The CPA Tax Advisor

Pay Less Tax on Your Investments

2011-09-07T16:34:00.000-07:00

It’s great to accumulate wealth by investing and saving you money, but did you know that taxes can take a large bite from your investments? Every investor, including those with 401(k)’s, IRA’s, and traditional brokerage accounts need to be aware of the impact of taxes. Here are a few tips and items to watch out for:

401(k)’s: A 401(k) can be a great way to save money for retirement as it is automatically deducted from your paycheck every time you get paid. If you are in the 25% tax bracket, every $100 you contribute saves $250 in taxes, plus savings for state taxes as well. You want to contribute as much as possible to reduce your taxes and save for retirement, especially if your employer has a matching contribution.

There is one common mistake that I do see often with 401(k) accounts and that is withdrawing money before retiring. It could be because you really need the money or you switched jobs and cashed out your account. You must resist the temptation to do this! Generally, there is a 10% early withdrawal penalty plus you will owe income taxes on the money withdrawn. This can easily add up to a third or even half of the money lost to taxes that you have withdrawn!

IRA’s: An IRA (individual retirement account) has similar tax characteristics of a 401(k). A strategy to maximize the tax-efficiency of your IRA may be to convert some or all to a Roth IRA. A Roth IRA has more favorable tax aspects as there are no taxes when you make a qualified withdrawal. Before making this decision, a thorough analysis should be done to make certain this strategy is beneficial for your situation.

Traditional Brokerage Account: A regular taxable investment account needs to be monitored closely to make sure you are not unnecessarily paying taxes. There are three straightforward ways to do this:
- Invest in tax-efficient mutual funds, ETF’s, and reduce the number of times you trade in your account. Every time stocks or bonds are sold, it may result in additional taxes
- Hold your investments for longer than one year to pay lower capital gains tax rates. This strategy compliments the first point.
- Compare the returns of tax-free municipal bonds to regular bonds to see which produces the higher overall rate of return.

Bad Tax Planning

2011-09-07T16:32:00.000-07:00

Tax planning can prevent you from overpaying taxes, but it has to be done before the year is over. Good tax planning takes a proactive approach, and bad tax planning includes either not planning, breaking the law, or taking it upon yourself without using a competent tax professional.

Without planning you may not be able to take advantage of the ever-changing tax laws. When we work with business clients either monthly or quarterly we are able to understand their business finances much better. By doing so we can suggest proactive ways to reduce taxes, run their businesses better, and help with cash flow and profitability. For example, if your business is doing well, it makes sense to review the current structure to make sure that it is tax-efficient. Our services are designed to save much more in taxes and produce more value than our fees.

A bad strategy is to pay for personal expenses through the business and take a deduction for it. Personal expenses should be kept separate and paid for personally. An IRS auditor can easily spot this, assess more taxes, and even assess penalties of 20% or more. And of course, underreporting your income is not wise either and may result in criminal prosecution.

I know what I know and know what I don’t know. I use other qualified professionals when it comes to legal matters, insurance, and healthcare. If you take it upon yourself to do your own tax planning, you usually end up unknowingly paying more in taxes than the cost of using a professional. The key is to make certain that you choose the right professional and ask a lot of questions.

Did You Have Damage From Hurricane Irene?

2011-09-07T16:30:00.000-07:00

Hurricane Irene caused a lot of property damage due to intense winds and rainfall. Many areas along the East Coast lost power for days and had flooding that has not been seen before. Most importantly, I hope that you were all safe.

Due to damage incurred from the hurricane, you may be able to deduct some of the damage to your property and belongings. These are called casualty losses and the definition is as follows:

A casualty is the damage, destruction, or loss of property resulting from an identifiable event (such as a hurricane, storm, or car accident) that is sudden, unexpected, or unusual.

The rules can be complex when figuring out your deduction. Generally, you can deduct your loss by using this formula: the loss minus insurance proceeds, then subtract $100. Finally, subtract 10% of your adjusted gross income from that figure to arrive at your deductible loss. Also, you need to be an itemizer in order to deduct casualty losses.

Let’s simplify with an example: Your car originally purchased for $30,000 is now worth $15,000. It is completely destroyed by Hurricane Irene, and your insurance reimbursed you $10,000. Your loss is then $15,000 - $10,000 = $5,000. Then subtract $100 to arrive at $4,900. Finally, subtract 10% of your adjusted gross income (let’s assume it is $40,000, then multiply by 10%) of $4,000. Your deductible loss is $900.

The rules are different for business owners. You may even be able to file an amended return from the prior year to receive a refund. As you can see the rules can be complex, so do not hesitate to contact our office with any questions.

Taxable or Non-Taxable?

2011-08-17T18:24:00.001-07:00

Which items do you think are taxable and which are not? The answers are below.

1. Workers compensation
2. Educational assistance
3. Cancelled debt
4. Expense reimbursements
5. Fringe benefits
6. Bartering
7. Hosting a party and receiving payment (such as a candle party)
8. Life insurance proceeds
9. Unemployment benefits
10. Federal income tax refund

Taxable: cancelled debt, fringe benefits, bartering, hosting a party, and unemployment benefits

Non-taxable: Workers compensation, education assistance of $5,250, expense reimbursements, life insurance proceeds, and federal income tax refund

There are always exceptions and the rules are constantly changing. If you ever have a question about the taxability of an item, do not hesitate to contact our office.

Save Taxes by Taking the Home Office Deduction

2011-07-28T17:45:00.000-07:00

The IRS allows business owners and employees to deduct expenses for using part of their home for business purposes. This can help to save income taxes as well as self-employment taxes. For every $1,000 of additional deductions, a self-employed person may save around $500! Here are the rules:

The first rule is that the area you use for business must be used exclusively and regularly for business. This means that the guest room that you use as an office cannot be used for even a single night to host your guests.

The second is that your home must be your principal place of business. To determine if your home is your principal place of business you must use it for administrative or management activities such as billing customers and recordkeeping.

If you are an employee there are other criteria that must be met as well. You must use your home for the convenience of your employer and you must not rent any part of your home to your employer.

What can be deducted exactly? You can deduct items such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, and depreciation of your house. Even if you itemize and deduct mortgage interest and property taxes on your tax return, it is more advantageous to someone who is self-employed to deduct a portion of these expenses as business expenses. The reason is to save self-employment taxes.

Although some believe the home office deduction will increase your chance of an audit, this should not discourage taxpayers from taking this valuable deduction. As long as you follow the rules and keep good records, you should not be concerned. Keeping good records and adhering to the rules applies to all other deductions as well.

Do You Watch Shark Tank?

2011-07-21T19:45:00.000-07:00

You have probably heard of the show Shark Tank, which airs on ABC on Friday nights. The show is about entrepreneurs who pitch their products and ideas to a group of wealthy investors who are referred to as “sharks.” Hopefully, the sharks will bite and offer to invest some of their money in the fledgling businesses.

Many times the sharks pass up on investing in the new business, which is very eye-opening for the entrepreneurs. Other times, more than one shark wants to invest in the business because there is a lot of upside, and the risk seems worth it. There are some great business lessons to be learned by all of this.

Research the market: Are there enough people that are willing to buy your product? Even so, what price should you sell the product for and who is your target customer?

Business model: Is there enough profit to be made? Does it make sense to spend a lot of money for the return that is generated? Is it costly to acquire customers?

Careful with your funds: Some entrepreneurs invest so much money in their product that they are now broke. Worse yet is that the product may not even be viable. Even if the business is good, the entrepreneur is eager to sell and may end up taking a lowball offer just to recoup their own investment.

Lack of Experience: When a product is good, the problem that entrepreneurs may have is usually manufacturing, distribution, and additional capital. Instead of selling a piece of your company, an alternative is to work with qualified professionals, such as consultants, attorneys, accountants, and competent employees.

Businesses are started every day. Some are successful, but unfortunately, many are not. The key to increasing your chance of success is to plan and be well thought-out. Just like preparing to take a test as a student, you have to study ahead of time to increase your chances of getting an “A.”

