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For Small Businesses and Taxes, It's the Year of the 1099s

2012-01-24T05:31:00.001-08:00

Do you owe your mother a gift for her birthday? If yes, do you plan on getting her one? If that reads like an interrogation designed to whip your conscience into shape, it is.

It's also the type of passive-aggressive inquiry that self-employed and small-business owners face this tax season. Only it won't be regarding their mothers. It'll be about paying Uncle Sam.

Congress and the Internal Revenue Service are on a mission to cut down on unreported income.

One initiative involving credit card payments created so much additional work and complaint from the finance industry that the IRS already backed down and postponed it for a year.

But a second -- a two-question grilling at the top of a couple of tax forms -- lives on, likely to entrap a few of you.

New questions on Schedules C and E

If you have profits or losses from a business, a rental, a partnership, an estate or a trust, you file Schedule C or E with your federal 1040 return.

At the top of the 2011 versions, you'll find these new zingers:

"Did you make any payments in 2011 that would require you to file Form(s) 1099?"

"If 'Yes,' did you or will you file all required Forms 1099?"

Form 1099s are information returns. They make the IRS aware that someone else has received income from you.

Generally speaking, if you paid any one person or entity $600 for services last year, tax law requires you to send them and the IRS a 1099-MISC. That MISC is for "miscellaneous" income.

Not everyone does that right now, accountants say. Consider the small building contractor who pays his painter, drywaller and other subcontractors in cash. He might not have filled out a 1099 for each. A self-employed consultant who pays a graphic artist $600 for marketing material must file one, too.

This year, for the first time, the IRS is reminding all these taxpayers of their legal obligation directly on tax forms. They're also getting taxpayers on record as to whether they complied.

See what I mean. It's "Law & Order: Special IRS Agents Unit."

"Taxpayers who don't handle these questions the right way are opening themselves up to penalties," said Troy Thompson, a tax lawyer and certified financial planner in Portland. "Perhaps not fraud, but I do expect vigorous assertion of the penalty for intentionally disregarding the requirements."

That could be up to $250 for each 1099 the IRS didn't get and $250 for each 1099 a contractor didn't get, with no cap on the amount. The IRS also might disallow expenses claimed as deductions if they're not documented as they should be on 1099s, Thompson said.

For a while, it looked as if landlords would have to worry about this, too. But last spring, Congress repealed requirements that rental property expenses be documented on 1099s. Only in limited cases do rental property owners need to issue 1099s, said Benson Goldstein, senior technical manager at the American Institute of CPAs.

The deadline to comply with these requirements is coming up. Most 1099-MISCs must be mailed to contractors by Jan. 31. They must be sent to the IRS by Feb. 28, though you have until March 31 if you file them electronically.

"Putting these kinds of 'gotcha' questions on the return is an increasingly common and I think potentially very effective tool in tax administration," Thompson said.

1099-Ks

A second change involves how electronic payments get reported to the IRS. It seems aimed squarely at keeping eBay sellers honest, but affects far more businesses.

A new law requires payment-settlement entities -- the banks, Visas, MasterCards and PayPals of the world -- to report transactions directly to the IRS. PayPal and similar third-party networks need do this only for merchants who bring in $20,000 and conduct 200 transactions a year.

These payments are supposed to be reported on a 1099-K to both the IRS and the merchants. The IRS expected to receive 53.8 million such forms this season.

Payment processors threw such a fuss about complying with this new law that the IRS in November announced it wouldn't penalize anyone this year who failed to comply. But they're still supposed to go out.

Your business might have a new obligation under this law as well. If you issue a 1099-MISC to a vendor or subcontractor, you're supposed to exclude any amounts paid by debit, gift or credit card or PayPal. That's to avoid duplicate reporting to the IRS.

Payments by cash or check, however, still must be included on those 1099s.

That's going to complicate bookkeeping for coffee shops, restaurants and contractors. It could actually lessen paperwork for those who make all vendor payments electronically.

"I might suggest pay credit card all the time," said Goldstein of the CPAs group. "Therefore, I don't have to issue 1099s."

Others predict many businesses will mistakenly include card payments, meaning some income will get reported twice.

"It's going to be a headache," said Greg Rogers, a certified public accountant in Oregon City.

Valerie Calley, owner of Oregon Trail Yarn & Books in Milton-Freewater, says this new requirement won't hamper most eBay business. She downloads PayPal transactions directly into her QuickBooks accounting software and pays taxes on all Internet sales.

"The 1099-K will be just one more piece of paper to give to the tax accountant," Calley said via e-mail. "I don't think Congress will realize the increased revenue they hoped for from the enhanced reporting requirements."

A spokeswoman for Intuit Inc. said its 2012 QuickBooks and TurboTax software will help users identify and exclude electronic payments from their 1099-MISCs. Instead of upgrading, customers with older QuickBook versions can also download a 99-cent app to exclude such payments.

That's good news for business owners who keep good records. Not so for others.

"A lot of small businesses, frankly, don't pay real good attention to their bookkeeping," said Susan High, licensed tax consultant and owner of Clackamas Income Tax & Accounting Inc. in Gladstone. "Especially ones that try to do it themselves."

It's Only Money believes you can do finances and taxes yourself. But if you're overwhelmed or panicked, seek help. Over the next couple of weeks, I'll explain the types of tax preparers you can use and how to best pick one.

Watchdog: Growing IRS Workload Hurting Taxpayers

2012-01-17T06:45:00.001-08:00

January 11, 2012 (Associated Press) — WASHINGTON - The Internal Revenue Service can't keep up with surging tax cheating and isn't sufficiently collecting revenue or helping confused taxpayers because Congress isn't giving it enough money to do its job, a government watchdog said Wednesday.

To cope with its growing and increasingly complex tasks, the agency is relying more on computer software designed to weed out fraud, Nina E. Olson, the national taxpayer advocate, said in her annual report to lawmakers.

But errors are abundant, creating additional work for the agency when taxpayers dispute its findings, the report said. The agency's use of computer systems sometimes ends up eroding taxpayers' rights, and people are having a harder time getting through to the IRS by telephone or letter, she said.

"The overriding challenge facing the IRS is that its workload has grown significantly in recent years while its funding is being cut," said Olson, an independent watchdog within the IRS. "This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers - and at the same time reduces the IRS' ability to deliver on its core mission of raising revenue."

IRS spokeswoman Michelle Eldridge said to combat burgeoning cases of fraud, the IRS uses congressionally approved compliance programs that are constantly audited to make sure people's rights are protected.

"While fewer dollars in a tight budget environment impacts elements of taxpayer service, it does nothing to erode our protection of taxpayers," she said.

By pointing her finger at the IRS budget, Olson was highlighting a politically sensitive issue. Especially in times of huge federal deficits, many lawmakers have shown little interest in being generous to the widely unpopular agency, which processes 141 million individual tax returns annually, including almost 120 million requests for refunds.

Congress cut the IRS budget to $11.8 billion this year. That is $300 million less than last year and $1.5 billion below the request by President Barack Obama, who argued that boosting agency spending would fatten tax collections and improve service.

Those arguments did little to persuade lawmakers.

"Like families across the country, the IRS will have to do more with less," Rep. Jo Ann Emerson, R-Mo., who heads the House Appropriations subcommittee that controls the agency's budget, said last fall.

Olson's report came days after the IRS estimated that people and companies underpaid their taxes by a huge $385 billion last year after audits and other enforcement efforts, compared with around $2.3 trillion the agency collected. Those underpayments come as lawmakers hunt ways to pare federal deficits exceeding $1 trillion yearly.

"Yet obtaining a little extra money to bring in a lot of extra money remains an intractable challenge for the IRS, and that is unfortunate," the report said.

Underscoring the IRS' volume of work, the report said the agency contacted taxpayers 15 million times in 2010 to change their claimed tax liability. Only 1 in 10 of those contacts was considered an audit, meaning most were denied the additional rights audits allow, including the ability to go to tax court.

The agency's increased reliance on computers means it is having less personal contact with taxpayers. The IRS is increasingly using "practices and procedures that harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage or allow taxpayer response," the report said.

It said the number of returns seeking refunds that agency computers set aside for screening for possible fraud grew by 72 percent, to 1.1 million, from 2010 to 2011.

The report blamed growing numbers of people who submit multiple false returns via electronic filing. The growth of refundable tax credits for purchases of first homes, college costs and other expenses is also encouraging bogus claims, since refundable credits can produce cash payments to people owing no taxes.

Olson's report said the IRS handled more than 226,000 cases claiming identity fraud in 2011, a 20 percent increase over 2010. Thieves often request refunds by using the Social Security number of a person they falsely claim as a relative, frequently early in the filing season before the actual taxpayer submits his or her return.

"You want to make sure you're not abusing the taxpayers by letting dollars go out the door," Olson said in an interview. Otherwise, "taxpayers are going to get disgusted" and lose faith in the tax system.

In one measure of errors, Olson's bureau received 21,000 complaints from taxpayers last year after the IRS blocked requested refunds because it suspected fraud. Three in four of them eventually qualified for the refunds, which averaged $5,600 and typically took six months to reach taxpayers.

In addition, the IRS corrected 10.6 million "mathematical errors" in taxpayers' returns in 2010, more than double the 4 million it corrected in 2005, the report said. But the IRS itself made mistakes - out of 300,000 returns on which it disallowed exemptions for dependent children, it had to restore the exemption just over half the time.

The report said that at the end of last year, it took the agency more than six weeks to answer nearly half of taxpayers' letters and faxes dealing with adjustments to their returns. The agency does not accept emails from taxpayers, Olson said.

And between 2004 and last year, the portion of taxpayers' phone calls the IRS answered fell from 87 percent to 70 percent.

"Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every 10 calls," the report said.

Highlighting tax code complexity, 4,428 changes have been made to the 3.8 million-word code over the past decade, the report said, including an estimated 579 changes in 2010.

Top Four End-of-Year Financial Planning Tasks

2011-12-20T06:08:00.000-08:00

Between turkey and holiday cookies, don't forget the most important type of planning you should do this year, financial planning. M&I, a part of BMO Financial Group, offers these four aspects of your finances everyone should review before 2012 arrives.

Budgets: Review your monthly budget and track your spending. Keeping track of where your money is being spent will highlight unnecessary expenses. Begin saving today. A savings account can help when life throws an unexpected curve ball. Ideally, build an emergency fund that could pay your necessary expenses for six months.

Creating budgets with your children is also a great way to teach kids about money and the difference between a need and a want. Our Helpful Steps for Parents tool provides parents with tips, games, and strategies to help teach children financial literacy. Visit www.bmoharris.com/parents to learn more.

"The Helpful Steps program starts with kids as young as five years old," said Jim Sathre, senior vice president, retail banking for M&I. "Giving kids a financial education will prepare them for every stage of life, from saving for college to buying a house."

Retirement: Examine how much you've been putting in your retirement account this year. If possible, plan to contribute the maximum allowable amount to your 401(K) and take advantage of your workplace retirement plan to gain matching contributions. If your workplace does not have a matching program consider a Roth IRA.

College: College planning is essential for every family whether you are just starting out or are planning to support a grandchild's education. If you have not started preparing for future college expenses, start now. College savings plans can offer considerable tax benefits. Each state offers residents a 529 college savings plan that provides tax benefits or other perks to help parents and students prepare for college bills.

Investments: Invest wisely. Investigate investment options to determine which is best to meet your financial needs. A few options include money market accounts, CDs and government bonds, and IRAs. Solid investments may reap dividends in the future.

We all know how important it is to save money and prepare for the future and reviewing your budget and investments will ensure you're meeting your financial goals.

Top 12 Financial Planning Strategies for 2012

2011-12-13T05:11:00.001-08:00

December 6, 2011 (Business Wire) — The Financial Planning Association (FPA) of San Francisco announced today the top 12 financial planning strategies for individuals to consider for 2012.

Ranging from developing a comprehensive financial plan, putting in place a disciplined savings program to diversifying portfolios and benefitting from the latest tax changes, these comprehensive tips and advice will help investors start 2012 on the right financial footing.

#1. Get Started Today

If you spent much of 2011 in denial or ignoring what you know you needed to do financially, don't be embarrassed; you had plenty of company. The best way to come to grips with your financial future is to review your financial plan. If you don't already have one, make a plan. You'll want to analyze your asset base, your earning potential, and your spending. Most importantly, you'll want to review your goals. Are they still attainable, or even reasonable? You can do it yourself, but a professional financial planner has the knowledge and the tools to calculate what it will take to reach your goals while helping you manage your finances along the way to help you get there.

#2. Spend Less. Save More.

The best way to provide -- or recoup -- the money you will need in the future is to save more now. Here's a good way to start -- pay yourself first through payroll deductions into your 401(k) or savings account. Another place to look is at your credit cards. Instead of paying high credit card rates, you'll be earning market-beating 9, 12, 18, or an even higher percent. That's your return on every dollar you don't have to pay to a credit card company.

#3. Got lemons? Make Lemonade.

There is a positive side to stock market losses. Take advantage of the down market this year to harvest tax losses. Any losses not used to offset capital gains can reduce ordinary income by up to $3K in 2011, and the excess is carried forward into future tax years.

#4. Keep on Contributing to Your 401k

Continue putting away as much as possible into your employer retirement plan. If the contributions are on autopilot, you're less likely to come to a sudden stop when current events are discouraging. Also, dollars are invested throughout the year, so in a market that is up one month and down the next, you won't buy all your shares at high points and you'll get more shares at low points.

#5. Keep an Eye on a ReFi

With interest rates at all-time lows, it's a good time to explore if refinancing makes sense. You may find it preferable to refinance from a 30- year loan to a 15-year loan, as some institutions are offering 15-year loans at less than 4%. Run the numbers. You may find that the payment on a new 15-year mortgage is similar to an existing 30-year mortgage and would significantly reduce the amount of interest paid over the life of the loan.

#6. Assess a Reassessment

With the continuing decline in home values in many locations, homeowners should consider applying for a reassessment of their home value for property tax purposes. This is a relatively easy process that might save significant money, especially for those in expensive areas. The county assessor's office can provide you with the forms and process for requesting a reassessment.

#7. Update Your Estate Plan

Take a fresh look at your estate planning documents. The annual gift limit remains at $13,000 per donor per person in 2012, but the lifetime exemption of $5,000,000 in 2011 has been adjusted for inflation and will be $5,120,000 in 2012.Your financial planner and your estate attorney will know what these changes mean for your specific situation.

#8. Give a Gift or Make a Loan

Want to help out a family member who may be in dire straights, but don't feel comfortable making an outright gift? Loans to family members must use government-approved rates, or they will be taxed as gifts. It's called the Applicable Federal Rate, or AFR, and our low interest rate environment could make 2012 an excellent time to make loans. The current long-term AFR for loans more than nine years is 2.80% (compounded annually), and the short-term AFR for loans less than three years is only 0.2%

#9. Resolve to Review Beneficiaries

Use the start of the New Year to review all beneficiary statements for 401k plans, IRAs, and life insurance policies. Remember that retirement account assets pass by beneficiary statement and not by will; the same is true for life insurance policies. Every financial planner has stories of clients who divorce and never revise their beneficiary statements; the client dies and a life insurance policy or 401k is paid to the ex-spouse, leaving a current spouse or children with nothing.

#10. Keep Up with Contribution Limits

Take advantage of 2012 increases in retirement account contributions. The maximum 401k, 403b, 457 contributions increase to $17,000. Catch-up contribution for the over-50 set is an additional $5,500

#11. Keep Your Cool

Listening to the financial news wasn't easy in 2011 and we may face the same cacophony of doomsayers in 2012. Selling stocks when prices are down is not a successful long-term investment strategy. And remember -- when media headlines proclaim, "investors are dumping stocks," someone else is buying them.

#12. See a Financial Planner

Financial planners can help you navigate your way through these perilous economic times. No one knows what the future will bring, but a good planner can provide the kind of experience and objectivity that can bring clarity to difficult financial decisions.

If you have a financial planner, and you haven't updated your plan in light of recent economic realities, it makes sense to check if you're still on track, or if there are course-corrections you could make to improve the situation.

The Benefits of Working Longer .

2011-11-22T05:46:00.001-08:00

When it comes to saving for retirement, many Americans are playing catch-up. If you—or a relative—are among them, here is some good news: The belt-tightening required may not be as painful as you might think, provided you are willing to delay retirement for a few years.

According to a new study by the Center for Retirement Research at Boston College, a 45-year-old with no savings who earns $43,000 a year—the nation's average wage—would have to set aside about 18% of pay annually to maintain his or her current standard of living in retirement. (The math assumes a 4% return on savings.)

Such a target isn't much higher than the 12% to 15% annual savings rate many financial advisers recommend for clients in their 20s.

There is a catch, though: In order to maintain his or her standard of living in retirement, the 45-year-old must continue to work until age 70. In contrast, a 25-year-old who consistently saves 15% per year is likely to be able to afford to retire by age 65.

Part of the explanation has to do with Social Security. By putting off retirement until age 70, an individual would receive a benefit that is 75% higher than what he or she could claim at age 62, the earliest date of eligibility. Postponing retirement also gives 401(k)s and other retirement savings accounts additional years to grow. And it shortens the amount of time a nest egg must last.

To make it easier to meet your target savings rate, take advantage of any matching contributions your employer offers in a 401(k) or other workplace retirement plan.

And beware of shortcuts. In a bid to boost retirement savings, some may be inclined to ramp up exposure to equities, in the hope of earning a higher return over time. But such a move will expose them to greater downside risk—without delivering much additional retirement security should stocks fare well.

