the vehicle, they get a bonus depreciation deduction of 50% = $9,034, and a regular depreciation of the rest (20%) = $1,807. The total of these two is $10,841 -- just barely under the IRS' maximum deduction for listed vehicles (in 2008) of $10,960 -- woohoo!. What does that mean for your business? You bought a vehicle for $18k, and you can deduct $10,841 from your taxable income this year. These are all prorated by business use -- if you use the car only 80% for business, take 80% of everything (approx $8673 deduction). I'm assuming your employer pays for 80% of your gas, and all the mtc (15k miles a year, 50mpg, 2.49/gal $600 + $200 mtc). Company deducts a total of $8,873.
If you buy the vehicle -- assume same purchase price, no depreciation. You pay for gas/mtc, your company reimburses you for mileage ($0.55/mi). You pay 18k, and an additional 800 for fuel/mtc. Your company reimburses you (this is a deduction for the company, and not income to you -- pay attention!) $6,600 for mileage.
You could also lease the vehicle. Let's assume the same $350/mo. You don't pay anything, the company pays $5k ($4,200 in lease payments, $800 fuel/mtc). Depending on lease term, and applicable taxes you could pay another$1k in sales tax/lic. Let's assume worst case, $100 lic, $1017 sales tax (6%), for total out of the company's coffer of $6,117. With a lease, you may have some included in income as a fringe benefit. For a $22k car (FMV, not actual cost), it is $38 for the first year up to $164 for 5th & later years -- so minimal.
Example 2: Mercedes C300 4Matic AWD - loaded (don't give a hoot about the credit). MSRP of 47k, invoice of $45,500. Let's assume you negotiate half the difference between invoice & MSRP -- $46,250; (doesn't qualify for clunker rebate); + $2,775 tax (6%) + 100 title/lic. -- let's just say $49k. If you take a 60 mo amortization, 49k @ 6% is around $950/month value.If the company buys the vehicle, they get a bonus depreciation deduction of 50% = $24,500, and a regular depreciation of the rest (20%) = $4,900. The total of these two is $29,400 -- just barely over the IRS' maximum deduction for listed vehicles (in 2008) of $10,960 -- oops! What does that mean for your business? You bought a vehicle for $49k, and you can deduct $10,960 from your taxable income this year. These are all prorated by business use -- if you use the car only 80% for business, take 80% of everything (approx $8,768 deduction). I'm assuming your employer pays for 80% of your gas, and all the mtc (15k miles a year, 20 mpg, 2.49/gal $1,494 + $200 mtc). Company deducts a total of $10,462. You can roll that excess deduction forward, but come on -- I'll charge you more (as your accountant), as it's more work for me.
If you buy the vehicle -- assume same purchase price, no depreciation. You pay for gas/mtc, your company reimburses you for mileage ($0.55/mi). You pay 49k, and an additional $1,694 for fuel/mtc. Your company reimburses you (this is a deduction for the company, and not income to you -- pay attention!) $6,600 for mileage.
You could also lease the vehicle. Let's assume the same $950/mo. You don't pay anything, the company pays $13,094 ($11,400 in lease payments, $1,694 fuel/mtc). Depending on lease term, and applicable taxes you could pay another $3 in sales tax/lic. Let's assume worst case, $100 lic, $2775 sales tax (6%), for total out of the company's coffer of $15,969. With a lease, you may have some included in income as a fringe benefit. For a $46k car (FMV, not actual cost), it is $157 for the first year up to $705 for 5th & later years.
Let's analyze --
Prius -
Company buys: $18k capital outlay (by the company), $8,873 deduction.
You buy: $18k capital outlay (by you), company deducts $6600, and you receive $6,600 (tax free). Let's assume 35% tax rate (20% tax rate, and 15.2% FICA/Med). You also save $2,310 in tax. Net capital outlay of $9,090.
Company leases the vehicle: Company deducts (and outlays) $6,117. Your W-2 income goes up by $38 (this year).
Mercedes -
Company buys: $49k capital outlay (by the company), $10,462 deduction (higher accounting fees).
You buy: $49k capital outlay (by you), company deducts $6600, and you receive $6,600 (tax free). Let's assume 35% tax rate (20% tax rate, and 15.2% FICA/Med). You also save $2,310 in tax. Net capital outlay of $40,090. You will get that 8,910 (6600+2310) every year (provided you drive 12k miles for business).
Company leases the vehicle. Company deducts (and outlays) $13,094. Your W-2 income goes up by $157 (this year).
Now comes the part when you decide. If the variables change, it can severely affect your decision.
Like all advice -- let me know the specifics of your case, and I let you make a better informed decision of what's better for you.
Send me an e-mail and I can taylor some advice to you directly -- ctdmonet@gmail.com
To make the decisions, you need to know several things. How many miles/year do you estimate the car will need? How much of that is personal? What kind of car are you looking for? How much do you plan on spending? What is the purpose of buying the vehicle -- what will it be used for?