Did You Get a Surprise After Filing Your Return?

2011-06-03T06:43:00.000-07:00

Everyone loves to receive a much larger than anticipated tax refund, but what if you unexpectedly had to pay? There could be several reasons why, but it’s not too late to fix it for 2011.

Your filing status or dependents may have changed, perhaps from married to single, which usually causes you to pay more income taxes. Maybe you cannot claim your children as dependents anymore. For 2010, each exemption decreased your taxable income by $3,650.

Your business did very well and additional taxes were not paid. If you are self-employed, not only will you owe income taxes on each dollar of earnings, but you may be subject to self-employment tax, which is an additional 15.3%.

Taxable income has increased and certain deductions and credits have been phased-out. Once your income goes beyond $100,000 many tax credits, such as the child tax credit, are reduced. Real estate losses may also become reduced as well.

To prevent a negative surprise for 2011’s tax return, check your current withholdings to make sure that enough taxes are being withheld each paycheck. If you need to increase your withholdings, simply print out form w-4 from www.irs.gov or ask your employer and submit it to them with the additional amount you would like withheld. Any amount can be specified, such as $100. If you need help estimating, please contact our office.

Penny Wise, Pound Foolish

2011-06-03T06:40:00.000-07:00

What do I mean by penny wise, pound foolish? Saving a penny, but it costs you a dollar. Here are a few examples:

Extreme Couponing: I watched an episode of extreme couponing and the first thought that came to my mind, aside from obsessive, is that the coupon clippers spend way too much time trying to save money. If an average family spends around $150 to $200 on groceries weekly, but they spend 30 hours a week couponing, aren’t they missing out on actually earning money? Multiply 30 hours by a minimum of $15/hour working and the result is $450. Even if $150 out of that goes towards taxes, it makes sense to try to earn more money than trying to save $150 by cutting coupons all day. One thought – my family cuts coupons, but we spend around 20 minutes a week maximum.

Not Investing in Yourself or Your Business: Aside from retirees, most individuals make the most income from earnings as a business owner or an employee. Don’t hesitate to intelligently invest money to further your career to produce more income, or to invest money into your business to produce more profits. Investing can be in the form of items designed to produce more income, such as marketing, or to reduce expenses, such as updating your equipment.

Spending Too Much on Items That Are Tax Deductible: Just because you can save taxes by paying loan interest, or by purchasing a new vehicle and equipment for your business, does it really make economic sense to do so? Spending a dollar to save a quarter is definitely penny wise, pound foolish.

Doing It Yourself or On the Cheap: Should you really do your own plumbing if you have never done it before just to save some money? It may end up costing you more when a real plumber has to fix your mess! I also see this with tax and accounting matters, but I am biased in this area, of course.

I still remember the first time I heard the penny wise, pound foolish saying (actually it was a partner at a large public accounting firm, and he said, “penny wise, dollar dumb,” but it still means the same thing). Think before trying to save!

Should Both Parents Work?

2011-06-03T06:37:00.000-07:00

The birth of a child is one of the most amazing, memorable times of a person’s life. I remember the birth of our first daughter, Alana, and how I truly understood the expression, “walking on air.” The births of each of our other children were equally as amazing.

With the birth of a child, or perhaps your second, or third, or fourth in my case, comes an important question. Does it make sense for both parents to return back to work? There are many factors to think about, financial and non-financial, but here are some of the financial elements:

Daycare Expenses: The cost can vary significantly, but a typical range can be $800 to $1,200 per month per child. If you have one child in daycare and are paying $12,000 per year, the cost may make sense, depending upon income, but what about two children in daycare with expenses of $24,000 per year?

Commuting: If you take mass transportation into NYC from NJ, you may have to pay for parking at the local train station, the PATH train to NYC, and possibly the subway. If you drive into NYC the toll is $8. That comes to $40 a week in tolls and approximately $2,000 a year!

Dining Out: Almost everyone likes to go out to lunch a couple of times a week to break up the monotony of work. If you spend $10 twice a week, this adds up to $1,000 a year. Also, if both parents work, then you may be more likely to order take-out more often during the week due to time constraints. This may add another $1,000 to $3,000 a year.

Taxes: My favorite subject. This really depends upon your bracket, but even with a parent in the 15% federal tax bracket, once payroll taxes and state taxes are included, at least a quarter of your earnings will go towards taxes. Although, you do get a credit of around $600 for each child in daycare up to a maximum amount of $1,200.If you have two kids in daycare and work in NYC, you can easily spend $40,000 for the privilege of working! Unless you are able to work from home, have a flexible schedule, and even have a grandparent help out, working doesn’t sound so appealing.

My Customer/Tenant Didn’t Pay Me. Can I Deduct This on My Tax Return?

2011-03-08T17:41:00.000-08:00

I get asked this question a lot, mostly from business owners. The answer to this question is that it depends. First a quick accounting lesson of cash vs. accrual. I promise not to keep it too technical!

If you are a cash basis taxpayer, then you record income or sales once you get paid, either by cash, check, or credit card. You also record expenses when you pay them, even if with a credit card.

For an accrual basis taxpayer, you record income when it is earned. For example, if you are a consultant and you sent an invoice to your client in January for December’s work, then you record the income from the invoice during December. The same goes for expenses, as it generally doesn’t matter when you paid your bill, but when you incurred the expense. This means that if you ordered supplies in December, but paid for them in January, you can deduct the expense in December.

Now to answer the original question: A cash basis taxpayer cannot deduct as an expense an outstanding invoice that was not paid by their customer, or tenant, if they are a landlord. Remember, the invoice was not included as income. On the other hand, an accrual basis taxpayer can deduct an expense for non-payment from a customer or tenant, as long as it is deemed uncollectible.

Most small business clients and landlords are on the cash basis method of accounting. It is much easier for record keeping purposes, and especially for income tax purposes.

What’s In Your Credit Report?

2011-03-07T16:19:00.000-08:00

When we apply for loans, search for a job, or even take out an insurance policy, our credit report is used in the process. Your credit report shows all of your outstanding debts and lines of credit, including credit cards, mortgages, auto loans, and personal loans. Even accounts that have been closed or debts that have been paid off will be shown for years. All of this information is used to apply a credit score to you.

It is important to make sure that you pay all of your bills on time and don’t incur too much debt so that you maintain a healthy credit score. Sometimes, incorrect information may inadvertently be placed on your credit report, which will negatively impact your credit score. The higher your credit score generally means that you will pay a lower interest rate when applying for loans, which can save you hundreds or thousands of dollars each year.

Although there are a lot of companies that will provide you with your credit report for a fee, you are legally entitled to one free credit report per year by each of the three credit reporting companies. They are Equifax, Experian, and TransUnion. The website to obtain your free credit report is www.annualcreditreport.com, which is very user-friendly. I recommend obtaining one report every four months from a different credit reporting company so that you will never have to pay for them.

Once you have your report you should review it for accuracy. If there is a mistake, such as an account that shows that you have been late, you will need to contact the credit reporting company who issued the report to have it corrected. Most likely you will need to contact all three companies to have it straightened out.

One last note: According to the Federal Trade Commission (FTC), you should be skeptical of companies that claim they can repair your credit. Some of their business practices are fraudulent and many of the steps you can take yourself at little to no cost. You can go to this page: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm or email me and I will send you the FTC report about repairing your credit, including a sample dispute letter.

Keep It Separate

2011-02-26T11:15:00.000-08:00

What should you keep separate? Business and personal expenses, of course! When you operate a business, including a sole-proprietorship, an LLC, corporation, or even a realtor, your business activities need to be kept separate from your personal expenses. This is especially important in the case of an audit by the IRS. Here are some best practices and areas where it matters most:

Have Two Separate Checking Accounts: One for your business and one for your personal expenses. When you have to pay for a personal expense, make sure to use your personal checking account. If you pay personal expenses through your business accounts, you will need to separately record these as draws or distributions, otherwise it may look like you are trying to deduct personal expenses as business expenses. The same applies to business expenses. Even though business expenses that are paid personally may still be deductible, chances are that you will not keep track of these expenses and forget to include them on your tax return, thus you end up overpaying taxes.