According to Boston College, a 35-year-old who sets aside 18% of his or her pay and earns a 4% rate of return will be able to retire at age 67; a 6% rate of return lowers the age to approximately 65.

12 Year-end Tax Planning Tips for Businesses and Individuals

2011-11-15T06:09:00.000-08:00

Managing a tax burden has never been more difficult, whether you’re managing your individual tax rates, the rates on your investments, the taxes on your privately held or pass-through business, or the income of executives and shareholders at your company. Lawmakers have been aggressively using the tax code to try to get the economy back on track, and there are now more ways than ever to reduce your tax liability – however, all of them take planning.

Fortunately, there’s still plenty of time to put last-minute planning techniques into play. But remember to consider your individual circumstances and consult a tax adviser. With that in mind, Grant Thornton offers the following 12 last-minute tax planning tips for individuals and businesses owners:

Accelerate deductions and defer income.
Why pay tax now when you can pay tomorrow? Deferring tax is a cornerstone of tax planning. Generally this means you want to accelerate deductions into the current year and defer income into next year. There are plenty of income items and expenses you may be able to control, and business owners and self-employed taxpayers often have the best opportunities. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes. But beware of the alternative minimum tax, which can affect timing strategies.

Bunch itemized deductions.
Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you get over these AGI floors. Consider scheduling your non-urgent medical procedures all in one year to clear the 7.5 percent AGI floor for medical expenses. To overcome the 2 percent AGI floor for miscellaneous expenses, bunch your pass-through business’s professional fees such as legal advice and tax planning, plus any unreimbursed business expenses such as travel and vehicle costs.

Maximize “above-the-line” deductions.
Above-the-line deductions are especially valuable because they reduce your AGI, and AGI is used to test whether you’re eligible for many tax benefits. Common above-the-line deductions include traditional Individual Retirement Account (IRA) and Health Savings Account (HSA) contributions, moving expenses, self-employed health insurance costs, alimony payments and any bank penalties you may have had to pay for early account withdrawals.

Consider charitable contributions carefully.
Think about giving appreciated property to charity so you can deduct the full value without paying capital gains taxes. But don’t donate depreciated property. Sell it first and give the proceeds to charity so you can take the capital loss and a charitable deduction. If you’re 70½ or older, consider making charitable donations directly from any traditional IRA distributions so the gift/distribution will not be included in your AGI. This provision is scheduled to expire at the end of this year. As always, double-check the limits and substantiation rules before making any contributions.

Leverage retirement account tax savings.
It’s not too late to maximize contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs still offer some of the best tax savings in the tax code. Contributions reduce taxable income at the time you make them, and you don’t pay taxes until you take the money out at retirement. The 2011 contribution limits are $16,500 for a 401(k) and $5,000 for an IRA (not including catch-up contributions for those 50 and older). Remember that 2011 contributions to your IRA can be made as late as April 15, 2012.

Roll over into a Roth account.
“Roth” versions of traditional retirement accounts, such as 401(k)s and IRAs, also provide a great savings opportunity. You don’t get a tax break when you put money into a Roth account, but the money grows tax-free and is never taxed again if distributions are made properly. Rolling over into a Roth account now may make sense. Tax rates are low, and the value of many accounts has been artificially depressed by the economic downturn. Paying tax on the rollover now could save you if tax rates go up and your account recovers. The $100,000 AGI limit on these rollovers was recently lifted, so even high-income taxpayers can convert. Understand that you will be required to pay tax on the converted amount and plan accordingly.

Expense business investments
Business owners have been given a great opportunity to save on taxes while investing in their businesses this year. Legislation enacted in 2010 doubles a bonus depreciation tax benefit for property a business places in service before the end of the year. Under this provision, you can fully deduct the cost of eligible equipment on this year’s return if you place the equipment in service by Dec. 31. To qualify for bonus depreciation, the property you place in service must be new and generally have a useful life of 20 years or less under the modified accelerated cost recovery system (MACRS).

Consider your salary as corporate employee-shareholder
If you own a corporation and work in the business, you need to think carefully about your salary structure. Your tax treatment will vary depending on whether you’re organized as a traditional C corporation or an S corporation (in which corporation income is “passed through” and taxed at the individual level). Distributions of corporate income are generally not subject to Medicare tax. That means if your business is an S corporation, you will pay Medicare tax only on business income received as salary, not income received as a distribution. C corporation distributions also escape Medicare tax, but are subject to a 15 percent dividend tax rate. So many C corporation owners will pay less overall tax on income received as salary (which is deducible at the corporate level), while S corporation owners will do better with more income received as dividends. But remember to tread carefully. You must take a reasonable salary to avoid potential back taxes and penalties, and the IRS is cracking down on misclassification of corporate payments to shareholder-employees.
Make up a tax shortfall with increased withholding.

Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall through increased withholding on your salary or bonuses. A bigger estimated tax payment can still leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year. To avoid any penalties, the best action plan is to make sure you pay estimated taxes equal to 110 percent of your estimated tax liability.

Don’t forget to use annual gift tax exclusion.
If you may have to pay estate taxes eventually, consider establishing a gifting program for your children and grandchildren to take advantage of the annual gift tax exclusion. Gifts of up to $13,000 per donee ($26,000 for married couples) are generally excluded from gift tax in 2011 and will be removed from your estate, with no limit on the number of donees. In addition, tuition payments to an educational institution for the benefit of your children or grandchildren are excluded from gift tax.

Watch out for the “kiddie tax.”
The “kiddie tax,” which requires a portion of a child’s unearned income to be taxed at the parents’ marginal rate, has been expanded to apply to full-time students under the age of 24 whose earned income does not represent at least one-half of their support. Be careful transferring income-producing assets to your kids.

Perform an overall financial checkup.
The end of the year is always a good time to assess your current financial situation and your plans for yourself and your business. You should think about cash flow, health care, retirement, investment and estate planning. Check wills, powers of attorney and health care proxies for changes that may have occurred during the year. Use the open enrollment period to reconsider employer-sponsored programs that could reduce next year’s taxable income. HSAs and flexible spending accounts for dependent care or medical expenses allow you to use pre-tax dollars. Remember, it’s never too early or too late to start planning for the future!

Keep in mind that these tax tips are general tax advice and may not be applicable to your particular circumstances. Make sure that you consult with your personal tax adviser before implementing any changes or additions to your tax planning strategy.

Should Your Clients Have Children Pay for Stock in the Family Business?

2011-11-08T05:53:00.001-08:00

Three strategies ensure how they can learn to earn and appreciate stock gifts.

Many parents who are business owners struggle not only with whether they want their children to take on ownership of the family business, but also with how to best transfer their ownership. The two obvious options are to gift or sell stock to the next generation.

This decision can be complicated further due to the circumstances leading up to the point when the next generation is ready to take on ownership. For instance, if the parents have been required to pay for their interest in the business, they may feel it should work the same way for their children. Another factor is the children themselves, who may be more or less interested in or capable of assuming ownership. Child A may have demonstrated strong potential and been even more successful than their parents in terms of operating the family business profitably, while Children B and C are less than fully engaged in the family business and thus have a lower probability of success.

I have even seen parents with multiple children who have started or bought additional businesses that are more in line with their children’s individual interests. In other cases, parents have established separate but equal leadership roles for their children within the family business to try to keep their children engaged in the parents’ dream of making them second-generation entrepreneurs. All of these variables can have an impact on whether parents decide to sell or gift ownership to children.

Some thoughts or emotions that may enter into having a daughter or son pay for interest in the family business include:

•They will value it more if they pay for it;

•We need our children to pay for the stock in order to fund our retirement needs;

•Siblings and co-workers may more fairly view the ownership transition if those receiving ownership have to pay for it.
In terms of gifting ownership, the overriding emotion is the pleasure that gift-giving provides to both the giver and the receiver. However, considering that many successful entrepreneurs provide a higher standard of living for their children than they personally experienced, gifting stock may exacerbate parental concerns about providing excessively for their children. Typical concerns along these lines include worries about creating a generation that is too materialistic; that continually expects bigger and better things; that has lost a sense of gratitude and may even have developed a sense of entitlement and boastfulness that is offensive to others and damaging to personal and business relationships.

What’re the Best Tax and Economic Approach to Stock Transition?

The short answer is that gifting is hands down the best approach to transferring ownership to the next generation. In fact, this option became even more attractive for gifts in 2011 and 2012, as a result of changes made by the 2010 Tax Relief Act. For these particular years, individuals with substantial wealth can take advantage of the $5 million gift-tax exclusion and the generation-skipping tax exemption in passing stock along to children. With the value of many companies depressed as a result of the economic recession we have experienced, the $5 million exclusion goes a long way.

A quick example may help demonstrate why selling stock to family members is not a good economic decision. Suppose you decide to sell your business to a child for $2 million. The selling price is subject to a federal capital gains tax of 15 percent plus state-income tax (let’s assume that the state income tax at five percent and that you have little or no stock basis). Your child has to earn approximately $3.3 million (assuming they are in a 40 percent tax bracket) to have $2 million to pay for the stock. Additionally, at your death, your estate will need to pay approximately $0.934 million in estate tax. The math on this transaction is reflected below to clarify what your client, the parent, really gets from the sale:

Gross sales proceeds $2,000,000
Less: Capital gains tax (1) (400,000)
Less: Estate tax (2) (700,000)
Net Proceeds $900,000

1.Note that the top marginal federal rate on stock sales is scheduled to increase to 20 percent beginning January 1, 2013, which will increase this amount in the future

2.Note that the above example uses a marginal federal estate tax rate of 35 percent that applies for 2011 and 2012, however the rate is scheduled to revert to 55 percent in 2013
When coupled with the $1.2 million dollars of tax the child will pay to get the $2 million of gross proceeds paid to the parent(s), it’s clear that this is an all-around losing proposition. Not only are your client and their children out the dollars paid in taxes, but they will both have lost the time value of money on the tax dollars.

How to Ensure Children Appreciate Stock Gifts?

A key ingredient seems to be developing successor leaders that have a solid understanding of what it takes to be successful in business as well as having them bring some valuable experience to the business. Possible ways to have them “earn” their equity and not officially pay for it include:

•Requiring them to work outside the family business before they can officially enter (after completing their college degree in a field relevant to the family business.)

•Setting milestones of commitment and achievement through an individual development plan designed to guide their career and growth as leaders in the business over an extended period of time.

•Easing children into greater ownership over time, such as awarding them non-voting shares so they can learn how to handle the privileges and responsibilities of ownership.
Conclusion

Having a well-conceived succession plan will address both the financial and leadership development aspects of the business for all generations of the family. With solid planning, the shares the parent gifts will feel a lot more like shares that their children have “earned”.

Since not all family businesses are interested or able to pass on ownership to children, in an upcoming issue I will divulge how an employee stock ownership plan can be used as an
employee- and tax- favored vehicle to facilitate succession.

Robert Half Releases 2012 Salary Guides

2011-10-18T05:48:00.000-07:00

The newly released 2012 Salary Guides from Robert Half International show U.S. starting salaries will increase an average of 3.4 percent next year.

Technology positions are projected to see the largest gains among all fields researched, with an anticipated 4.5 percent increase in base compensation. Accounting and finance professionals can expect starting salaries to rise an average of 3.5 percent, according to the research.

"Businesses seek professionals who can help them enhance their technology and accounting infrastructures," said Max Messmer, chairman and CEO of Robert Half International. "For many firms, the question isn't whether to implement improvements but how quickly they can find the talent to do so."

Following is an overview of hiring trends in the fields covered by the Salary Guides:

Accounting and Finance

The 2012 research forecasts an average starting salary increase of 3.5 percent for accounting and finance positions. Companies are hiring professionals who can identify and support growth opportunities, such as financial analysts and business systems analysts. Tax accountants who can help firms navigate complex corporate tax laws also are in demand.

Technology

Overall, base compensation for information technology (IT) professionals is expected to increase 4.5 percent in the coming year. Systems and networking engineers are in particularly strong demand as businesses look to expand their capabilities and transition to cloud computing. Mobile applications developers also are seeing demand for their services, given the proliferation of mobile devices.

Creative and Marketing

Professionals in creative fields can expect average starting salary gains of 3.5 percent in 2012, the research suggests. Those with interactive skills, such as user experience (UX) designers, are especially sought after as firms look to improve their web presence and transition many of their marketing programs online.

Legal

In the legal field, starting salaries are anticipated to rise 1.9 percent, on average, in the coming year. Lawyers with four to nine years of experience in high-growth practice areas -- such as litigation, labor and employment, real estate, and corporate law -- are seeing greater demand, the research shows.

Administrative and Office Support

Overall starting salaries for administrative professionals are expected to rise 3.4 percent in 2012. Companies that had streamlined support staff are now adding experienced executive and administrative assistants who can increase efficiencies, support key company projects and provide excellent customer service. Growth in the healthcare industry also is fueling demand for administrative personnel with experience in this sector.

About the 2012 Salary Guides

The newly released Salary Guides include:

-- 2012 Salary Guide from Robert Half for accounting and finance (www.roberthalf.com/salarycenter)

-- Robert Half Technology 2012 Salary Guide (www.rht.com/salarycenter)

-- The Creative Group 2012 Salary Guide (www.creativegroup.com/salarycenter)

-- Robert Half Legal 2012 Salary Guide (www.roberthalflegal.com/salarycenter)

-- OfficeTeam 2012 Salary Guide (www.officeteam.com/salarycenter)

All of the guides can be accessed at http://www.rhi.com/SalaryGuides. Salary calculators that can be used to determine average starting salaries in hundreds of local markets also can be accessed via the links to the Salary Guides above.

The Myth of Work/Life Balance

2011-09-27T05:57:00.000-07:00

The Myth of Work/Life Balance
Seven Ways to Rethink Your Approach to the Daily Grind

If you've been killing yourself trying to achieve daily work/life balance, Jon Gordon warns that it may be a pipe dream. He offers up another (better) solution.

In a perfect world, “work” and “home” would balance out neatly. We’d work from 8 to 5 each day, take an hour-long lunch, and then come home and spend uninterrupted time with our families. But for those of us here in the wake of the Great Recession, firmly entrenched in an “always on” society, this notion seems hopelessly outdated. Most of us are working longer, more stressful hours, and work is spilling over into evenings and weekends. No wonder a recent survey of North American employees found that 87 percent of respondents say their work/life balance (or lack thereof) is negatively affecting their health!

With so many people suffering from this problem, you would think the natural solution would be to encourage businesses to help their stressed-out employees find more balance in their lives. Not so, says best-selling author Jon Gordon.

“Work/life balance, at least in the sense that most of us think about it, is a myth,” says Gordon, whose new book is The Seed: Finding Purpose and Happiness in Life and Work (Wiley, 2011). “It does not exist. For many people, it never has. Personally, I have never been able to balance the scales of work and life on a day-to-day basis. Rather, I’ve come to realize that the dance between work and life is more about rhythm than balance.”

Gordon compares the rhythms of work and life to the rhythms of nature. There’s a time and a season for everything.

“For me and for most people, there are seasons when hard work and extra hours are a necessity, and seasons when there is more time for rest,” he explains. “And guess what? It’s okay. When you love what you do—and I truly believe there is meaning and even joy to be found in every job—you’ll thrive during the busy seasons and fully appreciate the down time.”

Gordon’s latest book—a business fable in the same vein as his Wall Street Journal bestseller The Energy Bus—follows Josh, an up and comer in his company, who has lost his passion at work. Challenged by his boss to take two weeks and decide if he really wants to work there, Josh takes off for the country, where he meets a wise farmer who gives him a seed and a promise: find the right place to plant the seed, and his purpose will be revealed.

This sense of purpose, asserts Gordon, is the natural remedy for the crushing guilt that many working parents in particular experience. (You know the drill: when you’re working late, you feel guilty that you’re not home with the kids; when you’re at home, you feel guilty about all the work not getting done.)

“When you believe your job has no meaning, of course you’re going to feel guilty for spending so much time there,” he notes. “It’s the realization that you are making a difference in the lives of others that lets you let go of the guilt and truly immerse yourself in what you’re doing during both seasons.”

Read on for Gordon’s advice on rethinking the concept of work/life balance and finding passion and purpose in both arenas:

First, let go of the work/life balance notion. Instead, think “purpose and passion.” It’s true that work/life balance is a topic that seems to be on many minds, says Gordon, citing a recent NPR segment titled “In America, Too Much ‘All Work, No Play’?” But in many ways, he insists, a perfectly balanced life is a perfectly tepid life. How much balance do you think Bono has when U2 is on tour? What about an Olympic athlete preparing for a competition? Or the leadership team at Facebook? Probably not much, but their passion and purpose fuel them to work harder and longer with more joy and satisfaction in both work and life.

“When your goal is to achieve work/life balance, you’ll be constantly disappointed and so will your loved ones,” says Gordon. “But when you approach every day with passion and purpose, whether you’re working long hours to prepare an important presentation or staying up late with your daughter to work on her science project, you can find joy and happiness in whatever it is you’re pursuing at that moment.”

Look at your work/life blend over the past year. Consider it as a whole. Rather than thinking of your work and life day to day, think of it as a whole. How many times did you get away with your family last year? Were there particular weeks/months where you worked really, really long hours? Were there times you were less busy? You might find that, when viewed that way, you did have a balanced life. Or you might realize you need to make a change in the way you do things during the upcoming year.

