A three-step strategy to save tax when selling appreciated vacant land
Let’s say you own one or more vacant lots. The property has appreciated greatly and you’re ready to sell. Or maybe you have a parcel of appreciated land that you want to subdivide into lots, develop them and sell them off for a big profit. Either way, you’ll incur a tax bill.
For purposes of these examples, let’s assume that you own the vacant land directly as an individual or indirectly through a single-member LLC (SMLLC), a partnership or a multimember LLC that’s treated as a partnership for federal income tax purposes.
Here are a couple of scenarios and a strategy to consider.
Scenario 1: You simply sell vacant land that you’ve held for investment
If you’ve owned the land for more than one year and you’re not classified as a real estate dealer, any gain on sale will be a long-term capital gain (LTCG) eligible for lower federal income tax rates. The current maximum federal rate for LTCGs is 20%. You may also owe the 3.8% net investment income tax (NIIT) on all or part of your gain and maybe state income tax, too.
Scenario 2: You develop a parcel and sell improved lots
In this case, the federal income tax rules generally treat a land developer as a real estate dealer. If you’re classified as a dealer, the profit from developing and selling land is considered profit from selling inventory. That means the entire profit — including the portion from any pre-development appreciation in the value of the land — will be high-taxed ordinary income rather than lower-taxed LTCG. The maximum federal rate on ordinary income recognized by individual taxpayers is currently 37%. The 3.8% NIIT may also be owed and maybe state income tax, too. So, the total tax hit might approach 50% of the gain.
S corporation entity strategy to the rescue
Thankfully, there’s a strategy that allows favorable LTCG tax treatment for all the pre-development appreciation in the value of your land. However, any profit attributable to later subdividing, development and marketing activities will be high-taxed ordinary income because you’ll be treated as a dealer for that part of the process. But if you can manage to pay “only” the 23.8% maximum effective federal rate (20% + 3.8%), or maybe less, on the bulk of a large profit, that’s a win. Here’s a three-step plan to accomplish that tax-saving goal.
1. Establish an S corporation
If you’re the sole owner of the appreciated land, establish a new S corporation owned solely by you to function as the developer entity. If you own the land via a partnership, or via an LLC treated as a partnership for tax purposes, you and the other partners can form the S corporation and be issued stock in proportion to your partnership/LLC ownership percentages.
2. Sell the land to the S corporation
Next, sell the appreciated land to the S corporation for a price equal to the land’s pre-development fair market value. As long as the land has been held for investment and has been owned for more than one year, the sale will trigger a LTCG — equal to the pre-development appreciation — that won’t be taxed at more than the 23.8% maximum federal rate.
3. S corporation develops the land and sells it off
Next, the S corporation will subdivide and develop the property, market it and sell it off. The profit from these activities will be higher-taxed ordinary income passed through to the shareholder(s), including you. If the profit from development is big, you might pay the maximum 40.8% effective federal rate (37% + 3.8%) on that income. However, the part of your total profit that’s attributable to pre-development appreciation in the value of the land will be taxed at no more than the 23.8% maximum federal rate.
Seek professional help
The bottom line is if you’re simply selling appreciated vacant land that you’ve held for investment, the federal income tax results are straightforward. But if you’ll develop the land before selling, the S corporation developer entity strategy could be a big tax-saver in the right circumstances. However, it’s not a DIY project. Consult with us to avoid pitfalls.
© 2024
Tax tips when buying the assets of a business
After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:
- Buy the assets of the business, or
- Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC.
In this article, we’re going to focus on buying assets.
Asset purchase tax basics
You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.
For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.
When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).
Asset purchase results with a pass-through entity
Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.
Asset purchase results with a C corporation
If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%.
A tax-smart purchase price allocation
With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.
To the extent allowed, you want to allocate more of the price to:
- Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
- Assets that can be depreciated relatively quickly (such as furniture and equipment), and
- Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.
You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.
You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.
Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.
Plan ahead
Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase.
© 2024
Don’t overlook taxes when contemplating a move to another state
When you retire, you may think about moving to another state — perhaps because the weather is more temperate or because you want to be closer to family members. Don’t forget to factor state and local taxes into the equation. Establishing residency for state tax purposes may be more complex than you think.