Business Vehicles, Property, and Equipment: Make sure that you purchase any business property in the name of the business. If the assets are on the books of the business, they need to be owned by the business.

If a Vehicle is in Your Name Personally: Corporate owner-employees may be able to reimburse themselves for vehicle expenses.

The bottom line is to keep your records clean, separate, and simple.

Do You Want to Audit-Proof Your Return?

2011-01-14T17:12:00.000-08:00

While certain taxpayers have a higher chance of being audited, such as small business owners with a schedule C, how can you audit-proof your return? Actually, there is no way of insuring that you never get audited, but just in case you do, to make sure that you come out unscathed, there is one secret to help you to survive an audit – organized, clean records and documentation!

The secret is not glamorous, but it will save your nerves, your hard-earned money, and will most likely help you to be more successful. Some techniques for individuals without a business to audit-proof their returns are as follows:

- Make sure that you have received all of your W-2’s from every job during the last year, along with 1099’s for interest, dividends, and investment transactions. Leaving one of these off your return is sure to have the IRS send you a deficiency notice.
- Keep copies of all receipts, documents, and cancelled checks for charitable contributions and other expenses you claim on your return.
- Keep track of your cost-basis for your investments.
- I also recommend keeping your tax returns and supporting documents for at least 7 years.

For business owners:

You have much more responsibility, because you may have income tax returns, payroll taxes, and sales taxes that need to be filed, to name a few.

- Use a computerized bookkeeping program, such as QuickBooks. This will help you to run your business better as well.
- Reconcile your bank and credit cards accounts to your statements to make sure that you have recorded all information, and keep your statements.
- Keep all of your receipts and canceled checks to support your deductions.
- Maintain a vehicle mileage log for your business vehicles to prove business use.
- Document the business reason for your meals and entertainment expenses.
- Separate your personal expenses from your business. Even if you account for your personal expenses as a draw, it is much cleaner to pay for them personally.
- For sales that are not subject to sales taxes, make sure to be able to prove exemptions, with proper documentation for out-of-state sales for online retailers or tax-exempt certificates for contractors, for example.

The bottom line is that you need to be able to show proof for your expenses and deductions if you are audited or receive a notice from the IRS and state taxing agencies. Unfortunately, you are guilty unless proven otherwise.

What’s New for 2011?

2011-01-14T17:08:00.000-08:00

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed by President Obama. The main focus of the new laws was to extend the tax breaks for two more years that were enacted under President Bush, and were about to expire at the end of 2010. With the passage of the new laws, virtually all taxpayers, including lower income and wealthy, will benefit. Here is an overview:

Individual Tax Brackets: Individual tax rates are going to stay the same, from between 10% to 35% of taxable income. Without the new laws they were set to rise from between 15% to 39.6%. This is a benefit for all taxpayers.

FICA Payroll Tax Cut: For one year, employees will see a reduction of their FICA payroll taxes, from 6.2% to a reduced rate of 4.2%. Look for this change starting with your first paycheck of 2011.

Capital Gains and Dividends: The rate on capital gains and dividends will continue to be between 0% to 15%, depending upon your tax bracket. Capital gains were set to rise to 20%, and dividends were to be taxed as high as 39.6%.

Child Tax Credit: The child tax credit will continue to be $1,000 per child, and will phase-out for joint filers with more than $110,000 of adjusted gross income, and at $75,000 for single filers. The credit was set to be reduced to $500 per child.

There are many other changes that will positively impact almost all taxpayers. These include: a one-year patch to the alternative minimum tax, extension of the American opportunity tax credit, bonus depreciation, the earned income credit, and several more. If you have any questions on how these changes will impact you, don’t hesitate to contact our office.

You May Not Be Able to File Your Return Early

2010-12-28T11:27:00.001-08:00

There were a lot of last minute tax breaks that were recently enacted. This is good news for many taxpayers, but since the changes were very last minute, the IRS needs to update its computer systems to be able to process the returns. This means that you may not be able to file your return until the middle of February.

Who will be affected? If you itemize your deductions, which include expenses such as home mortgage interest and property taxes. Also, taxpayers claiming the Higher Education and Fees Deduction, and teachers who claim the Educator Expense Deduction.

Although the IRS cannot process your returns, whether or not you e-file or file a paper return, you can still prepare your return and wait to file. The IRS will announce when they have their computers up and running.

Time is Running Out to Convert Your IRA . . .

2010-11-18T19:08:00.000-08:00

Through the end of this year only, there is a special tax benefit if you convert your traditional IRA to a Roth IRA, which allows you to make tax-free distributions from your retirement account. There is no income limitation, which previously disallowed a Roth conversion if your adjusted gross income was greater than $100,000. Before 2010, if your tax filing status was married filing separately you were not able to convert either, but this restriction has been lifted as well. Additionally, one of the reasons to take advantage of this during 2010 is that you can include any income from the conversion on your 2011 and 2012 tax returns.

But even with these benefits, should you convert your IRA to a Roth and pay additional taxes currently? Possibly, but it depends upon your situation and several major factors. The good news is that you have some time during 2011 to convert or “recharacterize” your Roth back to a traditional IRA if you realize that would be beneficial to you. The deadline to do this is April 15th 2011, but if you file an extension you will have until October 15th 2011.

Do You Have the Money to Pay the Tax? Even though you can spread out the income from the conversion over two years, do you have the money to pay the additional taxes? For example, if you convert $100,000 and you are in the $25% bracket, do you have an additional $12,500 for each of those years? If not, then converting is not right for you. And you never want to use some of the IRA distribution to pay the tax because you will create a tax nightmare for yourself with possible early distribution penalties of 10%.

How Much Time Until Retirement? If you are in your sixties, a conversion will probably not make a lot of sense. The main reason for the conversion is to not pay any taxes in the future from your Roth, which means that you will need several years to recoup the taxes that you have paid up-front. Although, you may want to convert to minimize the tax impact to your heirs. Another benefit is that a Roth IRA does not require minimum distributions once you reach age 70 ½.

Which Tax Bracket Will I Be In? If you think that you will be in a lower tax bracket when you retire, then converting now does not make sense. If you think that you will either be in a higher tax bracket or that tax rates will be higher when you retire, then a Roth makes a lot of sense. Of course, this is a guess, but you need to make an educated guess based upon all of the known factors.

These are just a few of the factors to consider when converting your IRA to a Roth. Conversion strategies, such as filing an extension, the creation of multiple Roth accounts, or conversion of only a partial balance can also be implemented to help make your conversion more tax-efficient and allow the benefit of hindsight.

Do You Keep Track of Your Business Mileage?

2010-11-15T13:00:00.000-08:00

Most business owners, sales people, and some employees should keep track of their business miles for tax purposes. In my experience, most do not keep very good records, and scramble to come up with an amount to prepare their taxes.

The best practice is to keep a vehicle mileage log. It doesn’t have to be fancy, as it can be written in a notebook, but a better option is Microsoft Excel, which helps with the calculations. An example of a good log would show the following:

- Beginning of year odometer reading
- Columns to show the date, where traveled, description, and the business miles driven
- A total at the bottom for business miles
- End of year odometer reading

Instead of keeping track of everywhere you have driven, for business and personally, you can easily figure your overall miles by subtracting your beginning odometer reading from the ending reading. Subtract your total business miles from the difference to obtain the personal amount.

What’s the benefit of all this extra work? Actually there are several. First, if you are ever audited, you will need to prove the business use of your vehicle. Second, it can reduce your taxes! For example, instead of deducting your actual vehicle business expenses, you may be eligible to use the alternative mileage method. By multiplying your business miles by the mileage rate, currently at $.50 a mile, you can deduct this amount if it is greater than your actual expenses.