“It is going to be virtually impossible to achieve complete balance every day of your life,” says Gordon. “There will simply be days and weeks when your work requires more time from you. There will also be days when your family requires more of your time. Instead of driving yourself crazy trying to achieve a work/life balance every day, look at your life on a weekly, monthly, and yearly basis. Schedule times to work hard, recharge, renew, play, and engage with your family and friends.”

Identify the “seasons” in your company’s work flow. In nature there’s a season for everything. Spring (planting season) and fall (harvest) are times of extreme work. But there’s a slow down in the summer when plants are growing, and, of course, winter is when farmers do other things (repair work on house and equipment, etc.).

Most industries/companies work this way, too. They have busy seasons (when they’re getting ready for major industry events or peak sales times, for instance) and not-so-busy seasons. It might be easy for you to plan your work/home life flow around these times. Not just in terms of when you plan vacations, but also in terms of daily work hours. During the slow time, it’s okay to leave a little earlier each day if you know you’re going to be working long hours once busy season arrives.

“For me, there is a time to be on the road and a time to be at home with my family,” notes Gordon. “My wife and I look at our year as a whole. We plan our schedule according to the seasons of our life knowing that I’ll be slammed in August, September, and October and slower in December and July. We plan for when I’ll be working and when I’ll be more engaged with the family. You can do the same. Everyone’s rhythm is a little different, but when you find the right one for you and your life, you’ll be able to achieve a lot more at work and at home.”

Keep in mind your family’s “seasons” too. Of course, you can’t base everything on work schedules. There are times your family needs you more than others: birth of a new baby, when a child starts school, or when an older parent is having a crisis and needs you to care for him/her.

“At times like these, you will want to put in the family time and make it up when you can at work,” says Gordon. “Just as with your work, you can plan for some of these seasons, but other busy seasons might pop up unexpectedly—such as a sick parent. You have to be ready to adjust to the season. You have to go where you are needed. If you are worried about work at those times, you can take comfort in knowing that there will be a period when you can apply more of yourself to the job.”

Build up a “hard work” bank account with your company. When the company needs you to really push, push hard. (And do it cheerfully.) This way, when you need to slow down the pace or take time off, they’ll be willing to work with you. Gordon suggests you think of it as making deposits into a bank account.
“By willingly and happily accepting the challenge of a difficult project or client or by working long hours to meet an important deadline, you make deposits in the company’s ‘hard work’ bank account,” he explains. When you need to make a withdrawal, whether it’s for a family emergency or just a much-needed break, you’ll have plenty of goodwill with the higher-ups in your account and they won’t begrudge you for taking the time off.”

When you’re at work, really engage. Fully commit to whatever you’re doing at work. Don’t complain—positivity goes a long way. And don’t feel guilty that you are not at home. Feeling guilty is a recipe for misery and poor performance on the job and unhappiness at home. Commit fully to your season of hard work while planning for your season of rest and recharging.

“When you commit to your season of work, you won’t be tempted to watch the clock, dreading each hour that will pass before you finally get to leave work for the day,” says Gordon. “You’ll be more successful at work and feel more fulfilled.”

When you’re at home, really BE at home. Throw yourself into those precious family relationships. Don’t spend family time thinking about work or zoning out in front of the TV or computer. It’s not about the amount of time we spend with our families, says Gordon. It’s about how engaged we are during the time we do have with them.

“When you focus on planning your life around the rhythms of work and home, you have to be fully committed to the demands of the specific season,” he says. “So when you’re in a family season, don’t constantly check your BlackBerry. Don’t take work calls during dinner. Devote as much of yourself as possible to your family. Use the time that you wouldn’t get to spend with them if you were in a work season to do something special. Read to your child each night. Take your family on a surprise weekend trip.

“When you live your non-work season to the fullest, you’ll be all the more motivated to give 110 percent when you’re at work,” he adds.

“What I’m really talking about is making the most of your time however you spend it—of making each and every moment really count,” says Gordon. “Understanding your rhythms and planning and committing to the seasons of your life may not help you achieve perfect work/life balance. But you will create a life that is more passionate, more productive, and happier in every way.”

IRS to Track Online Sales in Search of Unpaid Taxes

2011-08-09T05:34:00.000-07:00

People who make money selling items online will face extra scrutiny from the Internal Revenue Service when they file income tax returns for this year.

For the first time, payment processing networks such as PayPal will tell the IRS about sellers who use credit cards and debit cards to collect at least 200 payments that total more than $20,000 during 2011.

People who sell more than that amount online should take steps now to track their business expenses, said Mark Patrick, a Jacksonville certified public accountant. He said people who think they're making money from a tax-free hobby will discover the IRS is treating them as a taxable small business.

"They need to start keeping at least a spreadsheet or ledger of all the expenses they have," he said.

The stricter IRS oversight is part of the federal government's attempt to track down unreported income and boost the amount of taxes paid. By requiring the payment processing networks to report when a seller has garnered $20,000 in sales from online payments, the IRS can check whether the seller has fully disclosed his amount of sales.

"They suddenly find they have a business they didn't think they had," Patrick said.

Sellers should keep accurate records of their expenses so they can claim deductions that will lower their net taxable income, Patrick said.

For instance, he said people who sell online obtain many items at garage sales and flea markets.

"I've seen the guys come by garage sales and they've got a roll of $20 bills in their pockets," he said.

They will be totally unprepared for the new IRS enforcement if they don't keep track of how much it cost to buy the items that are later resold online. Another cost of doing business is mileage from driving to garage sales and flea markets. Any other overhead expenses should be tracked as well for deductions, he said.

The new regulations will require the payment networks to compile information about sales exceeding $20,000 on 1099-K forms. One copy of the 1099-K will go to the taxpayer and another copy will go to the IRS.

Few Homeowners Benefiting from Federal Short Sale Program

2011-08-02T06:00:00.001-07:00

More than a year after the federal government rolled out a national program to help streamline the short sale process, few homeowners are benefiting from it, and Realtors wonder whether it will ever gain traction.

The Home Affordable Foreclosure Alternatives program, known as HAFA, has disbursed just $9.5 million out of $4.1 billion from April 2010 to December 2010, according to a Government Accounting Office report in March. Through May of this year, only 8,541 short sales were completed nationwide through HAFA.

HAFA offers a short sale option to homeowners who don't qualify for a loan modification. If approved, the difference between what the house sells for and the loan balance is forgiven.

The majority of short sales are still handled through individual lenders' programs because HAFA doesn't allow lenders to collect on the loan balance, and incentives -- including $1,500 to the lender -- aren't enough to entice banks to go along with the program.

HAFA expires at the end of next year, and by then, the U.S. Department of the Treasury hopes to help more homeowners by having a standardized process and uniform documents for lenders, said Laurie Maggiano, director of policy for the department's Homeownership Preservation Office.

It's a gargantuan task that Maggiano likens to turning the Titanic on a dime.

"It's not a rowboat. It is a very complex machine. It takes time to get these processes ingrained," she said. "It is beginning to happen."

The government's Home Affordable Foreclosure Alternatives program was meant to give homeowners an alternative if they don't qualify for a loan modification.

But most banks are unwilling to go along with HAFA short sales, in part, because the program forgives the homeowner's loan balance. Lenders, in some circumstances, would much rather try to recoup their money.

Experts say incentives the program offers -- including $1,500 to the lender -- aren't enough to make some banks want to participate.

There were just 320 HAFA short sales pending last September. Currently, there are 18,000 pending nationwide.

"Is it where we want to be? No," said Laurie Maggiano, director of policy for U.S. Department of the Treasury's Homeownership Preservation Office.

Ellen Mahoney, president of Complete Title Services' loss-mitigation division in Birmingham, said the majority of short sales are put through banks' programs. That way, lenders avoid HAFA's rule that won't allow them to force homeowners to repay part of the loan balance. "If the borrower is collectable, I don't see the banks wanting the little enticement from the treasury," Mahoney said.

Mike Sher, associate broker for Max Broock Realtors in Bloomfield Hills, said he's doing more HAFA short sales lately. "With them, everything is black and white. You either are eligible, or you aren't."

HAFA requires homeowners to have lived in the home in the last 12 months, have a financial hardship and have a first mortgage less than $729,750, obtained before Jan. 1, 2009. When homeowners don't qualify, lenders will usually try to put them through their own short sale program.

"One of the big benefits of the program is they go in and assess the value of the property and they give you the price," Sher said. "So when you get an offer you've already done three-fourths of your work."

In addition to the $1,500 incentive to the lender, HAFA offers homeowners $3,000 to help with moving expenses and $2,000 to the investors who hold the loan.

The HAFA program expires at the end of next year and by then, the U.S. Treasury hopes to have a model process and uniform documents that banks could use to speed the process and avoid greater losses that come with foreclosure.

Changes ahead

Program changes could be announced as early as this week. The policy changes grew out of meetings with 50-60 representatives from the real estate and banking industries this spring, Maggiano said.

She said changes to the year-old program include easing eligibility requirements that industry players have said would widen appeal.

Not being able to force borrowers to repay part of the loan balance is a huge stumbling block to getting more lenders on board. Another is the $6,000 cap on claims from second lien holders.

Maggiano said that while the first mortgage holder receives 65 to 80 cents on the dollar after the property is sold, the second and other lien holders get less than 6%, and they want to retain the rights to go after homeowners for more. But the change is not likely to happen, she said.

"We don't want taxpayer dollars going to a transaction where a borrower still has contingent liability," Maggiano said.

The help will come too late for homeowners like Celso Martinez, who would have been happy to benefit from a program like HAFA.

The 44-year-old bought a Royal Oak bungalow in 2008 for $164,000, then lost his job and moved to Collierville, Tenn., for a new one last fall. He spent almost 10 years in Michigan, working at the General Motors Tech Center in Warren.

Laid off, Martinez exhausted his savings and unemployment benefits trying to keep up with the mortgage, but he fell behind. He got a short sale offer of $80,000 this spring, but his bank rejected it. He got another offer in June for $104,500, but that didn't go through, either.

The house is now for sale at $102,500, but as a foreclosure.

"It was my first time buying a home, living the American dream," said the native of El Salvador. "But it isn't as good as it sounds. Now I am kind of messed up with bad credit for seven years."

His Realtor, Janet Graham with Hall & Hunter in Birmingham, tried hard to sell the home. There were 87 showings. "It is just not right," she said. "They don't see all the energy that goes into trying to make these situations right."

What lenders say

It is estimated that lenders and servicers may lose $375 million this year on short sale transactions, according to a May short sale report from CoreLogic, a data firm.

Lenders do a lot more loan modifications than short sales.

At Chase, a major Michigan lender, the breakdown is about 60% modifications to 20% short sales, said spokeswoman Mary Kay Bean.

The bank has an average response time of 30 days from request to approval on the transactions and has completed more HAFA short sales than any other lender, with 2,686 through May. It has completed 120,000 short sales using its own process nationwide since June 2009.

"When a modification isn't possible, we approve appropriate short sales for customers because they provide a better outcome for the borrower, the bank, the investor and the neighborhood than a foreclosure would," Bean said.

Jason Root, a loss mitigation director for Freddie Mac who specializes in short sale policy, said one of the biggest obstacles he's seeing is when the second lien holder wants more than the $6,000 cap imposed by HAFA.

"If the second wants more than the cap allows, those will automatically move to a regular short sale," he said. "We are constantly looking at those to see which part of the HAFA is stopping them from getting done. We have met a few times with the Treasury Department to troubleshoot that."

Freddie Mac and Fannie Mae purchase loans from lenders, then repackage and sell them to investors. Together, they guarantee about 70% of conventional loans written in the country.

A Kinder, Gentler IRS is Ready to Help

2011-06-28T05:02:00.001-07:00

With talk of the possibility the economy could take a second dip into recession, it may be some comfort to know that the Internal Revenue Service feels your pain.

The federal agency charged with dunning taxpayers for their annual contributions has actually streamlined some procedures and softened some requirements to make it easier for folks to cope in these hard times.

Joseph A. Pancerella said he has seen evidence of a kinder, gentler IRS firsthand.

Pancerella, a certified public accountant and financial planner with offices in Shillington and Exton, Chester County, said he has recently seen people lose 90 percent of their business in just a year.

"Imagine going from doing $5 million to $6 million a year to not quite $1 million," he said.

The same is true for a homeowner who loses a job and is struggling to make mortgage payments.

"Not everybody is irresponsible," Pancerella said. "Not everyone is going to walk away from their mortgage."

Those who don't can, in the process of trying to do the right thing, dig themselves an even bigger hole in the form of unanticipated taxes, he said.

The IRS has tried to make it easier for taxpayers to settle up by making a so-called offer-in-compromise.

If you're not familiar, an offer-in-compromise is just what it sounds like.

If you owe federal taxes and, because of a financial setback, there is little if any chance of you paying the debt, you can ask the IRS to accept a portion of what you owe to settle your tax bill. This year, the agency has made it easier to qualify for the program.

The IRS took the measures because it is aware that some taxpayers have been struggling to meet their obligations in the wake of the country's economic downturn, said Jennifer A. Jenkins, an agency spokeswoman.

"To ease the burden on some who are feeling the financial pinch the most, the IRS streamlined and expanded its offer-in-compromise program," Jenkins said.

For example, in the past taxpayers needed to have a tax liability of less than $25,000 to participate in the program. The tax liability limit is now $50,000. Also, taxpayers must have incomes of $100,000 or less to be considered for the program.

"OICs still are subject to acceptance based on legal requirements and consideration of the taxpayer's ability to pay the tax owed," she said.

Another added benefit helps taxpayers already making payment on an offer-in-compromise who are now having trouble making their payments.

Taxpayers can now apply to renegotiate an existing offer to get more manageable payments based on their current financial situation.

Pancerella said taxpayers often run into trouble when they dip into their retirement savings to pay bills or make mortgage payments.

The fund trustee is responsible for taking a 20 percent tax bite out of funds withdrawn from a 401(k) or other retirement account, but the taxpayer also is responsible for income tax and another 10 percent penalty for withdrawing money before retirement age.

The total tax on a withdrawal of $100,000, for example, is about $21,000, but the trustee deducts only about $12,000. The taxpayer still must pay income tax and the excise tax, which amounts to another $9,000 in federal taxes, Pancerella said.

"Believe me, if you're taking money out of your retirement account you don't have $9,000 to pay the IRS," he said.

That is why taxpayers should consider all of the remedies available to them, including an offer-in-compromise, before taking cash out of their retirement funds.

IRS employees are now permitted to consider a taxpayer's current income and potential for future income when deciding on an offer-in-compromise, Jenkins said.

Normally, the standard practice is to judge an offer amount on a taxpayer's earnings in prior years. This new step provides greater flexibility when considering offers-in-compromise from the unemployed.

The IRS may require that a taxpayer entering into such a plan agree to pay more if the taxpayer's financial situation improves significantly, Jenkins said.

A Dozen Big Changes in Perceptions About Retirement

2011-05-24T05:27:00.000-07:00

Middle-income baby boomers have spent the past few years battening down the hatches for futures they expect will be uncertain but turbulent. In the process, their definitions of what retirement looks like have changed dramatically. A new poll sponsored by Bankers Life and Casualty Co. provides a detailed look at the changing financial profile of people born between 1946 and 1964, with household incomes ranging from $25,000 to $75,000 a year.

It's no secret that the middle class has been under enormous financial stress. The value of this study, "Middle-Income Boomers, Financial Security and the New Retirement," is in the detailed portrait it provides of specific boomer actions and attitudes. See how your own outlook compares with its findings.

Before the recession and market declines, Americans seemed to be on a debt-financed spending spree, often using their home equity as a piggy bank. No more. Since the downturn, middle-income boomers have sharply curtailed discretionary spending on most leisure-time items. Here are the percentages of respondents saying they are now spending less on:

Going out to restaurants: 63 percent

Vacations: 62 percent

Movies: 62 percent

Clothes and shoes: 60 percent

Gifts for birthdays and holidays: 58 percent

Electronics and tech gadgets: 56 percent

Hobbies: 55 percent

Cable television: 26 percent

Nearly 3 of every 4 boomers say they've been forced to rethink their retirement date. Of these, nearly 80 percent (that's more than half of all middle-income boomers) said they would delay retirement—by an average of five years—and 14 percent said they feel they can never retire. Retirement used to be linked with a person's age. "Today, more than ever, a new number has emerged in its place—the amount of one's personal savings," the study said. "On the new road to retirement, Americans can now retire only when they feel they can afford to do so."

The survey found that middle-income boomers had increased their contributions in employer retirement programs but still felt they would come up short in having enough money to retire. "Uncovered healthcare expenses (80 percent), inflation (79 percent) and living longer than their money lasts (71 percent) are the top three financial concerns that middle-income boomers have about retirement."

Asked what they expected their retirements to be like, boomers projected huge differences between their experiences and their perceptions of how previous generations had fared in retirement. In financial terms, at least, the Silent Generation had nothing to squawk about because it retired with pensions and other sources of guaranteed income.

6 Ways to Plan for Your Later Years

2011-05-10T06:41:00.000-07:00

Coming to terms with the realities of your later years can be one of the toughest challenges of aging. America is geared to youth and even acknowledging the inevitability of aging may be considered a form of cultural disloyalty.

So let's accept and applaud that 80 can be the new 60, that millions of baby boomers will reinvent themselves during their 60s and 70s, and that stereotypes about being old in America will be tossed out in favor of more positive images of vibrant old age.

[See 10 Bargain Retirement Spots.]

Even so, we will still get old. After all, isn't that the goal of today's enhanced emphasis on taking better care of ourselves? To age successfully, however, we also will need to contemplate important aspects of our later years, up to and including plans for our death.

