Month: October 2014

At-Risk Rules – An Elementary Understanding

At-Risk Rules

Code Section 465 of the Internal Revenue Code defines ‘At-Risk’ as the financial value the taxpayer has in jeopardy related to the business activity the taxpayer is invested in as some form of an owner.  Effectively, the taxpayer may only take losses on his tax return contingent on the loss being directly tied to invested dollars with some form of tax basis.

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Phantom Income

Phantom Income

Those small businesses using partnership or S-Corporation formats issue Form K-1 to the respective owners.  When income is assigned to the owner and there is no corresponding cash related to that income, then this income is referred to as ‘Phantom Income’.  In effect, it is assigned income for tax purposes without the corresponding cash to pay the tax liability. 

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Cost Drivers in Small Business

Cost Drivers in Business

The textbook answer defines cost drivers as those factors that determine the overall cost of operations.  As an example, in manufacturing the cost drivers may be processing time or number of steps to produce the product.  In service, the cost drivers could be the actual ratio of billable to non-billable time.

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Heads on Beds – Hotel Management

Heads on Beds

The hotel business has one tenet that stands above all other hospitality based business standards.  Get heads on beds.  Why does this one business standard have so much more value than any other?  Well, it is simple, the fixed cost of operations for hotels are over 70% of all costs.  Therefore any additional guest sleeping in one of the rooms adds significantly to the potential profit of the hotel.

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Variable Costs

Variable Costs

Variable costs are those business related expenditures that vary in proportion to production.  The most common examples of variable costs include raw materials, labor, packaging and distribution expenses related to producing and delivering the product or service.

Stock

Stock

The one single term mostly equated to capitalism is ‘Stock’.  When a business is incorporated, stock is the core medium of exchange for the investment.  The company issues a certificate referred to as stock in exchange for the investment – most often cash.  This is the one true form of pure risk.  Most other forms of investments generally have some form of collateral, credit, or cash flow to substantiate the investment.

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