Do You Use QuickBooks? You Should Be Doing This!

2010-11-15T12:59:00.000-08:00

QuickBooks is a very popular accounting software program for small businesses, and I use it personally for my practice as well. But, if you are using QuickBooks, there is one key step you should be taking – reconcile your bank and credit card accounts!

Why? When you reconcile your accounts, it helps to make sure that the data you entered is accurate. Everyone makes mistakes when they enter data, even when they upload data. This is okay, as long as you catch your mistakes by reconciling to your bank and credit card statements.

Reconciling your accounts will not only help you to make sure bank accounts are accurate, but it will also help you to make your receivables from customers and payables to vendors more accurate as well.

Fortunately, this is not a difficult task to do. If you have never reconciled before, it may take some work to get the first month’s reconciliation taken care of, but after that, the task become easier. The steps to reconcile are as follows: Click on banking; reconcile; choose the correct account; type in the statement date and the balances.

We offer ongoing QuickBooks consulting to assist clients with their books to insure they are getting the most from QuickBooks. Do you need help?

Year-End Tax Planning Tips

2010-11-03T09:50:00.000-07:00

We still don’t know what is going to happen to the tax rates after December 31st, but most likely they will go up. So how do you plan ahead to try to save taxes both this year and next? Here are a few ways that are generally effective no matter where taxes are headed:

For Business Owners:

Purchases of equipment and vehicles through the end of this year may qualify for bonus depreciation: This allows you to generally expense 50% of the cost of equipment or a vehicle for this year. For example, if you purchase a new vehicle, you may receive an additional $8,000 of additional depreciation expense for this year.

Review you business structure: If you are a single-member LLC or sole-proprietor, does this structure still make sense for next year? What if you are an S-Corp? Each entity has its own advantages and disadvantages, but a thorough analysis to see which entity will save you more taxes and help your business prosper is beneficial.

Retirement plans: Does your business have a retirement plan? Some plans need to be set-up before the end of this year to take advantage of them for 2010. If you have a plan already in place, is it set-up correctly to allow you to maximize your contributions and save taxes?

Estimated taxes & withholdings: Should you increase your estimated tax payments or withholdings to avoid underpayment penalties, and increase your itemized deductions for state tax payments? Now is the time to plan.

For Individuals:

Residential energy credits: You have until the end of this year to purchase eligible energy-efficient equipment, such as a new hot water heater, or even doors and windows, to receive a credit equal to 30% of the cost for a maximum credit of $1,500.

Convert you IRA to a Roth: For this year only, if you convert your IRA to a Roth IRA, you can defer the taxes over two years, 2011 and 2012. By converting to a Roth, distributions are tax-free! This decision should be weighed carefully to see if it makes sense for you.

Contribute to an FSA Plan: If your employer offers a flexible spending account for medical expenses, you can save taxes by participating. You will most likely need to enroll before this year is over.

Remember, a little planning can go a long way!

How Healthy Are Your Sales?

2010-09-17T07:24:00.000-07:00

There are many ways of measuring risk, but did you know that your sales concentration may be placing an unnecessary risk to your business? This also applies to sales professionals as well.

I have seen it over and over again, whereas a small business relies heavily on one or several large customers, and then the customer disappears. Sometimes multiple large customers disappear at the same time. Either they go out of business, cut-back due to a slowdown, have management changes, or other various changes happen that are beyond your control. This will all impact your business as your sales now plummet.

As a good rule of thumb, you don’t want to have more than 10% of your sales from one customer. It creates more risk than necessary because you never know if or when things will change. There is an adage known as Murphy’s Law that states, “Anything that can go wrong, will go wrong.” Additionally, you don’t want to rely heavily on one referral source for new business either. Murphy’s Law applies here as well.

What should you do to minimize your risk? First, never build your business around one or a few customers. This may be the case when a business is relatively new, but over time it is a huge risk. Secondly, assess sales per client to acknowledge who the large customers are. And thirdly, you need to market your business to decrease your risk of serving a few large customers.

A healthy business is constantly looking for ways to reduce risk. This not only decreases your chance of set-backs, but increases your odds of insuring ongoing success.

Children and Tax Benefits

2010-09-17T07:23:00.000-07:00

With the recent birth of our twins, I thought it would be appropriate to write about the tax benefits of raising children. The rules can get tricky, and your children must meet certain criteria to become your qualifying children for tax purposes. Here are a few highlights:

Dependency Exemption: For each qualifying dependent child, you can exempt from your income $3,650.

Child Tax Credit: For each qualifying child under 17 years of age you can receive a credit of up to $1,000 per child. The credit phases-out after your modified adjusted gross income is greater than $110,000 for filing jointly and $75,000 for filing as single or head of household.

Child Care Credit: If you pay for daycare, after-care or preschool so that you can work, you may be eligible for a credit of 20% to 35% of the cost, up to a maximum of $3,000 of qualified expenses for one child and $6,000 for two or more. Your children must be under age 13 to qualify.

Education Credits: There are three credits available for education expenses. The American Opportunity Credit provides a credit of up to $2,500 per eligible student for the first four years of college (100% of the first $2,000 of expenses and 25% of the next $2,000). The Hope Credit provides a credit of up to $1,800 for the first two years of college (100% of the first $1,200 of expenses and 50% of the next $1,200). The Lifetime Learning Credit provides a credit of up to $2,000 for an unlimited number of years (20% of the first $10,000 of expenses). There are income limitations for each credit which range from $120,000 for the Lifetime Learning Credit for joint filers to $180,000 for the American Opportunity and Hope Credits for joint filers. The income limitations are half for all other filers.

Income Shifting: If you are self-employed, you may be able to hire your minor children, pay them wages, and not have to pay income taxes or payroll taxes. Even if you do not own a business you may still be able to shift investment income to your children to minimize taxes. It takes a lot of planning, but strategizing can save a lot of taxes.

These are just some of the tax benefits to having children. Hopefully this will help to offset some of the cost of raising a family.

The 1099 Nightmare is Coming

2010-09-17T07:22:00.000-07:00

In addition to income tax filings, sales tax filings, and payroll tax filings, businesses need to also file annual 1099’s. Generally, a 1099-MISC is an information report that needs to be prepared by a business when they spend $600 or more on services from a non-employee. For example, if you are a contractor and you pay $600 or more to a subcontractor that does not own a corporation, you will need to issue him a 1099 at the end of the year.

Depending upon how many subcontractors you compensate, if any, you may not have to prepare and issue that many 1099’s during any given year. It may not be much of a burden, except for the new changes due to the Patient Protection and Affordable Care Act . . .

After December 31, 2011 business will have to report all payments totaling $600 or more to any vendor during the year, with almost no exceptions. If you go to the same gas station to fill up your tank, you will need to issue a 1099. Purchase supplies from Staples? Have a telephone and a cell phone bill? Take clients to the same restaurant often? Business owners will also need to obtain the taxpayer identification number of all of their vendors, along with their address to comply with the new regulations.

The main reason for these changes is because the federal government is trying to increase compliance with the tax laws by having businesses report all income that is received. But these reporting requirements are still being clarified by the IRS, and the obvious result of these changes is an increased time and expense burden to small business owners.

But It’s Tax Deductible!

2010-07-21T13:17:00.000-07:00

Paying mortgage interest, property taxes, equity loan interest, business expenses are all generally tax deductible. But does it make sense to incur excessive expenses just to produce a tax benefit?

For example, if you are looking to move to a bigger house, you will save a lot of money in taxes, right? Yes, you may actually save income taxes, but at the same time you will have spent much more money. Spending a dollar to save a quarter doesn’t make much sense at all.

Just because qualified business meals and entertainment may be deductible (generally only 50% deductible), it may not make sense to spend excessively. I have seen some business owners spend so much on meals that they could have used this money to hire an assistant so they can work less. Now, that’s real savings!