The Longevity Project, a current book on traits of people who have lived long and successful lives, notes that conscientious people are favored to live long and well. One reason is that they do not leave things to chance. They tackle future needs today. Having plans in place, they are more prepared and less stressed about what their futures may hold. Such an approach does not, of course, guarantee successful aging. But it sure raises the odds.

Here are some of the key planning needs that nearly everyone will face as they age and retire. Some are practical and financial; others are very subjective but no less important. In every case, the sooner you begin to build these plans, the better off you'll be in the future. How many of these life "boxes" have you checked off?

Achieve retirement self-sufficiency. Generating the largest possible retirement income often seems to be the only financial goal of retirement planning. But it's really just a very visible element of a more complex set of calculations, many of which are emotional, not financial. The goal of all this work is to produce self-sufficiency in retirement. We don't want to worry about making ends meet every month, and we certainly don't want to be a burden on our families. Reaching self-sufficiency is a process that should begin well before you turn 65. It often can require some very difficult and perhaps uncomfortable admissions about how much money you will have to live on in retirement. While we're balancing future expenses and income, we're also adjusting our dreams to reflect the reality of our likely future circumstances. It is hard work, but ignoring it doesn't make it easier or lead to better outcomes.

[See 3 Steps to Turn Nest Eggs Into Retiree Income.]

Do worst-case planning. Unless you're really wealthy, there are adverse life events that can devastate your finances. Take suitable precautions. For example, I just bought an additional life insurance policy that will be in force until I'm 80 years old. Its sole purpose is to help my wife (and me) sleep better at night knowing she will have an extra cushion if something happens to me. For the same reason—sleeping well at night—we're also going to strengthen our long-term care insurance, adding to our coverage limits (particularly for in-home care) and also getting what's called a state "partnership" policy. Under this policy, if one of us requires extensive care—most likely for Alzheimer's—we would seek Medicaid coverage after exhausting our insurance policy benefits and, most likely, a good portion of our wealth. If this happened, we would not have to deplete our assets totally to qualify for Medicaid. Instead, we'd be able to shield an amount equal to the total of our private insurance benefit payments. In our case, we are fortunate to be able to afford to divert our current income into these insurance payments. But we're also willing to reduce current consumption to do so. You may have your own worse-case planning to do.

[See Don't Take Life Insurance Payouts for Granted.]

Decide where to live. Most people want to age in place in their homes. If this applies to you, take a careful and hard look around your house and imagine how well it would suit you if you were in a wheelchair. That's the reality you need to consider. Further, is your home in a supportive neighborhood? Once you no longer can drive, how would you get out to shops and doctors' offices? If, instead, you opt for a seniors-only retirement community, what's your geographic preference and why? What kind of community can you afford?

Keep solid records. If you died tomorrow, how hard would it be for your loved ones to get access to your key legal documents (will, trusts, and the like) and financial accounts? Do you even have the basic legal documents drawn up? You should have multiple copies of key documents plus account information (and online access passwords). Increasingly, these are going to be computer files. Keep one set on your home computer, and back it up either on an external hard drive or on a "cloud" computing back-up service. Provide access information to the appropriate family members. Then—and this is much easier said than done—regularly update these files so they are always current.

Consider your legacy. There is no common yardstick to use in measuring the impact we've had on the world during our lives. Most likely, however, you have your own yardstick. What does it tell you? How do you measure up to your own standards? Are there things you still believe you should be doing to satisfy your expectations? Believe me, this is not something you want to wait to do until your final days. Maybe a frank look in the mirror will cause you to make some major changes in your life. Maybe it will reaffirm you've been on the right path all along.

Determine your final wishes. Social scientists who have studied people in their final days report how helpful it is when a person has made the key decisions about the end of their life well in advance. Often, people are not able to make sound decisions as they near death. They often have physical and mental impairments that make such work impossible. Their families may have to make these calls for them, adding a lot of stress to what is already a difficult situation. So, would you like to die at home, in a hospital, or perhaps in a hospice facility (you probably can have hospice at home or in a hospital setting as well)? Have you executed the proper documents providing your spouse or a family member with the authority to make medical decisions should you become incapacitated? Does this person know your preferences for end-of-life care? Do you want to be buried or cremated, or perhaps donate your body to science? Is there a final resting place you have in mind? Who's going to provide an obituary to your hometown newspaper, and what do you want it to say? Setting aside time to make these decisions will hardly rank among your happiest memories. But you will be providing your family an invaluable gift—allowing them to focus on the loving aspects of your life, not the hassles of wondering how you'd like things handled when you die.

Tax Tips Offered

2011-05-03T06:09:00.001-07:00

No one wants to think about taxes following the April 18 deadline. But experts suggest that preparing now could make next year that much easier.

"Planning for taxes is just good financial strategy," said Michael Devine, an Internal Revenue Service spokesman. "If you had trouble this year, that should tell you that you need some sort of filing system."

Keeping track of receipts and any other tax records can be as simple as putting everything in a box, drawer or file folder. Anything that might possibly be a deduction should be placed in that spot throughout 2011 and questioned later.

From a marriage or divorce to moving expenses and new windows or appliances, all of these things could be important come tax season.

"There are more things you can do ahead of time than after the fact," said Charles Schwichtenberg, a certified public accountant with Sumner Carter Hardy & Schwichtenberg.

Mr. Schwichtenberg stresses the importance of communication with whoever is preparing your taxes. More often than not, those tax professionals can provide vital answers to questions about life changes or big purchases through the year.

"Just thinking occasionally about how this will affect your taxes next year might help you plan legally to reduce tax liability," Mr. Devine said.

Another idea to consider before next year deals with withholdings. According to the IRS, if an individual paid in more taxes than expected or received a large refund, he or she may want to complete a new Form W-4 withholding statement with their employer.

"If you only think about taxes in April, then you might miss out on the ability to save some money," Mr. Devine said.

There may be an alternative to record-keeping, too. Mr. Schwichtenberg said there are many applications for smart phones to keep track of mileage using the internal global positioning system, as well as an app to store pictures of receipts and working lunches.

"(Mileage) is something that we see people having a tendency to be lackadaisical about," he said. The apps can help with that. There are also apps to keep track of non-cash donations.

"The bottom line is that there are apps out there to keep record-keeping easier," he said. "I think as we go forward, we're going to see more of that."

Parents Taking Due Credits Save Thousands in Taxes

2011-03-01T05:01:00.001-08:00

Consumers seek coupons for $25 deals on everything from massages to restaurants, but what about tax deals?

Parents who pay attention to their tax return can often recover thousands of dollars for everything from raising children to sending them to day care or college. Yet taxpayers leave billions of unclaimed credits on the table, according to federal figures.

Maybe it's a lack of knowledge. Maybe it's intimidation from the rules and regulations that come in tax forms and publications. But tax software such as TurboTax or TaxAct, which are free on the IRS site (freefile.irs.gov) for people with an adjusted gross income of $58,000 or less and available in stores for others, will help you hunt for the credits that fit your situation and do the number crunching for you.

Whether you do taxes on paper or online, watch for these potential deals. And take advantage of them because many could be reduced in a couple of years as short-term tax laws expire. Here are ways to save money:

CHILD TAX CREDIT: Parents can cut their tax bill by as much as $1,000 a child, up to a total of $3,000. Children must be under age 17, and there are income requirements to meet. The credit starts to phase out when married couples' incomes top $110,000 and single parents' exceed $75,000. But parents still might qualify for some limited credit with incomes up to $130,000 for couples and $95,000 if single, said William Massey, a tax analyst with Thomson Reuters. Typically, this credit reduces your regular taxes, but for some low-income families it is possible to get some money back from the government even if their income is too low to pay taxes.

Use Publication 972 and Form 8812 to qualify for a refund that exceeds what you owe in taxes.

EARNED INCOME TAX CREDIT: This credit is intended to help people who work but earn little. The amount of the credit is influenced by the number of children you have. For example, a couple with three children could have an income up to $48,362 and qualify, but a single person with no children would have to have an income under $13,460. The maximum credit with three children is $5,666, but if you are childless, it's $457. To find out if you are eligible, use the table in IRS Publication 596.

SENDING KIDS TO COLLEGE: The American Opportunity Tax Credit can take some of the sting out of paying college tuition and fees. You can get a credit of up to $2,500 per student per year for each of four years for college. To get the full benefit, income for a couple must be no more than $160,000; for singles, $80,000. But some credit is available for couples with income up to $180,000, or $90,000 for singles. The rules are covered in Publication 970.

Keep in mind that recent tax changes allow you to use the credit for each year of a four-year education up to the end of the 2010 tax year. Previously, the Hope Credit for college applied only to the first two years.

Massey notes that parents may be able to claim the credit if a grandparent pays a student's college costs directly to the college. In addition, if a student borrowed with student loans, either they or their parents can deduct the interest payments they make on the loans.

ADOPTED CHILD: Recent tax changes have enhanced the credits available to parents who adopt children, said Mark Luscombe, a tax analyst for CCH. Parents can receive a credit for up to $13,170 for expenses, such as legal fees, incurred while adopting a child. In some cases, travel costs may also be covered if the adoption was done away from home. Parents adopting special needs children may be able to get the full $13,170 credit even if they did not spend that much. Use Form 8839.

CHILD CARE EXPENSES: If you pay someone to care for a child under age 13 while you work, you can get a credit for up to 35 percent of the costs up to $3,000 per child or $6,000 for two children. This can cover care in your home as long as it's not provided by a spouse or one of your other children. The benefit can also extend to facilities such as day camps but not overnight camps. See Publication 503.

INSURING THE KIDS: If you were self-employed in 2010 and bought health insurance for yourself and your family, you will be able to deduct the premiums you paid for children under 27, even if you don't claim the child as a dependent, said Massey. This is a result of health care overhaul. Dates matter, however. Massey notes the deduction is possible only for the portion paid from March 30 to the end of 2010.

New 1099 Reporting Requirements for Landlords

2011-02-26T06:09:00.000-08:00

Congress in 2010 expanded the information return reporting requirements contained in Code Sec. 6041. Generally, Code Sec. 6041 requires payments of $600 or more to a single recipient in the course of a trade or business to be reported by the payor to the IRS and the payee, usually on Form 1099-MISC. There are exceptions to the general reporting requirements but these exceptions begin to disappear in 2011.

One of these disappearing exceptions to the reporting requirements involves landlords. The Small Business Jobs Act of 2010 (2010 Jobs Act) (P.L. 111-240) amended the definition of trade or business to include renting real property. Before 2011, most landlords were not subject to the reporting requirements because renting real property was not considered to be a trade or business. Under the new version of Code Sec. 6041, real property rental is now considered a trade or business but only for purposes of the reporting requirements.

There are some exceptions to the general rule requiring landlords to report payments of $600 or more made in the course of renting real property. The first exception is for those who receive substantially all of their rental income from the temporary rental of their primary residence. The second exception is for individuals who receive "minimal" rental income, which amount will be determined by regulation. Similarly, the third exception applies to individuals receiving rental income if compliance with the reporting requirements would cause hardship. What constitutes hardship will also be defined by future regulations.

Like all returns, Forms 1099 must accurately identify the payor and the payee, as well as the total amount paid. Accurate identification includes the name, address and taxpayer identification number (TIN) of the payor and payee. The telephone number of the payee is also required.

It is the payor's obligation to request this information from the payee and Form W-9 may be used for this purpose. A landlord should request that Form W-9 be completed before making any payments to the payee because, if the payee fails or refuses to provide the correct taxpayer identification number, the payor is usually required to collect backup withholding from any payments due to the payee. The payor may be liable for a penalty for failure to backup withhold so withholding the correct amount from the payee is crucial. Also, a $50 penalty is imposed on a payee who fails to provide a correct TIN upon request.

Since landlords have not, until now, been "engaged in a trade or business," the reporting requirements create a problem. According to the instructions for Form 1099, sole proprietors and others, like landlords, who are not otherwise required to have an employer identification number (EIN) should use their Social Security number (SSN) for reporting purposes. Moreover, the instructions state that the filer's name and TIN should be consisted with the name and TIN used on the filer's other returns. This opens up the opportunity for identity theft.

Fortunately, landlords have a few options to protect themselves. The landlord can organize a separate company or LLC to perform management services for the property, including making payments to contractors. As the payor, the management company or LLC would be responsible for reporting any payments on Form 1099 and could use its own EIN, thus shielding the landlord's SSN. Another option is for the landlord to hire an employee. A spouse or child could be hired and an EIN obtained in order to report the wages of the new hire. This EIN could then be used on Form 1099, again shielding the landlord's SSN. Or, the landlord may be able to place the real property in a trust and use the trust's EIN for reporting purposes.

The deadline for providing Forms 1099 to payees is January 31 of the year following the year of payment. The deadline for filing the returns with the IRS is February 28 of the year following the year of payment. There is an extended deadline, March 31, when the returns are filed electronically.

The 2010 Jobs Act also increased the penalties for failing to file Forms 1099 with the IRS, for filing Forms 1099 late and for failing to provide copies of Forms 1099 to the payee. The increased penalties apply to information returns required to be filed after December 31, 2010.

Tax Tips for Contractors

2011-02-23T04:57:00.000-08:00

The flurry of recent tax legislation and the lingering effects of the economic downturn make this tax planning environment one of the most challenging in recent memory. Contractors need to do what they can to improve cash flow by effectively managing their tax burdens and leveraging any available new tax incentives.

Tax planning over the next two years will require thoughtful and nimble analysis.

In order to help contractors with their planning, Grant Thornton LLP’s Construction group has developed eight tax tips for contractors. Below is a sampling of some of the things construction contractors should keep in mind:

1)Double bonus depreciation — full expensing! Lawmakers have extended and doubled bonus depreciation, allowing full expensing for many assets placed into service through 2011. Property qualifying for bonus depreciation that is placed in service after Sept. 8, 2010, and through the end of 2011 will be eligible for full 100% expensing.

2)Review deferred compensation plans. Most contractors are struggling to remain profitable in this difficult environment. If your company cannot afford large bonuses to retain key employees, now is the time to revisit alternative compensation arrangements.

3)Certain S corporations should consider taking gains in 2011. If you converted to S corporation status in 2004 or 2005, consider sales of “gain” property in 2011. Special provisions enacted over the last two years provide a reduced seven-year period for sales that take place in 2009 or 2010 and a five-year period for sales of property during 2011.

4)Take full advantage of capital asset expensing deductions. Rules originally intended for small businesses were significantly expanded to allow contractors to expense up to $500,000 of 2010 fixed asset costs, provided less than $2 million of assets were placed in service throughout the year. Unlike bonus depreciation, this applies to new or used assets.

5)Maximize Section 199 deductions. The Section 199 domestic production activities deduction is a unique tax incentive available to most contractors. This incentive allows taxpayers to deduct 9% of qualifying production activities, which includes the construction or substantial renovation of domestic real property.

Small Biz to Congress: Deep-Six the 1099 Expansion

2011-02-15T04:49:00.000-08:00

Small-business owners enumerate the costs that will come with more tax reporting.

The expansion of Form 1099 reporting requirements that lawmakers buried in the health-care reform bill has caused no shortage of anxiety among business owners and executives, many of whom already feel buried in paperwork. Following the Senate's vote last week to repeal the measure and President Obama's indirect endorsement of a repeal in his January State of the Union address, the House Committee on Small Business held a hearing this week to let executives air their concerns. Not surprisingly, the testimony universally encouraged Congress to drop the new requirements, and quickly.

Currently, a business must provide a 1099 form to the Internal Revenue Service for any services it receives from an unincorporated firm, such as a partnership. Last March the Patient Protection and Affordable Care Act broadened the requirement so that a business would have to file the form for every vendor it uses, regardless of incorporation status, both for services and goods that exceed $600 in a year. The measure, scheduled to take effect January 1, 2012, was intended to generate additional tax revenue to help fund health-care reform.

Business owners have complained that tracking all corporate purchases to determine when to file would be an overwhelming and expensive job, not to mention collecting hundreds of tax identification numbers from vendors. For example, "the simple task of tracking fuel purchases from multiple gas stations . . . is not as simple as collecting receipts," testified Mike Kegley, a Kentucky-based builder who appeared at the committee hearing on behalf of the National Association of Home Builders. Instead, "businesses must determine the taxpayer identification numbers for each gas station, as they are likely owned by different franchise owners. Many businesses will be forced to hire additional staff to comply, and few home builders are in the position to do that."

Kegley said his bookkeeper estimated that his company would likely spend at least $9,000 in the first year the new rules take effect, not including software costs, and at least $1,900 per year after that.

John "Mark" Eagleton, a restaurant franchisee in Colorado who testified on behalf of the National Restaurant Association, noted that the new rules mean he would have to file forms for the fresh lettuce he buys each day at the local grocery store, as well as his miscellaneous purchases at dollar stores, among the other 200 to 300 vendors he deals with, since those purchases typically exceed $600 in a year. The 1099 expansion "may seem like a simple edict, but it could put me out if business," said Eagleton, whose restaurant was slightly cash-flow negative last year after debt payments.

While repeal of the 1099 expansion looks like a distinct possibility, the main obstacle right now is money. "The budget has been based on this additional revenue coming into the coffers, so the argument right now is, 'If we repeal and don't bring in this additional revenue, what are we going to do to offset it?'" says James Guarino, a partner with Boston-based tax and accounting firm Moody, Famiglietti & Andronico.

Some relief has already come in the form of the IRS agreeing to exempt any credit-card transactions from the requirement. However, that's not enough, business owners say, since not all purchases can be made, or accepted, with a credit card.