Pinpoint all applicable taxes
It may seem like a smart idea to simply move to a state with no personal income tax. But, to make a wise and informed decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.
If the state you’re considering has an income tax, look at the types of income it taxes. For example, some states don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.
Check to see if there’s a state estate tax
The current federal estate tax doesn’t apply to many people. In 2023, the federal estate tax exemption is $12.92 million (increasing to $13.61 million in 2024). But some states levy estate tax with a much lower exemption, and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.
Make sure to establish domicile
If you make a permanent move to a new state and want to make sure you’re not taxed in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate taxes.
The more time that passes after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Five ways to help establish domicile in a new state are to:
- Change your mailing address at the post office,
- Change your address on passports, insurance policies, will or living trust documents, and other important documents,
- Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party),
- Open and use bank accounts in the new state and close accounts in the old one, and
- Register to vote, get a driver’s license and register your vehicle in the new state.
If you’re required to file an income tax return in the new state, file a resident return. And file a nonresident return or no return (whichever is appropriate) in the old state. We can help you make these decisions and file these returns.
Make an informed choice
Before calling the moving truck to relocate in retirement, do some research and contact us. We can help you avoid unexpected tax surprises.
3 types of internal benchmarking reports for businesses
As each year winds to a close, owners of established businesses can count on having plenty of at least one thing: information. That is, they have another full calendar year of financial results to peruse, parse and ponder over.
Indeed, you shouldn’t let this valuable data go to waste. Within your company’s financial statements lies a treasure trove of insights that can help you spot trends, both positive and negative.
That’s where benchmarking comes in. It can take several forms, but let’s focus on three types of internal benchmarking reports that can be particularly useful.
1. Horizontal analysis
A relatively easy starting point is to put two of your company’s financial statements side by side and compare them. In accounting, a comparison of two or more years of financial data is known as horizontal analysis. Differences between the years are typically shown in dollar amounts or percentages.
Naturally, what you’re hoping to find is growth. For instance, if accounts receivable increased from $1 million in 2022 to $1.2 million in 2023, that’s a difference of $200,000 or 20%. Horizontal analysis helps identify such trends. It’s then up to you and your leadership team to explain what caused them and, in the case of this example, keep that trendline moving in a positive direction.
You can also use horizontal analysis to sharpen your understanding of your business’s profitability. While public companies usually focus on earnings per share, private companies generally want to look at profit margin and gross margin. Rather than analyze only the top and bottom of the income statement (revenue and profits), you may want to drill down and compare individual line items such as the cost of materials, rent, utilities and payroll.
2. Vertical analysis
Vertical analysis works its magic within one year’s financial statements. Essentially, each line item in that set of financial statements is converted to a percentage of another item — often revenue or total assets. Accountants typically refer to financial statements that have been subject to vertical analysis as “common-size” financial statements.
For example, a common-size income statement that shows each line item as a percentage of revenue would explain how each dollar of revenue is distributed between expenses and profits. Alternatively, from a profitability standpoint, vertical analysis could show the various expense line items in the income statement as a percentage of sales. This would show whether and how these line items are contributing to your profit margin.
3. Ratio analysis
Ratios also depict relationships between various items on a company’s financial statements. For instance, profit margin equals net income divided by revenue. Ratios are typically used to benchmark a business against its competitors or industry averages. But you can use ratios internally as well.
Within a single set of financial statements, for example, you might calculate total asset turnover (revenue divided by total assets). This ratio estimates how many dollars in revenue the business generated for every dollar it invested in assets. Generally, the more dollars earned, the better. You can also, of course, compare ratios from one year to the next or over longer periods.
Know your options
Many companies use a combination of horizontal, vertical and ratio analyses over time to highlight positive trends and catch operating inefficiencies. What’s important is knowing your benchmarking options and maximizing the value that your financial statements can provide. For help choosing and executing the optimal benchmarking methods for your company, contact us.
© 2023
Defer a current tax bill with a like-kind exchange
If you’re interested in selling commercial or investment real estate that has appreciated significantly, one way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange. With this transaction, you exchange the property rather than sell it. Although the real estate market has been tough recently in some locations, there are still profitable opportunities (with high resulting tax bills) when the like-kind exchange strategy may be attractive.
A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).
For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.
Asset-for-asset or boot
Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.