The One Most Important Thing Your Business Needs

2010-07-14T13:17:00.000-07:00

You probably think I am going to say a good accountant is the most important thing your business needs. Although a good accountant is essential, it is not the number one priority. The most important thing your business needs is sales! Call it sales, revenues, fees, customers, or clients, but it is all the same. Without sales you do not have a business, therefore nothing else matters.

The recession has taken its toll on business owners, which is why it is even more important to focus on sales. The way to increase sales is to increase your marketing efforts. It doesn’t have to be expensive, but it should be effective. Your marketing efforts should be planned and focused.

As part of your marketing, you need to focus on who you want to target and how. For example, a veterinarian should only target pet owners. Lists can be obtained from database companies, such as infousa that are very specific.

The next step is how to contact your target market. Maybe the veterinarian can send a postcard to the pet owners. Maybe he/she can even get more creative and partner with a local, independent pet shop to cross market his/her services.

Just remember that a good marketing strategy is to diversify your marketing methods. I recommend marketing in at least 5 different ways because not all usually work at the same time. To obtain a list of marketing techniques for your products or services, please feel free to email me and I will send you the report right away.

Are You Overwhelmed By Debt?

2010-07-13T17:53:00.000-07:00

The number of bankruptcy filings has increased over the last several years due to the increase of household debt. Statistics can be found at www.abiworld.org, which is the website for the American Bankruptcy Institute. Bankruptcy is a tough decision to make and should be well thought out before filing. The focus of this article is not bankruptcy though, but debt management.

Why or how do so many people get into trouble with debt? When does it become a problem? There are so many reasons, such as job loss or, health problems, but overall it is a disconnect between income and spending, and not enough focus on financial management.

I’d like to share a few simple ways to reduce your debt and help to minimize its use in the future. If you keep it simple, you are more likely to be successful.

Stop incurring more debt: You can’t get out of debt if you are still using your credit cards. Do not increase your debt or you will never get out.

Emergency fund: By building up an emergency fund, you are less likely to take upon more debt for something unexpected. For now, it can be around $1,000 to start. Ideally, you will want to work towards 3 to 6 months worth of expenses, but it doesn’t make sense at this point to save $10,000 and simultaneously have a $10,000 credit card balance.

Budget: If you are serious about reducing your debt and improving your financial situation, you need to take the time to make a budget. You can use software, such as Excel or Quicken, but a very simple and effective way is to use envelopes. For example, if you are paid weekly by your employer and spend an average of $100 a week on groceries, then place $100 in an envelope labeled groceries. When you go food shopping, bring this envelope so that you can only spend$100 or less. This can be done with all other expenses. It is simplistic, but if it is done right it is extremely effective. My father taught me this one.

Know what you owe and prioritize: Make a list of all of the debts you owe, including credit cards, auto loans, equity loans, mortgages, student loans, etc. Now you need to work at chipping away those debts. The rational place to start is with the highest interest debt, but I don’t recommend this. You should actually try to pay off the smallest balances first because it will give a sense of accomplishment. Once the smallest is paid off, then use that payment toward the next balance. Finances are extremely psychological, as most of our financial decisions are emotional-based.

These few steps are a good place to start to manage and reduce your debt. If you are serious about debt elimination, you will not look for shortcuts, but rather ways to increase your income to pay off your debt sooner and take control. Focus and simplicity are the keys. If you need more help you can contact my office. Additionally, there is an excellent book on this topic that parallels my thoughts on debt, entitled “The Total Money Makeover” by Dave Ramsey.

NJ Senior Freeze deadline is August 2nd

2010-07-09T09:14:00.001-07:00

Update to the Homebuyer's Credit

2010-07-08T19:05:00.000-07:00

The homebuyer credit has been extended until September 30th for eligible taxpayers. If you entered into a binding contract to purchase a home by April 30th, then you have until this time to close on your home.

A Primer on QuickBooks

2010-05-04T11:59:00.000-07:00

What exactly is QuickBooks? QuickBooks is an accounting program that is used primarily by small businesses. It is very user-friendly, which makes it ideal if you are not an accountant.

QuickBooks will enable you to take control of your business finances to help you to make better decisions. Business owners can keep track of receivables from customers and clients, bills that are due, and account balances such as checking accounts, inventory, and credit cards. You can even reconcile your accounts to your statements to make sure your records are accurate. Can you imagine not knowing how much your customers owe you?

Ideally, you will want to be able to generate financial reports such as profit and loss statements, as well as balance sheets. A profit and loss statement will tell you how much your sales, expenses, and profits were, while a balance sheet reflects assets (such as checking accounts), liabilities (such as loans), and equity (the difference between assets and liabilities, which is your ownership stake).

Successful small business owners know how their business is performing on an ongoing basis. This is where QuickBooks can help. Your decisions should be made based upon the financial results of your business. Just remember not to do it alone. While QuickBooks is very user-friendly, many people do need assistance from an expert. It can be extremely advantageous to consult with us on an on-going basis. We can advise you on how to best set up QuickBooks, how to use it effectively, and how to interpret your business results to help you to save money, taxes, and increase profits.

I Received a Notice from the IRS – Now What?!

2010-05-04T11:58:00.000-07:00

If you receive a letter in the mail from the IRS, the first thing you should do is open it! It might not be as bad as you think. The most common notice I see is that a client forgot to include interest, dividends, or wages from a W-2 on their income tax return and now they owe additional taxes, interest, and penalties.

Just because you receive a notice that you owe money doesn’t mean the notice is correct. You want to see why there is an increase, and compare the figures in the letter to your tax return. Then you want to see what the proposed changes are. I have seen notices that have actually showed incorrect W-2 wages.

Usually you have 30 days to respond to the notice before additional interest and penalties will be assessed. There are several options to take at this point.

The first option, if the notice is correct and the additional penalties and interest are very insignificant, should be to pay the amount due as soon as possible. If the notice is correct and you have a valid reason for not including a portion of income, you should then include payment of the taxes and interest on those taxes only. Additionally, you will need to respond to the notice to state why the penalties should be removed. The IRS will remove penalties if you have a justifiable reason. As a caveat, if the penalties are not removed then you will owe not only penalties, but possible interest on the penalties as well. The cost/benefit has to be weighed carefully. If the notice is completely wrong, then you should not send any payment, but include an explanation in your written response to the IRS, along with any supporting documents to show why you do not owe additional taxes, interest, and penalties.

As you can see there are several options when receiving a notice from the IRS or one of the state taxing authorities. Do not hesitate to contact our office if you receive a notice. We can clearly explain it to you and guide you through the next step to take.

Patient Protection and Affordable Care Act

2010-05-04T11:56:00.000-07:00

The Patient Protection and Affordable Care Act is 906 pages long. It can be easily found by typing it in at google.com. One of the highlights of the Act is to provide a credit to small business owners who provide health insurance to their employees starting in 2010.

The amount of the credit is equal to a maximum of 35 percent of the premiums paid by an eligible small business during 2010. This will increase to a maximum of 50 percent of premiums paid during the year 2014. The employer must have paid at least half the cost of single coverage for their employees to be eligible.

Since the credit was designed to help small business owners that employ low and moderate income workers, average wages per employee must be less than $50,000 per year. Generally, an employer must have fewer than 25 full-time equivalent employees. Employers with less than 10 full-time equivalent employees with average annual wages per employee of less than $25,000 will receive the maximum credit.

Unfortunately, employees such as dependents, including spouses and children, and most business owners are excluded from the definition of employee.

Hopefully this credit will be of help to many small business owners who are on the fence about providing health insurance for their employees due to cost concerns.

Saving Energy Can Give You a Tax Break (Part II to Make Sure You Know All of the Details)

2010-03-01T12:57:00.000-08:00

During the last newsletter I wrote about the tax savings of installing energy-saving equipment, and I have received a lot of questions on this topic lately.