Still, there's good reason to hope. Congress "may drag [the repeal] out," says Guarino, "but I sense that one way or another it's going to get passed."

Facebook Overvalued at $50B in Global Poll of Investors

2011-02-08T05:07:00.001-08:00

Only 10 percent of respondents say Facebook's valuation is appropriate while 51 percent say valuation signals the 'beginning of dangerous new bubble'.

Facebook Inc. isn’t worth $50 billion, according to a poll of global investors that shows skepticism about Goldman Sachs Group Inc.’s recent estimate of the largest social-networking site’s value and concern that a bubble may be forming in the technology sector.

Sixty-nine percent of investors say Facebook is overvalued after Goldman Sachs invested $450 million in a deal that put the company’s worth at $50 billion, according to the quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 10 percent of respondents say Facebook’s valuation is appropriate; 4 percent say it’s worth more. The full story is online here.

The poll conducted Jan. 21-24 shows that investors disagree with Goldman Sachs’ assessment that Facebook is worth more than Web pioneers such as Yahoo! Inc., the biggest web portal, and eBay Inc., owner of the biggest online retail marketplace. Palo Alto, California-based Facebook surpassed Yahoo! in October as the third most visited website in the world.

Facebook raised $1.5 billion in a Goldman Sachs-led financing round this month. In addition to Goldman Sachs’ $450 million investment, Russia-based Digital Sky Technologies put up $50 million and Goldman Sachs clients outside the U.S. snapped up a $1 billion stake in the company. Goldman Sachs, which retained the right to sell $75 million of its stake to Digital Sky, had originally offered Facebook shares to its U.S. clients in a private placement. That was called off after details became public because the offering risked running afoul of U.S. securities laws.

Stephen Cohen, a spokesman for New York-based Goldman Sachs, declined to comment. A Facebook spokesman, Jonathan Thaw, declined to discuss the valuation. “We’re focused on creating a useful service and building our business for the long term,” he said in an emailed statement.

The Bloomberg poll shows that the Facebook deal has made investors uneasy about internet companies in general. More than half the respondents (51%) say the firm’s valuation signals the “beginning of a dangerous new bubble” in the market, while only 17 percent saw it as the foundation of a lasting boom.

Investors worldwide have doubts about the Facebook deal, and those outside the U.S. were most pessimistic. Seventy-two percent of non-U.S. respondents say the company was overvalued. Among U.S. investors that number is 63 percent.

The $50 billion valuation puts Facebook in league with the publicly-traded Tencent Holdings Ltd., the Shenzhen, China-based internet company whose services include online games and instant messaging that is worth more than $42 billion on the Hong Kong stock exchange. Tencent trades at about 15 times revenue. The Facebook valuation is about 25 times its 2010 revenue. Google’s price-to-sales ratio is 9, analysts estimate. eBay’s market value is $40.5 billion and Yahoo!’s is $21.2 billion.

LinkedIn Corp., a Mountain View, California-based professional networking firm, filed yesterday with the Securities and Exchange Commission to raise as much as much as $175 million in an initial public offering. The company is valued at $2.5 billion on SharesPost Inc., a San Bruno, California-based online marketplace for trading shares in private companies.

Among European investors in the poll, 56 percent say the Facebook deal signals a bubble among online firms while less than half of U.S.-based respondents (47%) agree. About a quarter of Asian investors (24%) see the deal as the start of a new boom in online companies, while overall 17 percent of those polled are positive.

In 2008, Mark Zuckerberg, Facebook’s founder and chief executive officer, became the world’s youngest billionaire at 23 when Forbes Magazine listed his wealth at $1.5 billion. The magazine now says his net worth has reached $6.9 billion. Zuckerberg is the central character in the hit movie “The Social Network,” about the founding of Facebook, which was nominated for eight Academy Awards this month.

Facebook’s social network has more than 500 million members and trails only Google and Microsoft Corp. as the world’s most visited website, according to ComScore Inc.

The company had revenue of $1.2 billion in the first three quarters of last year, up from $777 million, according to a person who had viewed documents sent to potential investors by Goldman Sachs. The company reported profit of $355 million in the first three quarters of last year, compared with profit of more than $200 million for all of 2009.

Time to Start Thinking About 2010 Income Tax Filings

2011-01-25T05:31:00.001-08:00

Many Americans will have to wait up to a month to file their 2010 tax returns this year.

That's because Congress' late action in December on extending tax credits is forcing the Internal Revenue Service to update its computer system to process claims.

"A lot of taxpayers will face a delay in filing a return because of the late changes," IRS spokesman Mark Hanson said.

Three groups will have to wait until mid- to late February before they can file. They are filers who itemize deductions; those who claim a higher education tuition and fees deduction; and K-12 educators who claim an out-of-pocket expense of up to $250 even if they don't itemize.

"The majority of taxpayers will be able to fill out their tax returns and file them as they normally do," IRS Commissioner Doug Shulman said in a statement. "We will do everything we can to minimize the impact of recent tax law changes on other taxpayers."

Also, the IRS has started regulating the tax-preparation industry. Paid tax preparers must now register with the IRS and receive a preparer tax identification number.

They can sign up by going to www.IRS.gov/taxpros. This does not affect individuals who fill out their own tax forms.

Filing a tax return is one of the biggest financial dealings people have every year, and they should not have to worry about the preparer not being legitimate, Hanson said.

"Hopefully, this will give taxpayers peace of mind that the tax preparer is registered with the IRS and is professional," he said.

About two-thirds of taxpayers traditionally get a refund, Hanson said. The rest usually have to pay and often are the last to file.

This year, procrastinators will have three extra days to prepare and file their taxes.

That's because the District of Columbia recognizes Emancipation Day, which this year falls on April 15, and it affects tax deadlines in the same way that federal holidays do. So taxpayers will have until April 18 to get their financial documents in order.

The IRS expects to receive more than 140 million individual tax returns this year, with most of those being filed by the April 18 deadline. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

Here are some of the deductions taxpayers could qualify for:

Energy: Homeowners can deduct up to 30 percent of the costs paid or incurred in 2010 for any qualified energy-efficiency improvement. The credit is limited to a total of $1,500. If you claimed part of it in 2009, you can take only the remainder on your 2010 taxes.

College: The American Opportunity Credit allows for up to $2,500 per student. The credit includes books, which did not qualify for deductions in the past. The credit counts all of the taxpayer's first $2,000 spent and 25 of the next $2,000 spent.

Homes: First-time home buyers who bought a house by April 30 and closed on it by Sept. 30 last year are eligible for a credit of up to $8,000. If you claimed the credit on your 2009 form, you can't claim it again.

Electric vehicles: Taxpayers who bought plug-in electric vehicles in 2010 are eligible for a credit of 10 percent of the vehicle's cost or no more than $2,500 per vehicle. Also, those who bought qualifying hybrid cars can claim a deduction as well.

Earned Income Tax Credit: The American Recovery and Reinvestment Act provides a temporary increase in the earned income tax credit for taxpayers with three or more qualifying children. The maximum credit is $5,657 for taxpayers who earned less than $49,000 last year. The credit started in 2009 and is good for 2010 as well.

Standard deductions: The IRS increased its standard deductions in 2009, and they will remain in place for 2010 returns. The exception is for heads of households, whose $8,400 deduction is up $50 from 2009.

Here's what most preparation services suggest you bring to an appointment:

--Prior tax return.

--Photo identification.

--Social Security cards for all people claimed on the return.

--Income statements.

--Child-care information with the provider's Social Security number or tax identification number.

--Proof of bank account for direct deposit or debit.

2011 Tax Filing Season Gets Under Way With Many Changes

2011-01-18T06:24:00.000-08:00

The IRS started accepting e-filed and Free File returns on Jan. 14, marking the official start of the 2011 tax filing season. However, many taxpayers will not be able to file until some time in February while the IRS updates forms and reprograms its systems to account for legislative changes made late in 2010.

Individual taxpayers will have until April 18 to file their returns. Although the normal deadline, April 15, falls on a Friday, that day is a legal holiday in the District of Columbia, and because D.C. holidays affect tax deadlines in the same way federal holidays do, all taxpayers are being given an extra three days to file their returns.

The IRS has announced that taxpayers who itemize deductions on Schedule A, as well as those who take certain recently extended deductions, will not be able to file their returns until mid- to late February. See “Tax Law Changes Will Delay Start of Filing Season for Some Taxpayers.”

For the 2011 filing season, the IRS is again making available its online “Where’s My Refund?” tool, which can be found on the front page of its website.

PTINs

For paid tax return preparers, perhaps the biggest procedural change this tax season is that they must obtain and use a preparer tax identification number (PTIN) when preparing returns. The IRS has launched an online PTIN registration site where preparers can obtain or renew their PTIN. PTIN registration costs $64.25. Preparers can also apply using a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application.

Generally, on any tax return or claim for refund, the preparer—whether signing or nonsigning—must provide his or her PTIN. However, the IRS recently provided a list of 28 forms or series of forms that are not subject to the PTIN requirement—for a list, see “IRS Exempts CPA-Supervised Nonsigners From New Preparer Rules.”

Many CPAs have reported problems with the PTIN registration process, both online and using the paper form. See “PTINs a Pain for Some CPAs.”

E-Filing

While the vast majority of tax practitioners already e-file, this tax season marks the first year that e-filing is mandatory for individual returns. Specifically, tax return preparers who anticipate filing 100 or more federal individual or trust returns during 2011 are required to e-file them.

2010 Tax Changes

A number of pieces of legislation enacted during 2010 will affect returns filed this season, as will changes enacted in earlier years. The four biggest tax bills enacted in 2010 were the health care reform legislation (the Patient Protection and Affordable Care Act, PL 111-148, and the Health Care and Education Reconciliation Act, PL 111-152), the Small Business Jobs Act of 2010 (PL 111-240), and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, PL 111-312).

Changes Affecting Individual Returns

Itemized deductions and personal exemptions: The itemized deduction limitation is repealed for 2010 (and through 2012). This means that taxpayers can deduct the full amount of their itemized deductions in 2010. The personal exemption phaseout rules also do not apply in 2010 (and through 2012).

Alternative minimum tax (AMT): The 2010 Tax Relief Act included a patch of the AMT exemption amounts for 2010 and 2011. For 2010, the AMT exemption amounts are $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. The 2010 Tax Relief Act also extended (through 2011) the ability to use nonrefundable personal credits to offset AMT (under IRC § 26(a)).

First-time homebuyer credit: The IRC § 36 first-time homebuyer credit expired during 2010. It is available to eligible taxpayers who closed on their home purchase on or before Sept. 30, 2010 (under a binding contract in place before May 1, 2010). The closing date deadline was moved during the year from June 30 to Sept. 30 by the Homebuyer Assistance and Improvement Act.

Rollovers to Roth accounts: The Small Business Jobs Act allows rollovers from elective deferral plans to Roth-designated accounts. If a section 401(k) plan, 403(b) plan or governmental 457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. This provision is effective for distributions made after Sept. 27, 2010. The taxable amount of the rollover must be included in gross income (although for rollovers in 2010, the taxable amount is includible in gross income half in 2011 and half in 2012).

Extended Provisions for Individuals

A number of credits and deductions that had expired for 2010 were retroactively extended by the 2010 Tax Relief Act and are therefore available for taxpayers to claim on their 2010 returns. Those available to individuals include the $250 deduction for elementary and secondary schoolteachers for purchasing classroom supplies; the state and local sales tax deduction in lieu of a state income tax deduction; the deduction for tuition and related expenses; and allowance for tax-free distributions from individual retirement plans for charitable purposes.

For a list of extended provisions, see “Congress Resolves Many Tax Issues During Lame-Duck Session.”

Changes Affecting Business Returns

The Small Business Jobs Act introduced a number of changes that may affect 2010 business returns.

Small business stock: The act created a 100% exclusion of gain from the sale of certain small business stock under IRC § 1202. To be eligible, stock must be purchased after Sept. 27, 2010 (this provision has been extended through 2011 by the 2010 Tax Relief Act).

Section 179 expensing: The Small Business Jobs Act increased the maximum amount a taxpayer may expense under IRC § 179 to $500,000 and increased the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011.

Bonus first-year depreciation: The first-year 50% bonus depreciation available under IRC § 168(k) was extended for one year by the Small Business Jobs Act to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). This amount was then increased by the 2010 Tax Relief Act to 100% for business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property).

Business credits: The carryback period for eligible small business credits under IRC § 38 was extended from one to five years. The Small Business Jobs Act also allows taxpayers to use eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in the taxpayer’s first tax year beginning after 2009.

Self-employed individuals’ health insurance: The Small Business Jobs Act allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children who have not attained age 27 as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s first tax year beginning after 2009.

Startup expenses: The Small Business Jobs Act increased the IRC § 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning in 2010. The start of the limitation on the deduction is increased from $50,000 to $60,000. So for 2010 the amount of the deduction is the lesser of: (1) the amount of the startup expenses or (2) $10,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $60,000.

Cell phones: The Small Business Jobs Act removed cell phones from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property under IRC § 280A will no longer apply to cell phones.

Extended Provisions for Businesses

A number of business credits and deductions that had expired for 2010 were retroactively extended by the 2010 Tax Relief Act and are therefore available for taxpayers to claim on their 2010 returns. These include the credit for research and development expenditures and various empowerment zone designations and renewal community tax incentives.

What Your Clients Are Hiding From You. How to keep your clients from going to your competition.

2011-01-11T06:28:00.001-08:00

You will be speaking with all your clients in the coming weeks. Toward the end of the conversation, ask, “What’s one question (about taxes or money) that you’re not sure if it’s worth asking?” It’s thoughtful for you to ask and that in itself is a plus.

If the answer to your client’s question is long, complicated or you’re not sure of the answer, tell them you’d like to do some research and then will e-mail them the answer.

You’ve now created new articles for your blog, newsletter or LinkedIn posts. More importantly, you’ve made your client feel more comfortable asking you questions.

In today’s economic conditions, many of your clients have questions that they aren’t bringing up to you. Perhaps, they don’t know if you’re the right person to ask. If their concerns go unvoiced, these can end up becoming growing problems. If you don’t know what’s on their mind, you can’t help them, which in turn can lead to missed opportunities for your clients and your practice.

Many of your clients’ questions are about their own financial affairs … missteps, forks in the road or how they compare with others. As a CPA for many businesses and individuals, you have a wider angle than any one client. Sharing your wide-angle expertise is truly your value, over and above punching in the right numbers.

Some of your clients’ concerns may have to do with the federal income and estate tax changes. Politics aside, you can have frank conversations about how the changes (may) impact a variety of individual and business scenarios. It is a great segue to schedule a planning and advisory session.

The CPA who speaks about such issues at seminars, in newsletters, blogs and LinkedIn groups may lure them away. Moreover, when you proactively address your clients concerns, it engenders greater loyalty, possibly more business from them and often more referrals to others. Your private, one-on-one conversations with clients are truly the greatest form of marketing.

The second best marketing tactic is communicating with your clients, colleagues and other contacts regularly and consistently. The questions you pull out from any one of your clients give you the content for your blog, newsletter and LinkedIn updates. Remember what our grade school teachers told us? “Don’t be afraid to ask questions. If you have a question, most likely others do too.” Likewise, your client’s concerns represent the many unvoiced.

Your clients don’t want to sound stupid or waste your time. If you are one of the exceptional accountants who review your client’s financials and tax returns with them, ask them what they understand and what they’d like clarified. While this takes more time, it takes a lot less time than acquiring a new client. It also allows you ask your clients how much time their colleagues’ CPAs spend with them to go over such matters, and remind them that should their friends, family or colleagues need added clarification, you are more than happy to help.

These simple Q&A sessions are great training opportunities for your staff accountants. By including them with your clients, you are introducing your clients to your legacy. Moreover, your associates will learn the art of client service, over and above the skill of accounting. Over time, you can trust your staff to conduct such sessions on their own.

As you may have already realized, the world of blogging, newsletters, LinkedIn, client service and personal attention, are all one and the same. They should work together, feed off each other and be opportunities to help your clients, your staff and your practice. If you feel it’s awkward to ask your client’s questions, think how difficult it is for them to ask you.

You’re the most knowledgeable financial expert they know. Your clients trust you with their money matters. To not ask for questions is to do your clients and your firm’s marketing a disservice. Enjoy the conversations and turn them into your next blog articles, newsletters and LinkedIn posts.

IRS Says Tax Changes Will Cause Some Filing Delays

2011-01-04T06:55:00.001-08:00

If you are a college student, teacher or resident of a state that has sales taxes but no income tax, the bipartisan tax agreement this month could mean significant benefits next year. And the IRS is adjusting its computers to take in your requests.

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That means it will take a little longer for some taxpayers to file their 2010 returns, as the Internal Revenue Service reprograms computers for new college tuition breaks, teachers who buy classroom supplies with their own money, and Americans who live where there's no state and local income tax to deduct.

The IRS said Thursday that it will be mid- to late February before it can accept returns that apply for those tax breaks. However, delays will be minimal for taxpayers who already itemize deductions, because they normally have to wait for their financial documents.

"The majority of taxpayers will be able to fill out their tax returns and file them as they normally do," IRS Commissioner Doug Shulman said. "We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the new year to get our systems reprogrammed and ensure taxpayers have a smooth tax season."

The IRS will announce a specific date when it can start processing tax returns affected by the changes.

The changes in the law that will cause delays:

-The new line on Schedule A, Itemized deductions, to allow for state and local sales tax deductions. Taxpayers in states with income taxes usually chose that deduction instead. Taxpayers cannot complete Schedule A until this tax break is programmed in IRS computers.