If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.
Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”
However, in many cases, the properties aren’t equal in value, so some cash or other property is added to the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property reduced by the amount of boot you received but increased by the amount of any gain recognized.
How it works
For example, let’s say you exchange business property with a basis of $100,000 for a building valued at $120,000, plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000: your original basis in the relinquished property ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.
Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.
If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The reason is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).
Unload one property and replace it with another
Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. But you have to make sure to meet all the requirements. Contact us if you have questions or would like to discuss the strategy further.
© 2024
It’s possible (but not easy) to claim a medical expense tax deduction
One of your New Year’s resolutions may be to pay more attention to your health. Of course, that may cost you. Can you deduct your out-of-pocket medical costs on your tax return? It depends. Many expenses are tax deductible, but there are several requirements and limitations that make it difficult for many taxpayers to actually claim a deduction.
The rules
Medical expenses can be claimed as a deduction only to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income. Plus, medical expenses are deductible only if you itemize, which means that your itemized deductions must exceed your standard deduction. Due to changes in the Tax Cuts and Jobs Act, which generally went into effect in 2018, many taxpayers no longer itemize.
Eligible medical costs include many expenses other than hospital and doctor bills. Here are some items to take into account when determining a possible deduction:
Transportation. The cost of getting to and from medical treatment is an eligible expense. This includes taxi fares, public transportation or using your own vehicle. Car costs can be calculated at 21 cents per mile for miles driven in 2024 (down from 22 cents in 2023), plus tolls and parking. Alternatively, you can deduct your actual costs, including gas and oil, but not general costs such as insurance, depreciation or maintenance.
Insurance premiums. The cost of health insurance is a medical expense that can total thousands of dollars a year. Even if your employer provides you with coverage, you can deduct the portion of the premiums you pay. Long-term care insurance premiums also qualify, subject to dollar limits based on age.
Therapists and nurses. Services provided by individuals other than physicians can qualify if they relate to a medical condition and aren’t for general health. For example, the cost of physical therapy after knee surgery does qualify, but the cost of a personal trainer to help you get in shape doesn’t. Also qualifying are amounts paid for acupuncture and those paid to a psychologist for medical care. In addition, certain long-term care services required by chronically ill individuals are eligible.
Eyeglasses, hearing aids, dental work and prescriptions. Deductible expenses include the cost of glasses, contacts, hearing aids, dentures and most dental work. Purely cosmetic expenses (such as teeth whitening) don’t qualify, but certain medically necessary cosmetic surgery is deductible. Prescription drugs qualify, but nonprescription drugs such as aspirin don’t, even if a physician recommends them. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if permitted under state law.
Smoking-cessation programs. Amounts paid to participate in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible expenses. However, nonprescription gum and certain nicotine patches aren’t.
Weight-loss programs. A weight-loss program is a deductible expense if undertaken as treatment for a disease diagnosed by a physician. This could be obesity or another disease, such as hypertension, for which a doctor directs you to lose weight. It’s a good idea to get a written diagnosis. In these cases, deductible expenses include fees paid to join a weight-loss program and attend meetings. However, the cost of low-calorie food that you eat in place of a regular diet isn’t deductible.
Dependents and others. You can deduct the medical expenses you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as a parent or grandparent, who would qualify as your dependent except that he or she has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them.
Track eligible costs
As you can see, for deduction purposes, many expenses are eligible. Keep track of your outlays and we’ll determine if you qualify for a deduction when we prepare your tax return.
© 2024
Perform an operational review to see how well your business is running
In the wide, wide world of mergers and acquisitions (M&A), most business buyers conduct thorough due diligence before closing their deals. This usually involves carefully investigating the target company’s financial, legal and operational positions.
But why let them have all the fun? As a business owner, you can perform these same types of reviews of your own company to glean critical insights.
Now you can take a deep dive into your financial or legal standing — and certainly should if you think something is amiss. But assuming all’s well, the start of a new year is a good time to perform an operational review.
Why to do it
An operational review is essentially a reality check into whether, from the standpoint of day-to-day operations, your company is running smoothly and fully capable of accomplishing its strategic objectives.