Firstly, the tax credit is available for 2009 and 2010. Although the total credit available is a combined $1,500 during both years. For example, if you purchased windows for $4,000 during 2009 you will receive a tax credit of $1,200 on your 2009 taxes (30% of $4,000). Then, if during 2010 you insulate your house for $1,000, you will receive a credit of $300 on your 2010 taxes, for a combined credit limit of $1,500.

What qualifies exactly?

The cost of windows, doors, and metal or asphalt roofs that meet or exceed the Energy Star program requirements qualify. Installations costs do not count towards the cost.

A natural gas, propane or oil water heater that has an energy factor of at least 0.80 or a thermal efficiency of at least 90%. For property placed in service after February 17, 2009, the property must have an energy factor of at least 0.82.

A central air conditioner that achieves the highest efficiency tier that has been established by the CEE as in effect on January 1, 2006. For property placed in service after February 17, 2009, the property must achieve the highest efficiency tier established by the CEE as in effect on January 1, 2009.

A natural gas, propane, or oil furnace or hot water boiler that achieves an annual fuel utilization efficiency rate of at least 95. For property placed in service after February 17, 2009, the annual fuel utilization efficiency rate is reduced to 90.

Also, check PSE&G’s website to find out if your purchase qualifies for state rebates.

Thinking of Starting a New Business?

2010-03-01T12:54:00.000-08:00

Starting a new business can be an exciting endeavor. You get to be your own boss, create your own hours, and possibly achieve a greater sense of satisfaction. But what should you do to make sure your business is successful?

Proper planning goes a long way, and a business plan is an excellent starting point. A business plan should contain the following information1:

General Company Description: What will your business do? What are your goals? What do you expect of the industry you will operate in? Will your business be structured as a sole-proprietor, partnership, corporation, or S-corporation?

Products and services offered: If you are a contractor, which type of construction will you perform - residential, commercial, or both? Will you be a general contractor or have a specialty such as plumbing? What are your competitive advantages and disadvantages?

Marketing: It is a good idea to perform some type of market research to make sure there is demand for your products or services. How will you obtain customers or clients? Will you serve a specific industry or niche?

Operations: What will the daily operations of your business look like? Generally, how will you run your business and manage employees.

Management and Advisors: Most likely you will be managing all aspects of your business during the beginning stages. You must realize though, that you cannot be an expert in everything. Advisors will help you to start off on the right track, save you time, money, and keep you out of trouble. A short list should include at a minimum: a CPA, attorney, insurance agent, banker, and a mentor. Never underestimate the value of a qualified professional advisor!

Start-up Expenses: You will need to estimate your expenses to start your business even before you begin operations. Some expenses can include legal fees, accounting fees, office equipment, software, machinery, vehicles, insurance, and marketing expenses. You need to know how you will pay for these expenses also. The funds may come from financing or personal funds used to capitalize the business.

Financial Plans & Projections: This should include a projected profit and loss statement for at least the first year, but it is also helpful to project the first 3 years, which is what I recommend. You want to make sure that when accounting for sales, the number is realistic and you can state how you will achieve this number. This also coincides with your marketing plan.

There is a lot to consider when starting a new business, but it is important to be thorough to insure its success. A little planning goes a long way to help your business start off on the right foot and avoid costly mistakes. Business planning is so important that it even makes sense for existing business to create a business plan to get back on track and take advantage of opportunities.

1 Sample business plan at score.org

Deductibility of Donations for Haiti

2010-02-01T13:07:00.000-08:00

The earthquake in Haiti was a tragic event, as hundreds of thousands of people lost their lives. Many people have reached into their pockets to make donations – many by text messaging through their mobile phones.

When making qualified charitable donations, taxpayers who itemize realize a tax benefit during the year of their contribution. But, due to a recent special relief provision, taxpayers can actually deduct qualified contributions made this year for Haiti relief on their 2009 income tax return.

To qualify, contributions must be made after January 11, 2010 and before March 1, 2010. Donations must be made by cash, credit card, text messaging etc., but property donations do not count. Keep this in mind when filing your 2009 tax returns to realize a much quicker tax benefit than usual.

Saving Energy Can Give You a Tax Break

2010-01-11T07:55:00.000-08:00

If you purchased energy-saving equipment for your home during 2009, or will during 2010 you may be eligible for a tax credit. The credit is equal to 30% of the cost, usually up to a maximum of a $1,500 credit.

Specifically, there are two separate credits, with the first being the Nonbusiness Energy Property Credit. This credit applies to homeowners who purchase high-efficiency heating and air conditioning systems, water heaters, stoves, and the cost of installation. Additionally, energy-efficient windows, doors, insulation, and roofs may also qualify, but the installation costs don’t count. The credit is equal to 30% of the qualifying cost up to $5,000 for a maximum credit amount of $1,500.

The second credit is the Residential Energy Efficient Property Credit. This credit is for someone who is looking to invest large sums of money to save on energy costs. The credit amount is also equal to 30% of the cost of equipment, but there is usually no limit to the credit amount. Qualifying equipment includes solar hot water heaters, solar electric systems, geothermal heat pumps, and wind turbines.

To determine if the equipment you purchase qualifies for these tax credits, you will first need to check the manufacturer’s tax credit certification statement. Not all energy efficient equipment qualifies, which is why it is important to do your research before making a purchase.

Frequently Asked Questions (and Answers)

2010-01-11T07:53:00.000-08:00

I thought that it would be informative to list some of the questions that I have been recently asked, along with the answers. I can only guess about the future of the estate tax for 2010 and beyond, but I will have an answer about this once legislation is actually passed.

Q: What is the IRA contribution limit for 2009 and the due date?

A: The maximum amount is $5,000 with a catch-up contribution of $1,000 for taxpayers over age 50. There may be a limitation of the deductibility of traditional IRA’s if you have a retirement plan at work, and there is an income limitation for the contribution of Roth IRA’s. The due date is 4/15/10 for 2009 contributions.

Q: Is it better to file a separate tax return from my spouse?

A: Also known as “Married Filing Separately,” usually results in a higher amount of taxes being paid, but can be advantageous in certain situations. We always do an analysis to see if this is better for our married clients.

Q: Does an extension also extend the amount of time I have to pay my taxes?

A: An extension only extends the amount of time to file your return, but if you owe taxes, then you will incur penalties and interest.

Q: Do I need to keep receipts for my donations?

A: Yes, you need receipts for all donations, but if the donation was less than $250, a cancelled check is sufficient.

Q: Should I pay my property taxes ahead of time so that I can deduct that payment on my return?

A: It depends on which year you expect to be in a higher tax bracket. You must also take into consideration if you are not subject to the AMT tax, which leads to the next question.

Q: What is the AMT tax?

A: AMT, which stands for “Alternative Minimum Tax” is a tax that parallels the income tax. It was originally design to prevent wealthy individuals from paying zero income taxes. The most common difference between these two taxes is that the AMT does not allow for the deduction of state and local taxes. Taxpayers are responsible for paying whichever tax is greater.

Q: Do I have to make estimated tax payments, and If so, why?

A: Usually self-employed taxpayers, retirees, and anyone who has income from sources that do not have taxes withheld are required to make quarterly estimated tax payments. If you need to make estimated payments and do not, you may be subject to underpayment penalties.

Expanded First-Time Homebuyer Credit

2009-12-04T06:53:00.000-08:00

The first-time homebuyer credit has been extended and is now also available for long-time homeowners. This is currently one of the most generous tax breaks for individuals.

Here’s how it works for a first-time homebuyer: a first-time homebuyer is eligible for a credit of $8,000 if they purchase a principal residence before April 30, 2010 and close before June 30, 2010. In order to qualify for the full credit amount, your modified adjusted gross income cannot exceed $125,000 or $225,000 for married couples filing jointly. The full phase-out amounts are $145,000 or $245,000 for married couples filing jointly to receive a partial credit. This is an increase to the original income limitations of $75,000 or $150,000 for joint filers.

For long-time homeowners: after November 6, 2009, long-time homeowners are eligible for a credit of $6,500 if they have lived in the same principal residence for any five-consecutive year period during the period that ended on the date the new home is purchased. The same income limitations apply.