-The new higher education tuition and fees deduction for parents and students, covering up to $4,000 paid to a post-secondary institution. Many parents and students, however, will instead use existing education credits.

-The new expense deduction for kindergarten-through-grade 12 educators who have out-of-pocket classroom expenses of up to $250.

The new tax law gives benefits ranging from tax cuts for millionaires and the middle class to longer-term help for the jobless.

Without the law, millions of Americans would have been hit with increases starting on New Year's Day.

The package retains Bush-era tax rates for all taxpayers, including the wealthiest Americans, a provision President Barack Obama and congressional liberals opposed. It also offers 13 months of extended benefits to the unemployed and attempts to stimulate the economy with a Social Security payroll tax cut for all workers.

Meanwhile, a board that reviews IRS operations said examinations of returns increased by 8 percent this year on taxpayers with incomes above $1 million.

Examinations of individuals with incomes below $1 million, small and large corporations, and collections, remained steady from last year. The rate of returns filed electronically rose slightly to 69 percent, while revenue from enforcement action was up from $48.9 billion in 2009 to $57.6 billion this year.

The IRS Oversight Board, which consists of nine members, was created by Congress under a 1998 law to oversee the agency's operations.

Tax Saving Suggestions from AICPA Tax VP

2010-12-28T08:48:00.000-08:00

Extension of the Bush tax cuts gives Americans more options as they do year-end tax planning. Specifically, the bill extended the charitable IRA contribution and state and local sales tax deduction for 2010.

Because the tax rates are extended, deferring compensation is an option for taxpayers who have that flexibility. The choice of estate tax method is new. The bill extends earlier provisions for energy credits and extends the American Opportunity Credit. Edward Karl, vice president of taxation for the American Institute of Certified Public Accountants, and other members of the AICPA tax staff suggest taxpayers consider the tax saving ideas below to cut their tax bills.

Top Off Retirement Accounts
Taxpayers can boost their retirement savings in a tax-efficient manner by contributing up to $5,000 to an Individual Retirement Account or Roth IRA if they are under 50 or $6,000 if they are 50 or older.

Claim the Saver’s Credit
Lower-income taxpayers should remember to take the Saver’s Credit for contributions they made to an employer-sponsored retirement plan, such as a 401(k) plan, or individual retirement vehicles, such as a traditional or Roth IRA. Taxpayers get a credit for up to half of what they contribute, although the maximum credit is $1,000 or $2,000 for couples.

Convert a Traditional IRA to a Roth IRA
Taxpayers who convert a traditional IRA to a Roth IRA in 2010 do not have to pay the tax due on the conversion in 2010. They can decide in 2011 if they want to defer 50 percent of the income to 2011 and 50 percent to 2012. While taxpayers can delay the payment decision as late as Oct. 15, 2011, they have to pay the tax when their taxes are due in April of 2011.

Contribute to Charities Tax Free
The new law allows taxpayers who are 70 ½ or older to make contributions to charitable organizations directly from IRAs without paying tax on the amount contributed from the IRA. Taxpayers can make these contributions during January of 2011 and have them apply to their 2010 taxes. Each taxpayer can contribute up to $100,000 for 2010 and 2011. Contributions for 2010 can be made until the due date of the 2010 return, which is April 18 for most taxpayers filing federal tax returns.

Offset Education Costs
Among the tax rules that taxpayers can use to offset 2010 education costs are the following:

* The American Opportunity Credit offers eligible taxpayers up to $2,500 per student for qualifying 2010 tuition and expenses, including books and computer equipment. The American Opportunity Credit can be used by students for the first four years of post-secondary education expenses. Importantly, taxpayers who pay no taxes may qualify for a refund of up to $1,000. The new tax law extends the American Opportunity Credit through 2012.

* An “above-the-line” deduction offers eligible taxpayers as much as $2,500 for interest paid on student loans, even if they don’t itemize deductions. The new tax law extends this deduction and increases the phase-out range.

* Section 529 college savings plans give parents, grandparents and others a way to contribute after-tax dollars in order to have earnings and interest accumulate free of federal, and in some cases, state taxes. No federal income taxes are paid on withdrawals from the accounts.

Take Tax Credits for Energy-Efficient Home Improvements
Homeowners who installed certain energy-efficient heating and air conditioning systems, water heaters, doors and windows, insulation and roofs are eligible to receive a credit to help reduce the costs. Taxpayers who did not take advantage of the credit in 2010 have an opportunity to do so in 2011, under the new tax law. A credit is available for homeowners who invest in green energy equipment, too. Such equipment includes solar electric systems, solar hot water heaters, geothermal heat pumps and wind turbines.

Consider Deducting State and Local Sales Taxes
Taxpayers can choose to take an itemized deduction for state and local general sales taxes on their 2010 taxes instead of the itemized deduction for state and local income taxes. Taking a deduction for sales taxes can mean a lower tax bill for taxpayers who make such a major purchase as a motor vehicle during the year or who live in states that do not have an income tax. The new tax law extends this option through 2011.

Choose Best Estate Tax Method
Taxpayers, who inherited property in 2010 when no estate tax applies, get nine months under the new tax law to choose whether to use the new estate tax rules (35 percent top rate and $5 million exemption) or no estate tax with the estate’s assets generally being subject to the carryover basis rules. Carryover basis rules result in a transfer of the decedent’s adjusted basis (typically, the owner’s original purchase price) to the beneficiaries. Historically, the basis of an estate assets have been established using stepped-up basis rules, which consider basis to be the fair market value of the assets at the time of the owner’s death.

Defer Compensation
Since tax rates will remain at current levels for the next two years, taxpayers may want to consider deferring payments into 2011 from such compensation sources as pensions, retirement plans and stock options.

Tax Season Starts on Time for Most Taxpayers; Those Affected by Late Tax Breaks Can File in Mid- to Late February

2010-12-24T07:35:00.000-08:00

WASHINGTON — Following last week’s tax law changes, the Internal Revenue Service announced today the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

The start of the 2011 filing season will begin in January for the majority of taxpayers. However, last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.

Taxpayers will need to wait to file if they are within any of the following three categories:

Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.
For those falling into any of these three categories, the delay affects both paper filers and electronic filers.

The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure a smooth tax season.

Updated information will be posted on IRS.gov. This will include an updated copy of Schedule A as well as updated state and local sales tax tables. Several other forms used by relatively few taxpayers are also affected by the recent changes, and more details are available on IRS.gov.

In addition, the IRS reminds employers about the new withholding tables released Friday for 2011. Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. The IRS also reminds employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov before year’s end.

Related Item: Forms Affected By the Extender Provisions

Payroll Tax Cut to Boost Take-Home Pay for Most Workers; New Withholding Details Now Available on IRS.gov

2010-12-21T05:51:00.000-08:00

IR-2010-124, Dec. 17, 2010
WASHINGTON â€• The Internal Revenue Service today released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011.
Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This reduced Social Security withholding will have no effect on the employeeâ€™s future Social Security benefits.
The new law also maintains the income-tax rates that have been in effect in recent years.
Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than Jan. 31, 2011. Notice 1036, released today, contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employerâ€™s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov in a few days.
The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than Jan. 31, 2011.
For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workersâ€™ pay as soon as possible but not later than March 31, 2011.
Employers and payroll companies will handle the withholding changes, so workers typically wonâ€™t need to take any additional action, such as filling out a new W-4 withholding form.
As always, however, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms. Publication 919, How Do I Adjust My Tax Withholding?, provides more information to workers on making changes to their tax withholding.

10 Things Small Business Owners Need to Know About Personal Guarantees

2010-12-14T08:33:00.000-08:00

In today's tight credit markets, more and more banks are requiring personal guarantees from applicants for business loans. These personal guarantees are just like they sound -- they are a personal promise to pay the business loan.

This promise allows the bank to pursue the guarantor’s personal assets as an alternative source of repayment.
At stake are all the assets a business owner has worked hard for years to accumulate, including his house, savings accounts, second home, cars, etc.
Because there are a lot of misconceptions out there, these 10 key points will help you understand what a personal guarantee is and how it works.

What is a guarantor? A guarantor is anyone who signs a personal guarantee, pledging personally to repay someone else’s obligation. This pledge can be secured or unsecured.
When does a personal guarantee go into effect? A guarantee is in effect once a guarantor signs the agreement with the lender and remains in effect until the loan obligation is satisfied or the lender releases the guarantee.
Who is required to sign a personal guarantee? Typically, a guarantor is an individual or entity with a relationship to the business that is borrowing money. This can include, but is not limited to: small-to-medium size business owners, real estate investors, partners and family members.
What is a “joint and several liability” clause? This clause, found in many personal guarantee agreements, means a lender can pursue any one or all of the guarantors for the entire amount of the obligation. In other words, each guarantor is at risk for the full amount of the loan. If a lender seeks repayment from only one guarantor, that person then would have to pursue repayment from the other partners.
Does filing for bankruptcy prevent a lender from pursuing personal assets? No. The lender may still be able to seek personal assets subject to a bankruptcy filing.
What about spouses? How are they impacted? If you are married, your spouse may have also signed a personal guarantee. In that case, should the business fail, your jointly owned possessions are on the line for the debt, as well as your spouse's assets and income. If your spouse did not sign a personal guarantee, their individually owned assets are not impacted; however, your jointly owned assets may be subject to legal actions taken by the bank.
What are your options for limiting risk concerning a personal guarantee? You can: a). decide not to take out the loan and remove any risk regarding a personal guarantee; b). find a credit worthy individual acceptable to the lender to cosign the guarantee (there is usually a fee for this); c). put some type of limit on the guarantee (e.g. – place a cap on the guarantee that is less than the loan amount). d). Sign the guarantee and then purchase Personal Guarantee Insurance.
What if a business is incorporated? Doesn’t that protect the business owner/guarantor from a bank’s ability to pursue personal assets? No. If a business owner signed a personal guarantee, then the bank can absolutely pursue personal assets in order to repay the loan.
Are business owners concerned about the potential impact when a personal guarantee is called? Yes. According to independent research commissioned by Asterisk Financial Group, 75% of business owners with personal guarantees have calculated the personal financial cost if it was called by their lender. This means that most business owners know what the impact on their lifestyle would be in this worst-case scenario.
What if I’ve exited the business? Am I still liable for the personal guarantee? Yes. The guarantee agreement remains enforceable until the obligation has been fully repaid or the bank releases a guarantor. Typically, the bank only releases you from your personal guarantee obligation when the loan is paid off, even if you’ve sold the business and moved on.

50,000 Inmates Claim Tax Refunds, Report No Wages

2010-12-07T06:09:00.000-08:00

December 1, 2010 (Associated Press) — WASHINGTON - A government investigator says nearly 50,000 prison inmates claimed more than $130 million in tax refunds this year without providing any wage information to the IRS.

A report by the Treasury Department's inspector general for tax administration stops short of saying the refunds were fraudulently claimed. It does, however, say the Internal Revenue Service should investigate further.
The report, scheduled for release on Thursday, is the latest in a series of audits looking at prison inmates claiming tax credits and other government payments.
The report noted that the IRS identified nearly 250,000 fraudulent tax returns during the 2010 filing season - a 50 percent increase over 2009 - preventing $1.48 billion in fraudulent refunds.

Smart Year-End Tax Moves for Investors

2010-11-30T05:48:00.000-08:00

There are plenty of reasons for taxpayers to scream. Here it is, year-end tax-planning time, when investors must decide whether to take gains or harvest losses and make important retirement-account choices. Yet crucial questions remain—not only about next year's tax law but also about this year's.
If Congress doesn't pass an extension of the Bush-era tax rates for upper-income earners, the top rate on long-term capital gains will rise by one-third next year—an increase that is double the rise in rates on ordinary income. The rate on dividends, meanwhile, could nearly triple. And many taxpayers are still waiting for answers on the 2010 alternative minimum tax, the estate tax and the gift tax.
Adding to taxpayers' anxiety, two serious overhaul proposals were just announced in Washington—one from President Obama's deficit commission and the other from the independent Bipartisan Policy Center. While it is unlikely they would be enacted in current form, they take aim at many prized benefits, from the mortgage-interest deduction to low capital-gains rates. It's natural to fear that moves made now could prove useless later, or even backfire.
Given all the uncertainty, is your annual year-end tax-planning session worth the effort this year? Yes—in fact it is crucial, because it could be your last chance to take advantage of today's low rates.
Congress will address taxes in December, and may (or may not) clear up 2010 and 2011 issues before year-end. Advisers like Mark Nash of PricewaterhouseCoopers LLP in Dallas are urging clients to get ready to pounce once the law becomes clear. "We are making plans [for clients] now that can be executed quickly before the end of the year, or looking at moves—like Roth IRA conversions or installment-sale elections—that can be revised next year," he says.
Even if Congress merely extends current law, understanding "wash sale" rules, loss-harvesting and Roth IRA conversions now can pay off later.
That is because the window is closing on current investment tax rates, now at historic lows. Already, many investors face a substantial tax increase in 2013 passed by Congress as part of the health-care overhaul. Every financial and political analyst interviewed for this story expects taxes on investments to rise more than taxes on wages in coming years.
The good news? Investors have enviable flexibility when it comes to timing income and deducting losses—far more than wage earners. There's so much to say about investment tax planning that we're saving other year-end tips for next week.

Capital Gains and Losses

If Congress extends the Bush 2001-03 tax rates for couples earning more than $250,000 ($200,000 for singles), then the top rate on long-term capital gains (those held longer than a year) will remain 15% for a year or two. If lawmakers don't extend the current law, then on Jan. 1 the top rate on gains will rise to 20%.

Whatever the outcome, a new 3.8% tax on investment income takes effect in 2013 as a result of the health-care overhaul. It applies to income from rents, royalties, dividends, capital gains and interest (except municipal-bond interest) for nearly everyone with adjusted gross incomes over $250,000 ($200,000 for singles). (For details, see "How the New Wealth Taxes Will Hit You," June 12.)

What you can do. People with liquid investments should prepare to act quickly this year if the Bush cuts aren't extended, or later if they are. That means understanding some important details of current law.
• Loss harvesting. If you sell an investment at a loss, you can use up to $3,000 per year of the loss to offset ordinary income like wages and "carry forward" the rest to shelter future investment gains. (Note: These rules apply only to investments held in taxable accounts, not tax-sheltered retirement plans such as individual retirement accounts and 401(k) plans.) Short-term losses are those from investments held a year or less, and long-term losses are from those held longer.
The rules on overall gains and losses are intricate but give investors room to optimize results. "Smart investors pay close attention to the timing of gains and losses in order to minimize taxes," says independent tax analyst Robert Willens.
If tax rates rise next year, it may make sense to hold off taking losses until January, when their value will be greater. On the other hand, many investors still have losses they took during the terrible downturn of 2008. If they can take short-term gains this year, Mr. Willens suggests doing so to use some of those losses. This can often work with proper planning.
Why use the losses this year instead of next if tax rates are going up? Although the losses would in theory be more valuable next year, Mr. Willens and others usually advise using them as soon as possible, because the market could change and waiting too long could erode their value.
Here's an example. Susan has $40,000 of losses left from 2008. This year, she has $50,000 of potential gains: $30,000 is long-term and $20,000 is short-term. She wants to use her loss and is worried about the prospects of the stock with the short-term gain. So she sells all the stock with the $20,000 short-term gain and enough of the long-term holding to realize $17,000 of gain.
The result: $37,000 of short- and long-term gains are sheltered this year, with $3,000 of losses left to offset her wage income. Why save $3,000 of the loss to offset wages? Because ordinary income is taxed at much higher rates than long-term gains, it's a more lucrative offset.
• Understand the wash-sale rules. If you sell an investment at a loss, you don't get the loss if you also buy the same holding 30 days before or after the sale. What many don't know is that these rules apply only to losses, not to gains. In the above example, Susan was free to re-acquire the stock she sold right away at a higher cost basis, which will reduce her taxable gain in the future. As long as transaction costs are low, it often makes sense to "scrub" your gains if you have losses.
• Mix and match. When reckoning gains and losses, remember that those on mutual funds and exchange-traded funds can offset gains from stocks, and vice versa.
Tax strategist Robert Gordon of Twenty-First Securities Corp. in New York notes that many taxable bonds have appreciated as interest rates have fallen. If an investor holds individual bonds with long-term gains, he suggests selling the bonds, in effect converting interest payments taxable at ordinary rates to long-term capital gains with a top rate of 15%. If the investor buys the bond back right away, he should elect to deduct the premium from the interest payments over the remaining life of the bond.
What if you are selling an entire business instead of a liquid investment? Many are pushing to finish deals before the end of the year, says Mr. Nash. Failing that, he says, some people with deals under way are selling the business to a trust before the end of the year to take advantage of the 15% rate, and letting the trust sell it next year. This is a complex move but could be useful this year for people selling substantial assets who have a buyer.

Dividends

If lawmakers extend the Bush 2001-03 tax cuts for upper-end taxpayers, the top rate on dividends will remain 15%. If they don't, the top rate may stay linked with the one for capital gains and rise to 20% (as requested by the Obama budget), or dividends will once again be treated as ordinary income, with a top rate of 39.6%.

What you can do. Individual investors can do little. Those who control companies can have them pay dividends before the end of the year. Several public companies, including Wynn Resorts Ltd., Limited Brands Inc. and Progressive Corp., have paid special or extraordinary dividends recently, ahead of possible changes next year.