Should I have my business buy the vehicle, or should I buy the vehicle? Granted there are limitations as to financing, business history, and the like so I'm going to assume that that is not the limitation. Everything is bought with cash in a perfect world anyway. We may determine a monthly value, but that is just the cost of money -- not necessarily a payment. Let's just look at a couple of types of cars, for example: A high mileage compact and a luxury sedan
Example 1: Toyota Prius (you're trying to take full advantage of the credit). MSRP of 22k, invoice of $20,900. Let's assume you negotiate half the difference between invoice & MSRP -- $21,450 less clunker rebate of $4,500 is $16,950 + 1017 tax (6%) + 100 title/lic. -- let's just say $18k. If you take a 60 mo amortization, 18k @ 6% is around $350/month value.
If the company buys the vehicle, they get a bonus depreciation deduction of 50% = $9,034, and a regular depreciation of the rest (20%) = $1,807. The total of these two is $10,841 -- just barely under the IRS' maximum deduction for listed vehicles (in 2008) of $10,960 -- woohoo!. What does that mean for your business? You bought a vehicle for $18k, and you can deduct $10,841 from your taxable income this year. These are all prorated by business use -- if you use the car only 80% for business, take 80% of everything (approx $8673 deduction). I'm assuming your employer pays for 80% of your gas, and all the mtc (15k miles a year, 50mpg, 2.49/gal $600 + $200 mtc). Company deducts a total of $8,873.
If you buy the vehicle -- assume same purchase price, no depreciation. You pay for gas/mtc, your company reimburses you for mileage ($0.55/mi). You pay 18k, and an additional 800 for fuel/mtc. Your company reimburses you (this is a deduction for the company, and not income to you -- pay attention!) $6,600 for mileage.
You could also lease the vehicle. Let's assume the same $350/mo. You don't pay anything, the company pays $5k ($4,200 in lease payments, $800 fuel/mtc). Depending on lease term, and applicable taxes you could pay another$1k in sales tax/lic. Let's assume worst case, $100 lic, $1017 sales tax (6%), for total out of the company's coffer of $6,117. With a lease, you may have some included in income as a fringe benefit. For a $22k car (FMV, not actual cost), it is $38 for the first year up to $164 for 5th & later years -- so minimal.
Example 2: Mercedes C300 4Matic AWD - loaded (don't give a hoot about the credit). MSRP of 47k, invoice of $45,500. Let's assume you negotiate half the difference between invoice & MSRP -- $46,250; (doesn't qualify for clunker rebate); + $2,775 tax (6%) + 100 title/lic. -- let's just say $49k. If you take a 60 mo amortization, 49k @ 6% is around $950/month value.If the company buys the vehicle, they get a bonus depreciation deduction of 50% = $24,500, and a regular depreciation of the rest (20%) = $4,900. The total of these two is $29,400 -- just barely over the IRS' maximum deduction for listed vehicles (in 2008) of $10,960 -- oops! What does that mean for your business? You bought a vehicle for $49k, and you can deduct $10,960 from your taxable income this year. These are all prorated by business use -- if you use the car only 80% for business, take 80% of everything (approx $8,768 deduction). I'm assuming your employer pays for 80% of your gas, and all the mtc (15k miles a year, 20 mpg, 2.49/gal $1,494 + $200 mtc). Company deducts a total of $10,462. You can roll that excess deduction forward, but come on -- I'll charge you more (as your accountant), as it's more work for me.
If you buy the vehicle -- assume same purchase price, no depreciation. You pay for gas/mtc, your company reimburses you for mileage ($0.55/mi). You pay 49k, and an additional $1,694 for fuel/mtc. Your company reimburses you (this is a deduction for the company, and not income to you -- pay attention!) $6,600 for mileage.
You could also lease the vehicle. Let's assume the same $950/mo. You don't pay anything, the company pays $13,094 ($11,400 in lease payments, $1,694 fuel/mtc). Depending on lease term, and applicable taxes you could pay another $3 in sales tax/lic. Let's assume worst case, $100 lic, $2775 sales tax (6%), for total out of the company's coffer of $15,969. With a lease, you may have some included in income as a fringe benefit. For a $46k car (FMV, not actual cost), it is $157 for the first year up to $705 for 5th & later years.
Let's analyze --
Prius -
Company buys: $18k capital outlay (by the company), $8,873 deduction.
You buy: $18k capital outlay (by you), company deducts $6600, and you receive $6,600 (tax free). Let's assume 35% tax rate (20% tax rate, and 15.2% FICA/Med). You also save $2,310 in tax. Net capital outlay of $9,090.
Company leases the vehicle: Company deducts (and outlays) $6,117. Your W-2 income goes up by $38 (this year).
Mercedes -
Company buys: $49k capital outlay (by the company), $10,462 deduction (higher accounting fees).
You buy: $49k capital outlay (by you), company deducts $6600, and you receive $6,600 (tax free). Let's assume 35% tax rate (20% tax rate, and 15.2% FICA/Med). You also save $2,310 in tax. Net capital outlay of $40,090. You will get that 8,910 (6600+2310) every year (provided you drive 12k miles for business).
Company leases the vehicle. Company deducts (and outlays) $13,094. Your W-2 income goes up by $157 (this year).
Now comes the part when you decide. If the variables change, it can severely affect your decision.
Like all advice -- let me know the specifics of your case, and I let you make a better informed decision of what's better for you.
Send me an e-mail and I can taylor some advice to you directly -- ctdmonet@gmail.com
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