Along with the new law there are also some newer restrictions. The credit is disallowed if the purchase price exceeds $800,000, you must be at least 18 years old on the date of purchase, and a dependent is not eligible for the credit. Since this credit is so generous and fraudulent returns have been filed, the IRS now requires a settlement statement to be attached to the return. The IRS also has the authority to deny the credit without having to audit your return.

Buy or Lease?

2009-10-30T11:08:00.000-07:00

When thinking of buying vs. leasing we usually think of cars, but did you know that you can lease just about anything? Personal computers, apartments and houses, business equipment, and even employees can all be leased. Which is the best way?

First, there is no best way because each decision should be made on an individual basis. I know that we want to know an exact answer, but there really is none. Let’s look at buying vs. leasing a car for a business owner.

If you lease a car for your business you are generally able to deduct your lease payments as expenses. When financing or buying the same car you will generally be able to deduct your interest payments and a portion of the purchase price as depreciation, which may be an amount that is lower than your loan payments.

It sounds like leasing may be a better deal, right? In many cases it is for tax purposes, but did you know that you may be eligible to take an extra $8,000 in depreciation expense during 2009? For this year financing or purchasing a car is usually more beneficial from a tax standpoint. But are taxes the only factor to consider?

Other factors to consider are how long you intend to keep your car, how many miles you drive, how well the car maintains its value, or just personal preference (meaning that you may want to drive a newer car every two to three years). The decision should be thought out carefully, and similar questions should be asked when purchasing or leasing other items, such as computers, equipment, or furniture.

Estate Planning Basics

2009-10-26T13:13:00.000-07:00

No one wants to think of the inevitable, but there are some basic points regarding estate planning we should all know. There are complex trusts and gifting strategies that can be incorporated, but let’s talk about first things first. Do you have a will? How do you own your assets? Are your beneficiaries updated in your insurance policies or retirement plans?

A will is your last will and testament, which spells out your wishes when you become deceased. With a properly set-up will, your assets will transfer to the beneficiaries you desire. Without a will your assets will be distributed according to state law, and your spouse or children may not receive all of your assets. Additionally, if you have children you will need to appoint a guardian to take care of them. It is important to see a qualified attorney to handle this for you. Do not attempt this yourself. We can refer you to an attorney that best fits your needs.

The way you own assets also affects the way assets are distributed upon death, such as your house. The two ways are tenants in common and joint tenancy. As tenants in common, your share of the house is passed to your heirs designated in your will. With joint tenancy, your share is passed to the surviving joint tenant, regardless of what your will states. It is important to make sure your assets are owned in the way that best suits your needs.

Life insurance is separate from your will. You will need to designate a beneficiary when purchasing a policy, and the same applies to your retirement accounts. Upon death the proceeds will be automatically transferred to your beneficiaries. This is why it is critical to update your beneficiaries periodically. Can you imagine if you are divorced and never changed your life insurance beneficiary who is now your ex-spouse? The answer is obvious – your ex-spouse will be very happy!

Many people tend to think that estate planning is only for the wealthy or they don’t need an estate plan. It can be a costly mistake to feel this way, especially since simple wills are not very expensive, and it doesn’t cost money to change your beneficiaries of your life insurance or retirement plans.

Are You Forgetting About Your Old Corporation?

2009-10-21T14:25:00.000-07:00

You have a great idea for a new business, so you naturally take the next step to move your idea forward. You incorporate your business. This may be a wise choice to make, but what happens if your new company never becomes active and you ignore it? Or what about a corporation you have that was once active and is now dormant? Should you really care anymore?

When you own an inactive corporation that you have been ignoring, this can create an ever-enlarging tax liability. Even though the corporation is inactive, you are still required to file federal and state income tax returns and possibly sales tax returns.

A New Jersey corporation still continues to be liable for minimum corporate taxes, even if it doesn’t have any income or assets. The minimum tax is currently $520, which can easily double after several years go by due to interest and penalties. Between late filing penalties, late payment penalties, and interest assessments, there is no escape. If your corporation was registered to collect sales taxes and has no longer been submitting sales tax returns, the problem becomes worse. Additionally, the IRS assesses monthly late fees for unfiled corporate and partnership returns.

I think that I am making my point that you need to take action. I have been coming across this situation more and more. If you have an old corporation or partnership, please contact our office so that we can advise you on the proper course of action.

What is the Difference Between an LLC, S-Corp, C-Corp, and Sole Proprietor?

2009-09-14T07:50:00.000-07:00

Business owners have several choices of how they can operate their business. The decision should be well thought out and be able to meet your objectives. Here are some of the pros and cons of each structure:

The easiest form of operating your business is as a sole proprietor. A sole proprietor has a lighter administrative burden because you account for your business activity on your individual tax return. Also, you may not need to file quarterly payroll tax returns, and may not need worker’s comp insurance. The downside to operating as a sole proprietor is unlimited legal liability, high self-employment taxes, and a greater potential to be audited by the IRS.

A limited liability company offers greater legal protection than a sole proprietor, and is also extremely flexible. You may have the option to be taxed as a sole proprietor, partnership, C-corporation, or S-corporation. Usually, single-member LLC’s are taxed as sole proprietors, which means that you have the potential to pay high self-employment taxes.

A C-corporation offers legal protection like an LLC. The drawback is that you have to abide by more legal formalities, and also pay corporate taxes. Then, when you want to distribute the profits, you will pay taxes yet again as a dividend. C-corporations have their place, but are generally suitable for larger corporations.

A variation of the C-corporation is the S-corp. An S-corp operates just like a C-corporation, but avoids the corporate level tax by taxing profits on the owner’s individual tax return and potentially saves self-employment taxes. The downside to an S-corp is a higher administrative burden.

As you can see there are many pros and cons to each business structure and the decision should not be taken lightly. If you are thinking about choosing or changing your business structure, please call our office so we can advise you.

NJ Homestead Rebate and Senior Freeze Deadlines Extended

2009-08-26T19:27:00.000-07:00

The filing deadline for the New Jersey Homestead Rebate and Senior Freeze has been extended to November 2, 2009. The eligibility requirements for the Homestead Rebate have tightened due to budget constraints.

The first requirement for the Homestead Rebate is that you must have owned and occupied a home in New Jersey that was your principal residence on October 1, 2008. If you are age 65 or older, blind, or disabled you must have income of less than $150,000. For homeowners under age 65 you must have less than $75,000 of income.

For homeowners age 65 or older, blind, or disabled the maximum amount of the rebate is $1,200, which is calculated as a percentage of your property taxes. For homeowners under age 65, the amount is 20% of your property taxes if your income is lower than $50,000 and 13.34% of your property taxes if your income is between $50,001 and $75,000.

To be eligible for the 2008 Senior Freeze Program, you must be age 65 or older, lived in NJ for the past 10 years, lived in your home for at least 3 years, have paid the full amount of property taxes, and meet the income limitations.

To apply for the 2008 reimbursement, your income for 2007 must be $60,000 or less, and $70,000 or less for 2008. For the 2009 program, the income limitation increases to $80,000 for 2009, while remaining unchanged at $70,000 for 2008. Applications for the 2009 program will not be available until February 2010 or later.

FSA Plan = Money Saved

2009-07-23T12:21:00.000-07:00

What exactly is an FSA plan and how can it save you money? FSA stands for flexible spending account, which is a special account that is used to pay for medical expenses on a pretax basis. In other words, the money put towards the plan is not subject to income taxes and social security/medicare taxes.

An FSA plan must be set-up by your employer for the benefit of its employees. For this reason, sole proprietors, partners, and S-corporation owners are not eligible to participate. Each year you need to decide how much money you want to put towards the FSA plan, which will then be deducted equally from each paycheck. For example, if you decide to put aside $1,200 and you get paid twice each month, then $50 will be deducted from your paycheck. For a person in the highest tax bracket the tax savings would be over $500 each year!