Stock Options and Restricted Shares

So-called nonqualified stock options and restricted stock are now the most common forms of executive stock compensation. Employees who receive either type usually owe ordinary income taxes and payroll taxes (FICA) on the stock's value at current market prices when they exercise the options or the restricted stock vests. If they continue to hold shares more than a year after that, appreciation is taxed at long-term capital-gains rates, without payroll taxes.
If the Bush tax cuts aren't extended for all, the top rate on ordinary income will rise to 39.6% from 35% and on capital gains to 20% from 15%. In addition, there is the new 3.8% tax on investment income (described above) coming in 2013. The 2013 tax also adds a 0.9% payroll tax to the wages of couples making over $250,000 ($200,000 for singles). It would apply to income recognized when options are exercised or restricted stock vests.
What you can do. Plan not only for this year but also the next two, with the 2013 taxes in view. There is a lot to consider: ordinary tax rates, capital gain rates and holding periods, plus the stock's current price and its future prospects.
Eddie Adkins, a benefits specialist with Grant Thornton LLP, says he sees savvy executives planning now to avoid the 2013 increases. Because it may be hard to come up with the cash required to acquire shares or pay taxes, many are doing "cashless" transactions in which some shares are sold in order to cover the costs of keeping others, he says.
One caveat: The wash-sale rules (described above) come into play here. A grant of options or restricted stock, or an option exercise, count as buying stock, so be careful not to harvest losses from the same stock within 30 days before or after.

Roth IRA Conversions

Roth IRAs are in many ways the gold standard of retirement accounts. Assets in them can grow and be paid out income-tax-free, and there are no mandatory distributions for the owner, as there are with regular IRAs. Tax-free Roth payouts don't count in calculations for alternative minimum tax, Social Security tax, Medicare premiums or the 3.8% investment income tax coming in 2013, at least for now.
This is the first year all taxpayers may convert other IRAs to Roth accounts regardless of their income. Many have jumped to do it, even though that means paying full income taxes on the transfer. Roth sponsors have experienced a surge, with Fidelity Investments and Vanguard Group reporting four to five times the number of conversions as of this time last year.

A key Roth boon is that people who convert can reverse the transaction as late as Oct. 15 of the following year. This has led some to put different asset classes into separate Roth accounts with plans to undo the ones that have lost value or grown less. (See Tax Report, Aug. 14.) For 2010 only, investors may also split the conversion income and report half in 2011 and half in 2012, paying taxes at then-current rates. If the Bush cuts are extended, taking advantage of the deferral could make sense.

What you can do. Remember that Roth conversions work best when the following are true: Your tax rate will be the same or higher in the future; asset values have been beaten down; you have outside money to pay the tax; and you can transfer assets without moving into a higher tax bracket. In some cases, a conversion that raises income may help you avoid the alternative minimum tax.
Even a small conversion will start an important five-year clock running. Once the five years is up, Roth payouts of both principal and earnings are tax-free for those over 59½; if not, only payouts of principal are tax-free until five years is up. A December conversion starts this clock running as of the previous January.
But January is often a good time to convert to a Roth IRA, because this leaves the longest possible time to undo the conversion: almost 22 months. Those who convert in January 2011 will have almost until the 2012 elections to decide whether to undo the transfer.
Many taxpayers fear that if they pay to convert, Congress will change the rules in the future. The issues are many, but at least one expert familiar with tax theory and history, Columbia University Law School Professor Michael Graetz, plans a partial Roth conversion early next year.
"Waiting until next year gives until October 2012 to undo the conversion, and we should know more about where Congress is heading," says Prof. Graetz.
For one group of taxpayers who want to save for retirement—those who don't have current IRAs—a Roth conversion is close to a no-brainer. These investors can open a "nondeductible" IRA, put in up to $5,000—$6,000 if they're at least 50—and immediately convert to a Roth IRA with little or no tax.
This strategy doesn't work well for those who already have large IRAs, unless they're converting all their accounts. That's because partial conversions have to be prorated among pretax and after-tax IRAs. PricewaterhouseCoopers's Mr. Nash notes that this move can work for executives who have earned too much to have a deductible IRA, and sometimes their spouses as well.

2010 Year-end Tax Planning — Time to ‘Kick It Up A Notch!’

2010-11-23T06:40:00.000-08:00

We are reminded every day of the current uncertain tax environment. The more news our clients read, the more confused they become. I am constantly looking at prior tax laws trying to predict Congress’ next move. What advice should we give clients in these tough times?
Reading articles and going to conferences gives you all the raw material you need to construct good planning ideas for your clients. If you need planning strategies, you don’t have to look very far. Using these tax law strategies and adding creativity, objectivity and analytical skills have always been the strength of CPA tax planning. But as it stands now, that is not enough.
This year’s planning meetings will give us an opportunity to help clients with making decisions when clear vision does not exist. We have all seen some level of uncertain times, but this is the worst i that I have seen. See if any of the following situations sound familiar:

While speaking to clients about the Roth conversion, Charlie CPA was pointing out that his strategy was very sound mathematically. (This strategy has been adequately described in articles and webcast from the AICPA’s PFP and TAX divisions all year). Charlie found that while the basis of his recommendation was sound, clients were not jumping at the chance to convert. Charlie thought clients believed that “if it looks too good to be true, it probably is.” But he later discovered a different dynamic. He found two reasons they were hesitant to convert. First, some clients do not want to give the government money — no matter what. (Have you ever seen a client’s hand shake when writing a big tax check? Some of us have.) Second, some “do not trust government” when it comes to tax planning. Clients all rationalized this with “Congress will just take away the Roth benefits and I will lose.”

This situation is becoming common. In a recent meeting with a business client, Sue CPA suggested accelerating income to take advantage of lower tax rates for dividends achieved in a strategic business restructuring. The client was presented with a well-thought-out strategy (using key assumptions) that would save money. Sue was certain this strategy was good for this client which had always implemented her strategies in the past. This year, the client was frozen with inaction due to the uncertainty and lack of trust in the current tax system. Most clients are “common sense wise” even if they may be “tax law illiterate.” Sue’s clients just didn’t feel right paying tax in advance of when it was absolutely required.
Lindsay CPA has been presenting planning options to clients related to the much-publicized Bush tax cuts and the possible (maybe probable?) higher tax rates in the coming years. When presented with a well-thought-out strategy to accelerate income into the current year, her clients are still reluctant to act. They are concerned about playing a “game” in which rules can change both before and after they make a decision. We often have clients ask, “Can the government really pass tax laws after I have implemented my tax strategy retroactively?” And the answer is “yes.”
Estate and gift tax uncertainty may be the most egregious example of poor congressional tax policy. Clients have a right to know how to structure their affairs to reduce tax liability. I have found that this is not about avoiding paying tax. Many of my clients expect to pay some tax. I find they care more about not paying more tax than their neighbor! They want the tax rules to be fair, predictable and simple. Given the dramatic changes and uncertainty surrounding estate and gift tax laws, it’s easy to see why clients are reluctant to discuss planning.
What clients need from CPAs (in addition to well-thought-out strategies) is a “total analysis” and objective advice. Advice is the key word. Too often, CPAs lay out an outstanding analysis that concludes in two or three options and then ask clients to choose one. Clients usually don’t understand the tax law and look to CPAs for help to make tax decisions. Clients want this question answered: “What would you do if you were in my shoes?” And in the past, our analytical and logical skills showed us a clear path. Every situation is different, but CPAs are challenged, more than ever, to not just lay out options, but to also help clients make a decision. Client indecision is a decision and will often be the wrong decision.
Be prepared to address questions on your client’s mind, such as: What are the possibilities for tax changes? Will I be better off taking income this year or in 2011? Should I do estate planning when so many unanswered questions loom? Will I be better off on the sidelines while the tax law becomes predictable? No one is in a better position than CPAs to show clients the tax action plan that is custom designed for them.
More than ever it’s important to put yourself in your client’s situation. Consider their family situation. Think about their financial situation. What is their tolerance for planning strategies with no certainty of success? These issues allow you to custom design action steps for them.
If you tailor your recommendations to each client you will be able to take him or her from “options” to “action.” CPAs cannot guarantee the results of tax planning. What we can guarantee is the process we take to formulate our recommendations. Each recommendation should contain the following:

Analytical comparison of all options to formulate an objective list of solutions
Review of the client’s situation to check how the various solutions fit this client
Consideration of the client’s tolerance for taking risks to achieve above average results

I compare these times to the recent financial meltdown. Clients wanted answers and advisers did not have them. I was very impressed watching CPA peers, particularly those with the Personal Financial Specialist (PFS) credential, stand with their clients during those horrible times. They helped clients and each other make the tough decisions to survive. Many other advisers hid and did not answer the phone because they did not have answers.

CPAs have a unique opportunity to stand by our clients during this stressful time and help them make appropriate tax planning decisions. Clients appreciate and value CPAs’ objective advice and assistance. Time to step up year-end planning a notch (or two)! BAM!

More small businesses will be hiring

2010-11-19T08:11:00.001-08:00

CLICK ON THE LINK

Small businesses the engine of job growth are preparing to pick-up the pace, according to McLean-based Capital One Financial Corp. Thirty percent of small businesses polled by Capital One in the third quarter plan to hire workers in the next six months, 4 percent more than in the bank\'s second-quarter survey. The majority of small businesses are still on the sidelines. Sixty-three percent said in the survey, they would not be adding employees in the next six months. Most businesses will hold the line on other spending in the half year ahead. Capital One said 66 percent of small businesses say they plan to keep business development and investment spending at current levels, while only 16 percent plan to increase their spending. Fifteen percent said the would decrease spending. The modest improvement in hiring plans is more significant when considering the small business community\'s outlook in the third quarter. Just 27 percent of small businesses in the survey expect that economic conditions for their business were improving in the third quarter, down from 32 percent in the second quarter, and 39 percent in the first.Slightly more than half (51 percent) of businesses in the survey said their firm s financial position had held steady relative to one year ago, while 30 percent felt their firm s financial position had improved. Eighteen percent reported that their financial position had worsened.The survey was conducted for Capital One by Braun Research of Princeton, N.J., which interviewed a nationally representative sample of 1,901 for-profit small businesses in the U.S. Samples were also taken in New York, New Jersey, Louisiana, Texas and the Washington, D.C., area.

What Is the Future Outlook for Small Business?

2010-11-16T06:00:00.000-08:00

It’s that time of year when we begin looking ahead to the coming year. In fact, with 2010 drawing to a close (can you believe it?), it’s that time when business owners begin looking ahead to the coming decade. If you want to know what the next 10 years have in store, take a closer look at a new report from Intuit.
Intuit 2020 Report: 20 Trends That Will Shape the Next Decade builds on more than five years of research led by the Institute for the Future and Emergent Research. It is the first in a series of reports looking at key trends affecting consumers and businesses in the coming years. Subsequent reports will drill down into specific trends and industries, but the current report presents a broad overview.

What’s the takeaway? “The coming decade will be complex, volatile and uncertain, but it will also provide many new opportunities for small businesses and their customers in the United States and abroad,” the report notes. Here are some points I found especially interesting and that have big implications for the future of innovation:
Small businesses will get ever more specialized. Customers will increasingly seek customized products and services. The rise of innovations such as cloud computing, a flexible workforce and lower-cost manufacturing options will make it easier for small businesses to seek out product and service niches.
Startup will get easier and cheaper. In response to growing niche market opportunities, lower equipment costs and better technology, it will be easier than ever to launch a business without a big investment. This means more innovation, as new ideas can be tested without much risk – and startup companies will proliferate.
Big and small firms will join forces. Collaborative partnerships with big companies will increase, as small companies bring to the table innovative practices, market agility and intimate customer knowledge. What will big firms offer small businesses? Marketing and distribution power so that they can take their innovations to broader markets.
One prediction I’m not so sure I agree with: “The Web and mobile technologies will become the great equalizer of big and small, with customers no longer knowing – or even caring – about the size of the firm that provides their goods and services.” In a niche economy where personalization is sought after, will being a small company actually be an advantage? I think consumers may, in many cases, prefer to do business with small firms provided their needs are being met.
And here’s one innovation I particularly hope to see – and I think most busy business owners wish for as well: “The hardware and software we use on a daily basis will get smarter, helping people make everyday decisions and streamline complex tasks,” the report contends. That’s especially good news given that data will become even more critical to competitiveness. Information overload isn’t going away – so smart machines to help us deal with it will be very welcome.
Be sure to check out the full report. You can also find related materials at the Intuit website.

Editor’s Note: This article was previously published at OPENForum.com under the title: “What Does the Future Hold for Small Business?” It is republished here with permission.

IRS to Get Tougher on Sole Proprietor Audits

2010-11-02T07:53:00.000-07:00

The Internal Revenue Service will be taking additional steps to check on whether sole proprietors are hiding sources of income during field audits.
A report by the Treasury Inspector General for Tax Administration found that IRS field examiners are generally effective in checking for unreported income during field audits of sole proprietors. However, the report recommended that the IRS could take further steps to determine if additional sources of income need to be reported.

While IRS field examiners generally check for unreported income, TIGTA found that the IRS could improve the accuracy of its preliminary cash transaction analyses by taking greater advantage of performance feedback mechanisms and ensuring that appropriate personal-living-expense data are being used. The preliminary cash transaction analysis involves little or no taxpayer burden, but uses tax return and personal expense data to determine whether the sole proprietor’s income and expenses are roughly equal.
“Tests for unreported income during IRS audits of sole proprietors are critical to the process of verifying that the correct amount of tax is reported,” said TIGTA Inspector General J. Russell George in a statement. “Our results indicate that sole proprietors may have avoided tax and interest assessments of over $8 million in fiscal year 2008.”

The IRS’s National Research Program estimated that unreported business income by sole proprietors accounted for $68 billion (or 20 percent) of the $345 billion tax gap. This is due in large part to resource constraints and the need to balance audit coverage across other segments of the tax return filing population, such as corporations and partnerships.

TIGTA recommended that the IRS issue guidance to group managers to provide specific written feedback to examiners on the adequacy of their tests for unreported income, and that the IRS reinforce the requirement and importance of using appropriate personal-living-expense data in preliminary cash transaction analyses. The IRS agreed with these recommendations and plans to take the appropriate corrective actions.

Tax Planners Unsure What Moves to Make

2010-10-26T05:36:00.001-07:00

October 18, 2010 (Detroit Free Press) — The beauty of year-end tax planning this year is that you don't have to feel badly about procrastinating.

What kind of moves should you be making to cut that tax bill? Who knows?
"I don't know what to do," said James Jenkins, president of Jenkins & Co., an accounting firm in Southfield, Mich. "Call 1-800-PSYCHIC; try that."
Or maybe just wait until after Election Day, Nov. 2, to see what difference that might make.
Why all the uncertainty? Because $4 trillion worth of Bush-era tax cuts expire at the end of this year if Congress does nothing. Some could be extended; others likely will not.
So you may be seeing higher tax rates on capital gains and dividends.
President Barack Obama has a plan that increases the top marginal tax rates to 36 percent and 39.6 percent - up from 33 percent and 35 percent. Obama also has long promised that he would not increase taxes for most married taxpayers with incomes below $250,000 and for single taxpayers with incomes below $200,000.
Yet much is yet to be debated.
"People are still taking a wait-and-see attitude on a lot of this," said Andy Zaleski, senior director of BDO USA in Troy, Mich. "This is really an uncertain time for individual taxpayers."
Plenty of accountants and taxpayers are frustrated because it's not clear what changes are ahead.
The old year-end theories-such as delaying a bonus into another tax year or making a slew of charitable contributions before Dec. 31 - might or might not be helpful this year.
For example, taxpayers who think their tax rate will be higher next year could actually want to delay making charitable contributions until 2011. But that's not a good strategy for those who expect their tax rate to remain unchanged in 2011, said Bob Scharin, senior tax analyst for Thomson Reuters in New York.
One big question mark for investors: Where are long-term capital gains rates headed?
Under current rules, most taxpayers pay 15 percent on capital gains if they've held the property for more than one year before selling. Some individuals even pay a 0 percent rate on long-term gains if they're in the 10 percent or 15 percent income tax brackets.
Capital gains and losses are classified as long-term or short-term. If you hold an asset or property one year or less, your capital gain or loss is short-term.
If nothing is done in Congress, the long-term capital gains rate would change in 2011 to 20 percent for most individuals on assets held up to five years. The rate would be 18 percent if the assets are held longer than five years.
And beginning in 2011, again if Congress makes no moves, the long-term capital gains rate would go up to 10 percent for assets held up to five years - not 0 percent - for individuals in the 10 percent and 15 percent income tax brackets. For assets held longer than five years by those taxpayers in lower brackets, the 2011 rate would be 8 percent.
Scharin said one move that makes sense now is for some individuals in lower tax brackets to sell before Dec. 31 if they'd qualify for that 0 percent long-term capital gains rate.
This strategy could apply to married taxpayers filing a joint return on taxable income of up to $68,000. For singles, the taxable income could be up to $34,000 in 2010 to qualify for that 0 percent capital gains rate.
Scharin noted the 0 percent capital gains rate applies only to the extent the individual's taxable income does not exceed the appropriate threshold.
For example, let's say a married couple has $50,000 of taxable income, aside from capital gains. Scharin said for 2010 they can qualify for the 0 percent rate on up to $18,000 of long-term capital gains. If they have $20,000 of such gains, $18,000 would qualify for the 0 percent rate and $2,000 is taxed at 15 percent.
Scharin said it can make sense for taxpayers to lock in that 0 percent now. But you'd want to make sure how much you're selling and what level of taxable income you'd have for 2010.
If the 0 percent rate stays in place next year - that is, if Congress extended this tax break - you'd still have avoided capital gains taxes for 2010 and you'd be able to have a chance to take additional tax-free gains in 2011.