For example, let’s say a business relies on superior transportation logistics as a competitive advantage. Such a company would need to continuously ensure that it has the right people, vehicles and technology in place to remain a major player. The point is, you don’t want to fall behind the times, which can happen all too easily in today’s environment of disruptors and rapid technological change.
Before getting into specifics, gather your leadership team and ask yourselves some big-picture questions such as:
- Are our IT systems up to date and secure, or will they soon need substantial upgrades to keep our data safe and our business competitive?
- Are our production facilities capable of handling the output we intend to work toward in the coming year?
- Are staffing levels across our various departments appropriate, or will we likely need to expand, contract or reallocate our workforce this year?
By listening to members of your leadership team, and perhaps even some key employees on the front line, you can gain a sense of your staff’s operational confidence. If they have concerns, better to address them sooner rather than later.
What to look at
Getting back to M&A, when business buyers perform operational due diligence, they tend to evaluate at least three primary areas of a target company. As mentioned, you can do the same. The areas are:
1. Production/operations. Buyers scrutinize mission-critical functions such as technological obsolescence, supply chain operations, procurement processes, customer response times, and product or service distribution speed. They may even visit production facilities and interview certain employees. Their goal, and yours, is to spot performance gaps, identify cost-cutting opportunities and determine ways to improve productivity.
2. Selling, general & administrative (SG&A). This is a financial term that summarizes a company’s sales-related expenses (including sales staff compensation and advertising costs) along with its administrative costs (such as executive compensation and certain other general expenses). A SG&A analysis is a way for business buyers — or you, the business owner — to assess whether the company’s operational expenses are too high or too low.
3. Human resources (HR). Buyers typically review a target business’s organizational charts, staffing levels, compensation and benefits, and employee bonus or incentive plans. They also look at the tone, quality and substance of communications between HR and staff. Their goal — and yours too — is to determine the reasonability and sustainability of each of these things.
A funny question
Would you buy your company if you didn’t already own it? It may seem like a funny question, but an operational review can tell you, objectively, just how efficiently and impressively your business is running. We’d be happy to help you gather and analyze the pertinent information involved.
© 2024
Does your business have employees who get tips? You may qualify for a tax credit
If you’re an employer with a business where tipping is routine when providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.
Credit fundamentals
The FICA credit applies to tips that your staff members receive from customers when they buy food and beverages. It doesn’t matter if the food and beverages are consumed on or off the premises. Although tips are paid by customers, for FICA purposes, they’re treated as if you paid them to your employees.
As you know, your employees are required to report their tips to you. You must:
- Withhold and remit the employee’s share of FICA taxes, and
- Pay the employer’s share of those taxes.
How the credit is claimed
You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.
Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.
Let’s look at an example
Let’s say a server works at your restaurant. She is paid $2.13 an hour plus tips. During the month, she works 160 hours for $340.80 and receives $2,000 in cash tips which she reports to you.
The server’s $2.13-an-hour rate is below the $5.15 rate by $3.02 an hour. Thus, for the 160 hours worked, she is below the $5.15 rate by $483.20 (160 times $3.02). For the server, therefore, the first $483.20 of tip income just brings her up to the minimum rate. The rest of the tip income is $1,516.80 ($2,000 minus $483.20). As the server’s employer, you pay FICA taxes at the rate of 7.65% for her. Therefore, your employer credit is $116.03 for the month: $1,516.80 times 7.65%.
While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Get the credit you deserve
If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.
© 2024
The kiddie tax could affect your children until they’re young adults
The so-called “kiddie tax” can cause some of a child’s unearned income to be taxed at the parent’s higher marginal federal income tax rates instead of at the usually much lower rates that a child would otherwise pay. For purposes of this federal income tax provision, a “child” can be up to 23 years old. So, the kiddie tax can potentially affect young adults as well as kids.
Kiddie tax basics
Perhaps the most important thing to know about this poorly understood provision is that, for a student, the kiddie tax can be an issue until the year that he or she turns age 24. For that year and future years, your child is finally kiddie-tax-exempt.
The kiddie tax is only assessed on a child’s (or young adult’s) unearned income. That usually means interest, dividends and capital gains. These types of income often come from custodial accounts that parents and grandparents set up and fund for younger children.
Earned income from a job or self-employment is never subject to the kiddie tax.