There are of course some drawbacks to an FSA plan from both an employee and employer perspective. First, if you don’t use the full amount that you elected to set aside by the end of the year, then you will forfeit the money to your employer. The best way around this is to set aside the absolute minimum that you project you will need for medical expenses. Additionally, even if you come up a little short, the tax savings may still be much greater than the shortfall.

The drawback to the employer is the extra cost of for administration of the plan, although it is offset partially by the social security/medicare tax savings. Another point is that if an employee leaves during the beginning of the year and has already spent their maximum, you cannot ask the employee to repay you back. This is why you want to set the threshold to a reasonable level so you lower your risk.

We all seem to be paying more and more for healthcare, but the FSA plan is one way to help lower our costs by lowering our taxes. Regardless of what the current administration elects to implement regarding healthcare, an FSA plan should still remain a viable way to help us out.

Tax Law Changes and Updates for 2009

2009-07-17T11:45:00.000-07:00

There are many tax law changes for 2009 that can save taxpayers hundreds to even thousands of dollars in taxes. Here is a list highlighting some of these changes:

A tax break on the purchase of a new car. This break allows taxpayers the ability to deduct the sales taxes they pay on a new car regardless of whether they itemize or not. The vehicle must be purchased between February 16, 2009 and December 31, 2009. Additionally, there is a phase-out for joint filers with incomes greater than $250,000 and single filers with incomes greater than $125,000.

A suspension of Required Minimum Distributions from retirement plans for 2009. This benefits retirees who are required to take distributions from their retirement accounts after reaching age 70½, but do not need to. By not taking distributions, it gives your retirement account a chance to grow after the downturn of the markets during 2008.

Bonus depreciation for equipment purchases. This benefit is extended for businesses that purchase equipment during 2009. An additional 50% of the purchase price can be expensed during the first year.

First-time homebuyer credit. First-time homebuyers may be eligible to receive a credit of up to $8,000 if they purchase a home before December 1, 2009. Prior year purchases between April 8, 2008 and December 31, 2008 may be eligible for a $7,500 credit.

Getting the Most from Your Deductions

2009-07-13T11:08:00.000-07:00

No one likes to pay any more taxes than they have to. One simple way to avoid this is to get the most from your deductions and expenses. This means keeping track of all of your tax deductible expenses throughout the year. Once the last-minute rush to gather up all of your receipts begins, expenses are often overlooked that can reduce your tax liability.

Here is one strategy for charitable contributions: each time you make a charitable contribution, obtain a written receipt to acknowledge your donation, which should contain the name of the charity, the date, and the amount contributed. When donating household goods, such as clothing, you can use a guide, such as the one at www.salvationarmyusa.org to determine the value of your donations. Please note that the IRS does not allow a deduction for contributions without a proper receipt or a cancelled check (for amounts under $250).

Keep track of unreimbursed employee expenses. As always, you should keep your receipts for any business expenses that you pay out of pocket. These can include tolls, parking, gas, meals and entertainment, dues, subscriptions, advertising, and marketing. Additionally, if you use your vehicle for your job, keep track of your business and overall mileage. It will be well worth the savings come next tax season.

One more way to better keep track of expenses is to reconcile your bank statements to your checkbook. This is true whether you use QuickBooks, Quicken, or a pencil and paper. By reconciling your checkbook, it insures that you are capturing all of your expenses, such as bank fees, or checks that you forgot to record. Both businesses and individuals can benefit from reconciling their books.

Keep all of your receipts in one place or in an envelope – whatever works best for you. Usually the extra effort is worth the hassle, especially because it makes you more conscious of what you are doing with your money.

Are You Backing Up Your Data?

2009-07-12T17:58:00.000-07:00

Most of us use computers for both our businesses and personal lives. What would happen if the information in our computers was lost or destroyed? Would you lose valuable information to run your business, such as the amounts due from your customers? What about the 1,200 pictures that you took with your digital camera over the last five years? Here are a few simple options for backing up your data:

Offsite remote backup: There are many companies out there that will backup your data remotely and securely over the internet for a nominal cost. For instance, QuickBooks can backup your QuickBooks data for as little as $4.95 a month. Plenty of companies are out there that will backup your entire hard drive, but you need to make sure that the company is both reputable, financially strong, and that your data is secure.

External or Second Hard Drive: Starting at less than $100, you can purchase an additional hard drive that backs up your data on a regular basis. This is not very difficult, as the hard drive can be connected to a USB drive, along with installing the backup software, and now you are ready.

These are just some of the most basic ways to backup your data, but it is always advisable to speak to a computer consultant when dealing with complex issues.

New Jersey Budget Creates Tax Hikes

2009-07-10T13:21:00.000-07:00

New Jersey just passed the budget for its current fiscal year, which includes additional tax hikes. Some of the tax hikes affect corporations, property tax deductions, an increase to income tax rates for certain taxpayers, and alcohol.

If you own a NJ corporation you have probably noticed that over the past several years you have been paying a 4% surtax on your corporate tax liability. For instance, if you owe just the minimum corporate business tax of $500, your actual liability is $520. Unfortunately, this surtax has been extended for one year.

Income tax rates for taxpayers filing jointly have changed if you make over $400,000 as follows. Additionally, the top tax rate increases to 10.75% for those making over $1,000,000. Although this tax change does affect only high income earners, it actually gives high income taxpayers an incentive to move out of state such as to Pennsylvania to save taxes. Only time will tell if this actually happens with any significance.

The property tax deduction has been scaled back so that if you have gross income of more than $250,000 and are younger than age 65 you will not receive a property tax deduction from your NJ taxes. If your income is between $150,000 to $250,000 your deduction will be capped at $5,000.

Wine drinkers, smokers, and anyone who drinks hard alcohol will also pay additional taxes. The tax on cigarettes is now $2.70 per pack, an increase of $12.5 cents. Starting August 1st, the taxes that retailers pay to manufacturers and distributors of hard alcohol, wine, and apple cider (the alcoholic kind) all will increase. Of course the increase to retailers will be passed on to consumers. I think that lawmakers are encouraging us to drink more beer (no tax increase this year) and to quit smoking.

Yes, there is one last tax increase for gamblers – all NJ lottery winnings greater than $10,000 are subject to NJ income tax.

An Overview of IRS Audits

2009-07-09T12:11:00.000-07:00

I recently spoke to a group of business owners about the different types of IRS audits. The first and least complex is the correspondence audit, next is the office audit, and lastly and most complex, the field examination. I highly recommend to anyone who receives a letter from the IRS, or even the State of NJ, to contact their tax advisor as soon as possible.

The correspondence audit is the most commonly used audit of all three types of audits. It starts with a letter issued from the IRS stating that a change has been made to your tax return, such as for dividend income that you failed to report. Assuming in this case the IRS is correct, you will need to submit the additional tax assessed on the unreported dividends, along with interest to the IRS. If the IRS is not correct and you disagree then you will need to provide an explanation to prove that you do not owe additional taxes.

Since correspondence audits are very cost effective for the IRS, they do also send letters for specific deductions, such as charitable contributions, to request substantiation for your deductions. This is why it is extremely important to keep all receipts for your deductions, because without any proof that you made donations, your deduction will be disallowed and additional taxes and interest will be assessed.

The next audit, the office examination, takes place at one of the field offices of the IRS by a local agent. Although more complex than a correspondence audit, the agent usually focuses on a select number of items. It is very important to be very prepared for this type of audit because it can lead to the agent broadening the scope of the audit.

Lastly, and most in-depth, is the field examination. This involves an IRS agent visiting your place of business or possibly your home. The agent requests much more information and asks a lot more questions. Again, it is very important to be well-prepared for this audit. It is also crucial to communicate with and work closely with your tax advisor.

After completion of an audit, there can be several outcomes. The first is an assessment of additional taxes, interest, and/or penalties, the second is no change to your tax liability, and third you may actually be due a refund. You can also appeal an assessment, which we will talk about in a future article.