If you extend credit to your customers, some losses are inevitable. So unless you are willing to forgo the credit part of your sales, you have to figure out ways to control your bad debt losses.

Once you have extended credit to a customer, you have a stake in continuing the relationship even if you suspect there might be trouble a-brewing. You don’t want to crack down on a good customer too hard too soon; yet you don’t want to be “taken” by a debtor who has become unable or unwilling to pay. The problem is distinguishing between slow pay (which is bad enough) and no pay.

What you need is an early warning system to detect a credit problem in the making, so you can stop additional sales to that customer and begin collection procedures in earnest. Here are some of the telltale signs that point to an account that is turning sour:

• The debtor has begun paying erratically, settling up on smaller invoices while larger ones just get older, at the same time disputing specifications or terms.

• The debtor fails to return your phone calls or shows unusual annoyance at your inquiries.

• Your requests for information, such as updated financial statements, are ignored.

• The debtor places jumbo orders and presses you for a higher credit limit.

Any one of these hints of trouble can be the handwriting on the wall. Two or more and it’s time to crack down. Take a firm stand; turn up the heat on your collection efforts with this debtor, and make no more sales unless they’re cash on delivery. For advice of this and similar issues, please contact Craft Noble.

Partnerships are “pass-through” entities that file Form 1065 reporting partnership income but paying no income tax. Instead the income “passes through” to partners who pay tax on their share of the partnership’s income on their individual tax returns.

The filing deadline for Form 1065 for partnerships on a calendar-year is April 15th of the following year. For tax returns due after December 31st, the extension period will change and be shortened from six to five months - giving partnerships until September 15, 2009.

According to the Journal of Accountancy, the S corporation is the most popular form of business ownership in the country, swelling to around four million entities. The primary reason for their growth is that S corporations avoid that double taxation that applies to regular C corporations while still offering protection from personal liability.

However, as the popularity of S corporations continues to rise, they are facing greater scrutiny from the IRS. In particular, the IRS has focused its attention on three issues:

• Shareholder-owner compensation. The basic tax rule is that compensation paid to shareholder-employees must be reasonable in amount. Historically, the IRS has questioned compensation amounts paid to C corporation owners that seemed unreasonably high. With an S corporation, a high-tax bracket owner may establish a compensation amount that is extremely low, or even zero, while increasing other pass-through income (i.e., dividends.) By doing so, the owner avoids employment taxes on these payments.

The IRS recognizes the tax benefits of this strategy. Therefore, it may object to compensation that appears to be low relative to corporate profits.

Suggestion: Have compensation reviewed before the end of the year. If appropriate, the S corporation may pay bonuses to shareholder-employees. In any event, document the reasons for compensation amounts.

• Shareholder basis. Generally, a shareholder’s “tax basis” for deducting corporate losses may be increased by contributing additional capital to the company.

The IRS may challenge basis adjustments resulting from loans by third parties to the company. Furthermore, it has consistently maintained that a shareholder’s guarantee of an S corporation debt does not increase basis.

Suggestion: Loans should be made directly from the shareholder to the S corporation. A written note, based on reasonable terms, can serve as proof that a bona fide loan exists.

• Fringe benefits. An S corporation may provide tax-free fringe benefits, like health insurance or employerpaid group-term life insurance coverage (up to $50,000), to its employees. However, if an employee owning 2% or more of the company receives fringe benefits, he or she is generally taxed on the value.

To avoid abuses, the IRS may examine fringe benefit packages.

Note that there are several exceptions to the general rule. For example, certain “working condition” fringe benefits are tax-free to 2%-or-more shareholders.

Suggestion: Consider restricting benefits for owners to those that are essential or that result in minimal or no taxation.

In summary, S corporation owners must be careful to observe all the technicalities in the tax law. For assistance, contact the Craft Noble office.

If you haven’t already started teaching your children about money and finances, you’re neglecting an important part of their education. Consider these suggestions:

• Teach children how to live below their means. Children learn by example, and you can be their best teacher. Teach them to think first and spend later. Impulsive spending increases your children’s chances for getting in over their heads with consumer debt.

• Illustrate the power of compounding. Here’s an example. If your child invests $1,000 from a summer job at a 6% return, the investment will double in 12 years, grow to over $4,000 in 25 years, and exceed $10,000 in 40 years — all this from a single $1,000 investment.

• Fund a Roth with summer earnings. If your child has a summer job, consider setting up a Roth IRA. The funds can be withdrawn to cover college expenses or left to grow for retirement. If your daughter invests $5,000 in a Roth at age 16, and the fund earns a 6% return, by age 65 that $5,000 will have grown to over $86,000 tax-free. If she continues to invest $5,000 every year to age 65 with a 6% return, the balance will exceed $1,400,000.

• Match savings. Consider matching every dollar your child puts into savings. It may prepare him or her for later participation in an employer’s 401(k) plan.

If you want your children to be money-smart, take the necessary steps to educate them while they’re young.

Craft, Noble and Company helps clients realize the benefits of planning. While the day-to-day financial outlook is less than optimistic, the long run can be for those who can adjust their horizon.

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