Calculating the tax
To determine the kiddie tax, first add up the child’s (or young adult’s) net earned income and net unearned income. Then subtract the allowable standard deduction to arrive at the child’s taxable income.
The portion of taxable income that consists of net earned income is taxed at the regular federal income tax rates for single taxpayers.
The portion of taxable income that consists of net unearned income that exceeds the standard deduction ($2,600 for 2024 or $2,500 for 2023) is subject to the kiddie tax and is taxed at the parent’s higher marginal federal income tax rates.
The tax is calculated by completing an IRS form, which is then filed with the child’s Form 1040.
Is calculating and reporting the kiddie tax complicated? It certainly can be. We can handle the task when we prepare your tax return.
Is your child exposed?
Maybe. For 2023, the relevant IRS form must be filed for any child or young adult who:
- Has more than $2,500 of unearned income;
- Is required to file a Form 1040;
- Is under age 18 as of December 31, 2023, or is age 18 and didn’t have earned income in excess of half of his or her support, or is between ages 19 and 23 and a full-time student and didn’t have earned income in excess of half of his or her support;
- Has at least one living parent; and
- Didn’t file a joint return for the year.
For 2024, the same rules apply except the unearned income threshold is raised to $2,600.
Don’t let the tax sneak up on you
The kiddie tax rules are pretty complicated, and the tax can sneak up on the unwary. We can determine if your child is affected and suggest strategies to minimize or avoid the tax. For example, your child could invest in growth stocks that pay no or minimal dividends and hold on to them until a year when the kiddie tax no longer applies. Contact us if you have questions or want more information.
© 2024
Did your business buy the wrong software?
No one likes to make a mistake. This is especially true in business, where a wrong decision can cost money, time and resources. According to the results of a recent survey, one of the primary ways that many companies are committing costly foibles is buying the wrong software.
The report in question is the 2024 Tech Trends Survey. It was conducted and published by Capterra, a company that helps businesses choose software by compiling reviews and offering guidance. The study focuses on the responses of 700 U.S.-based companies. Of those, about two-thirds regretted at least one of their software purchases made in the previous 12 to 18 months. And more than half of those suffering regret described the financial fallout of the bad decision as “significant” or “monumental.”
Yikes! Clearly, it’s in every business’s best interest — both financially and operationally — to go slow when it comes to buying software.
Inquiring minds
The next time you think your company might need new software, begin the decision-making process with a series of inquiries. That is, sit down with your leadership team and ask questions such as:
- What functionalities do we need?
- Are we talking about an entirely new platform or an upgrade within an existing platform?
- Who will use the software?
- Are these users motivated to use a new type of software?
Compatibility is an issue, too. If you’re using an older operating system, new software could be buggy or flat-out incompatible. In either case, you could incur substantial additional costs to update or replace your operating system, which might involve new hardware and impact other software.
When deciding whether and what to buy, get input from appropriate staff members. For example, your accounting personnel should be able to tell you what types of reports they need from upgraded financial management software. From there, you can differentiate “must haves” from “nice to haves” from “needless bells and whistles.”
If you’re considering changes to “front-facing” software, you might want to first survey customers to determine whether the upgrade would really improve their experience.
Prequalified vendors
When buying software, businesses often focus more on price and less on from whom they’re buying the product. Think of a vendor as a business partner — that is, an entity who won’t only sell you the product, but also help you implement and maintain it.
Look for providers that have been operational for at least five to 10 years, have a track record of successful implementations and can provide references from satisfied customers. This doesn’t mean you shouldn’t buy from a newer vendor, but you’ll need to look much more closely at its background and history.
For each provider, find out what kind of technical support is included with your purchase. Buying top-of-the-line software only to find out that the vendor provides poor customer service is usually a quick path to regret. Also, is training part of the package? If not, you’ll likely need to send one or more IT staffers out for training or engage a third-party trainer, either of which will cost you additional dollars.
Your goal is to create a list of prequalified software vendors. With it in hand, you can focus on comparing their products and prices. And you can use the list in the future as your software needs evolve.
No remorse
“Regrets, I’ve had a few,” goes the famous Sinatra song. Buying the wrong software doesn’t have to be one of them for your business. We can help you identify all the costs involved with a software purchase and assist you in ensuring a positive return on investment.
© 2024