Is the Online Information About Your Business Correct?

2010-10-19T07:19:00.000-07:00

Check before you roll your eyes. A third of searchers say they give up when they can't easily find information -- and one in six say info about small businesses online is incorrect or confusing, says a new study.

Seven out of 10 consumers are more likely to use a local business if it has information available on a social media site, says a new study.
The annual study, called Local Search Usage Study: Bridging The Caps, From Search to Sales, is a joint effort of comScore and TMP Directional Marketing, a local search marketing firm. It includes an online survey of some 4,000 consumers, plus data gleaned from observing one million consumers who agreed to have their online searches monitored anonymously.
Having a page on Facebook is a start, but it's not a one-time effort: 81 percent of consumers using social media say it's important for businesses to respond to questions and complaints. And for the record, you do need to worry about reviews and ratings – 78 percent said they're important when deciding what to buy.
What else do you need to be doing with social media? Nearly four out of five (78 percent) of users want special offers, promotions, and information about events, 74 percent want regular posts about products, and 72 percent want posts about the company itself. (Wondering about posting those photos of the company office—or picnic? Two-thirds of those surveyed want to see them.)
If this all seems too daunting, the survey also suggests a simple starting place: make sure there is correct information about your business in as many places online as you can (Google, Yelp, Facebook, Twitter, etc.). Social networkers are 67 percent more likely to buy something than general searchers, but one in six searchers is frustrated by the lack of reliable information about small businesses on the Web – either it's not there at all, it's incorrect, or it's confusing or disorderly. One third of searchers give up on a business when they can't quickly find the information they're looking for.
Where are consumers looking first for local business information? Seventy percent of consumers go online first for local business information, up seven percentage points from last year. One third of the survey's respondents hit traditional search engines (up 2 percent from last year), 23 percent look to the old-fashioned yellow pages (yes, really – down 5 percent from last year, though), and 22 percent turn to Internet yellow pages (the survey includes sites such as Yelp in this category).
Then there's the 13 percent who search local sites, and 9 percent who search social networks (both up 1 percent from last year.) Keep in mind that most consumers reference multiple sources – these figures simply represent where a person looks first. It's also worth noting that, in the past, consumers were more likely to use the old-fashioned Yellow Pages to find a specific business; today, online searches are used when trying to find new businesses or products (or the best deals on those products).
Of the searches on local sites, far and away the winner was Google (Google Places) with 41 percent. Bing Maps placed second at 11 percent (up from 4 percent last year), and Yahoo! Local took 10 percent. Tied for fourth place, with 9 percent apiece: SuperPages, YP.com, and Yellowbook.com. Six percent of consumers used Mapquest, while Dexknows and Yelp each controlled roughly 1 percent of the market.

New Publication Highlights Major Accounting Developments of Past Year

2010-10-12T07:03:00.001-07:00

October 4, 2010 (SmartPros) — With another SEC announcement on the use of IFRS in the US expected in 2011, PwC releases new edition of IFRS and US GAAP: Similarities and differences.

PwC US released an updated edition of its popular IFRS and US GAAP: Similarities and differences guide. Its purpose is to improve companies’ understanding of the changes to, and major differences between, International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP).

The 2009 edition was PwC’s most-downloaded publication.

Even without a set conversion timeline from the SEC, IFRS has been affecting US companies for some time — through business dealings with non-US customers and vendors, along with the use of IFRS for statutory purposes by some non-US subsidiaries. In addition, US companies will experience an unprecedented change in accounting standards as key aspects of US GAAP and IFRS converge.

Amidst that backdrop, the 2010 edition of PwC's guide IFRS and US GAAP: Similarities and differences alerts companies to the timing and scope of changes that US GAAP/IFRS convergence, and the possible use of IFRS in the United States will bring about. It also provides context, showing how convergence with, or adoption of, IFRS has ramifications far beyond companies' accounting departments.

“Regardless of SEC rulings or delays in the US adoption of IFRS, companies should educate themselves on this topic to prepare for the future of their businesses,” PwC's US Convergence & IFRS Leader Jim Kaiser said. “Our guide helps companies navigate these issues, explaining the implications of US GAAP/IFRS differences in a comprehensive way. Similarities and differences is an important tool many companies rely on year after year,” Kaiser added.

The guide has been updated to reflect the major changes related to market conditions and accounting standards over the past year, with an overview of the new IFRS for Small and Medium-sized Entities standard. Further updates include:

Commentary and insight with respect to recent and proposed guidance, including developments pertaining to the overall convergence agenda;
Report on the US GAAP codification project;
More detailed analysis of current differences between the frameworks including an assessment of the impact embodied within the differences; and
Updates incorporating authoritative standards and interpretive guidance issued through June 30, 2010.

Guided by the 2010 edition of IFRS and US GAAP: Similarities and differences, both public and private organizations will gain a greater understanding of what their next steps should be to ensure they have allowed themselves sufficient time to prepare for transition. For more on PwC's IFRS resources, visit www.pwc.com/USifrs.

Taxpayers Face Oct. 15 Deadlines

2010-10-05T05:54:00.000-07:00

October 1, 2010 (SmartPros) — Oct. 15 is fast approaching and is a key deadline for millions of individual taxpayers who requested an extension to file their 2009 tax returns. It is also a crucial due date for thousands of small nonprofit organizations at risk of losing their tax-exempt status because they have not filed the required forms in the last three years.

“The Oct. 15 deadline is particularly important this year because it’s the last chance for many small charities to comply with the law under the one-time relief program the IRS announced in July,” said IRS Commissioner Doug Shulman. “And as always, it’s an important deadline for taxpayers who took an extension to file their returns.”

Don’t Miss Your 1040 Deadline
The IRS expects to receive as many as 10 million tax returns from taxpayers who used Form 4868 to request a six-month extension to file their returns. Some taxpayers can wait until after Oct. 15 to file, including those serving in Iraq, Afghanistan or other combat zone localities and people affected by recent natural disasters.

The IRS encourages taxpayers to e-file. E-file with direct deposit results in a faster refund than by using a paper return. Electronic returns also have fewer errors than paper returns. Oct. 15 is the last day to take advantage of e-file and the Free File program.

Free File is a fast, easy and free way to prepare and e-file federal taxes online. The Free File program provides free federal income tax preparation and electronic filing for eligible taxpayers through a partnership between the IRS and the Free File Alliance LLC, a group of private sector tax software companies.

File If You Are Tax Exempt
Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file the required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15 under the one-time relief program.

The IRS has posted on a special page of IRS.gov the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard) , and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

Small organizations required to file Form 990-N simply need to go to the IRS website, supply the eight information items called for on the form, and electronically file it by Oct. 15. That will bring them back into compliance.

Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.

Check Your Withholding
With little more than three months remaining in the calendar year, individual taxpayers are encouraged to double check their federal withholding now to make sure they are having enough taxes taken out of their pay.

“Now is a good time to make sure your employer is withholding the proper amount,” Shulman said. If you face a shortfall in your federal withholding, there is still time left in the year to make up the difference.”

The average refund for 2009 was $2,887, up 8 percent from 2008. Even though the Making Work Pay Tax Credit lowered tax withholding rates in 2009 and 2010 for millions of American households, some workers and retirees still need to take steps to be sure enough tax is being taken out of their checks.

Those who should pay particular attention to their withholding include:

• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some Social Security recipients who work and
• Workers who do not have valid Social Security numbers.

Retirees who receive pension payments may also need to check their federal withholding.
As was the case in 2009, taxpayers who wind up owing tax because too little was taken out of their paychecks during 2010, may qualify for special relief on a penalty that sometimes applies. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want. Failure to adjust withholding could result in potentially smaller refunds or in limited instances may cause a taxpayer to owe tax rather than receive a refund next year.

The IRS withholding calculator on IRS.gov can help a taxpayer compute the proper tax withholding. Worksheets in Publication 919, How Do I Adjust My Withholding?, can also be used to do the calculation. If the result suggests an adjustment is necessary, the taxpayer should submit a new Form W-4, Withholding Allowance Certificate, to his or her employer, or adjust the amount of quarterly tax paid.

2011 Tax Changes At-a-Glance

2010-09-28T07:21:00.001-07:00

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2011 Tax Changes At-a-Glance

A host of tax provisions enacted in 2001 and 2003--commonly referred to collectively as the "Bush tax cuts"--expire at the end of the year. While it's possible that new legislation could extend some or all of these expiring tax provisions, election-year politics make it difficult to predict what action, if any, Congress will take. With that in mind, here's what you need to know about the major changes that are scheduled for 2011.

Federal income tax brackets

Right now, there are six income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner.

2010 Income Tax Brackets--Married Filing Jointly

Taxable Income	Marginal Tax Rate
Not over $16,750	10%
Over $16,750 to $68,000	15%
Over $68,000 to $137,300	25%
Over $137,300 to $209,250	28%
Over $209,250 to $373,650	33%
Over $373,650	35%

As it stands now, there will be no 10% bracket for 2011, and the remaining bracket rates will return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.

Marginal Tax Rate

For 2010, if you sell shares of stock that you've held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you pay no federal tax on the gain.

However, these rates expire at the end of 2010. Beginning in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more. Finally, while qualifying dividends are taxed in 2010 using the same capital gains tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income subject to the increased 2011 tax brackets.

The Estate Tax

There is currently no estate tax for 2010, and special rules are in place that govern the way basis is calculated for property passing upon death. The estate tax reappears in 2011, however, with a $1 million exclusion amount (meaning that up to $1 million of assets will be exempt from estate tax) and a top tax rate of 55%. To put that in context, for 2009, the top estate tax rate was 45%, and estates received an exclusion of $3.5 million.

Year	2009	2010	2011
Estate tax exclusion	$3.5 million	N/A	$1 million
Top estate tax rate	45%	No tax	55%

Other Important Changes

Other changes for 2011 include:

Phaseout of itemized deductions and exemption amounts--Itemized deductions and personal exemption amounts will once again be phased out for higher-income individuals
The "marriage penalty" returns--Changes made to correct the federal income tax "marriage penalty" expire at the end of 2010, resulting in a reduced standard deduction amount and lower tax bracket thresholds (i.e., higher rates will apply at lower income levels) for married couples filing jointly in 2011
Tax credits get cut--The child tax credit will be reduced and both the Hope education tax credit and the earned income tax credit become less generous (the Making Work Pay tax credit also disappears)
Section 179 small business expensing--The increased IRC Section 179 expense limit ends (Section 179 allows small businesses to elect to expense the cost of qualifying property rather than recover the cost through depreciation deductions); the amount that a small business may expense will drop from $250,000 in 2010 to $25,000 in 2011

Recession officially ended in June 2009

2010-09-21T06:54:00.001-07:00

Recession officially ended in June 2009
uncertain about the future.

The National Bureau of Economic Research, an independent group of economists, released a statement Monday saying economic data now clearly point to the economy turning higher last summer. That makes the 18-month recession that started in December 2007 the longest and deepest downturn for the U.S. economy since the Great Depression.　
　
NEW YORK (CNNMoney.com) -- The Great Recession ended in June 2009, according to the body charged with dating when economic downturns begin and end.
But the news is little comfort to the millions of Americans still out of work, underwater on their mortgages or
Still, weaker economic data over the past few months have led to rising fears of a double-dip recession. The forecast of top economists surveyed recently by CNNMoney was that there is a 25% risk of a

In its statement, the NBER acknowledged the risk, but said "the committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007."
The NBER said it "did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity." Rather, it decided that June was when the economy hit bottom, and that it has been slowly but steadily growing since then.
"Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion," said the NBER.

"Obviously, for the millions of people who are still out of work, people who have seen their home values decline, people who are struggling to pay the bills day to day, [the recession is] still very real for them," he said.
Most economists have been saying for months that the recession likely ended in the summer of 2009.
"No, we are not still in a recession as some people have asserted," said Barry Ritholtz, CEO of Fusion IQ, a research firm based in New York. "No, it's not a depression. The wheel has turned, the trough is more than a year behind us. This is not a robust recovery, but the economy is now expanding, not contracting."
Ritholtz places the risk of a double-dip recession in the 20%-30% range. Some other economists have put the risk as high as 40%. One of those is Sung Won Sohn, economics professor at Cal State University Channel Islands. He said the NBER determination does nothing to reduce his fears of another recession looming around the corner.
"The primary reason is we don't have any cylinder powering the economy," he said. "It's hard to imagine where the strength comes from."
The NBER typically takes a long time to declare the start and end of recessions, waiting for all the economic data to be revised and finalized and making sure that any change in direction of the economy is long-lasting. It didn't declare that the recession started in December of 2007 until a year later.
0:00 /1:55Economists: Politics holding up economy
In addition to looking at gross domestic product, the broadest measure of the nation's economic health, the NBER also weighs employment, industrial production, income and sales for determining when the economy changes direction.
Gross domestic product has recovered to about 70% of its pre-recession level, said Lakshman Achuthan, managing director of Economic Cycle Research Institute and an expert in the dating of recessions. Other measures followed by economists, such as industrial production and sales, have also rebounded nicely, he said.

But he acknowledged that the rebound hasn't felt like a recovery to the typical American. He pointed to private sector employment -- only 9% of jobs lost during the recession have come back -- as an area of continued weakness.
That, and several other weakening indicators, are key factors in rising fears of a double dip.
Double-dip recessions are still relatively rare. The last one occurred in the United States when the 1980 recession was followed by another in 1981-82. The NBER waited until July 1981 to declare the end of the 1980 recession, which turned out to be the same month that it eventually determined the next recession had begun.

　
　Speaking to a town hall meeting in Washington, President Obama said the announcement about the end of the recession is further proof that steps taken early in his administration, including the economic stimulus package, were the right ones. But he cautioned it does not mean that the economy has recovered.within the next year, up from a 15% chance just six months ago.The housing recession isn't over

Some tax benefits for college costs expire at end of 2010

2010-09-14T06:14:00.000-07:00

Some parents have big dreams about what they'll do when their children start college. They'll take a cruise, go back to school, maybe walk around the house with no clothes on. But unless your child has received a generous scholarship, mooning your neighbors may be all that you can afford to do.

You can take some of the sting out of college bills by taking advantage of the credits, deductions and other tax-advantaged programs Congress has enacted to make college more affordable. At the end of this year, though, some of those benefits are scheduled to expire. Here's a look at what's changing:

Tax credit

The American Opportunity Credit, included in last year's economic stimulus package, provides a tax credit of up to $2,500 per student in 2010. You can claim the credit for up to 100% of the first $2,000 in qualified college costs and 25% of the next $2,000. To get the full credit, you'll need to spend at least $4,000 on qualified expenses.

Forty percent of the credit is refundable, so a low-income family that doesn't owe federal taxes could receive a check from the government for up to $1,000.

In addition, the income limits on this credit are broader than limits on the Hope and Lifetime Learning Credits, which have been around since the Clinton administration. Married couples with modified adjusted gross income of up to $160,000 can claim the full credit.

The credit is scheduled to expire on Dec. 31. There's a good chance Congress will extend it, "but the question is when," says Mel Schwarz, partner at Grant Thornton in Washington, D.C. One possibility is that Congress will wait until next year to extend the tax credit and make it retroactive for 2011.

YOUR MONEY: Student loan program changes affect rates, repayment

DEBT: Student loan debt exceeds credit card debt in USA

In any event, it makes sense to get the most out of the credit available for 2010. If you haven't already run up $4,000 in qualified expenses, here are some steps you can take before the end of the year:

•Prepay tuition. Many colleges send out tuition bills for the spring semester at the end of the year. If you pay the bill before Dec. 31, you can claim the credit for those expenses on your 2010 tax return, says Melissa Labant, tax technical manager for the American Institute of Certified Public Accountants.

•Buy next semester's textbooks. Textbooks and course materials are qualified expenses for the American Opportunity Credit. If your child knows what courses he or she is going to take in the spring, you can buy textbooks before Dec. 31 and claim the credit, says Gil Charney, tax researcher for H&R Block's Tax Institute.

You can't claim the credit for expenses paid with your 529 college savings plan, says John W. Roth, tax analyst for CCH, a publisher of tax reference books. Because 529 plans also receive special tax treatment — withdrawals are tax-free if they're used for educational purposes — that's considered double-dipping. Instead, use your 529 plan to pay for costs that aren't covered by the tax credit, such as room and board.

Coverdell accounts

Since 2002, Coverdell Education Savings Accounts have allowed families to save up to $2,000 a year in a portfolio of mutual funds or other investments. Contributions are after-tax, but withdrawals are tax-free as long as the money is used for qualified expenses. Along with college-related costs, the money can be used for tuition at a primary or secondary school.

Barring action by Congress, though, these accounts will become much less appealing after Dec. 31. Annual contributions will shrink to $500, and tuition for primary and secondary schools will no longer be a qualified expense, says Barbara Weltman, author of J.K. Lasser's 1001 Deductions and Tax Breaks. Even more significantly, a portion of withdrawals taken after Dec. 31 will be taxed, Weltman says. What to do before year's end if you have a Coverdell account:

•Roll it into a 529 college savings plan. As long as you roll the money directly into a 529 plan, you won't have to pay taxes on it. Withdrawals from 529 plans are tax-free as long as the money is used for qualified expenses.

•Spend the money. Under current law, you can use Coverdell funds to pay for a broad range of education expenses, including computers, school uniforms and tutoring. If you've got some money sitting around in a Coverdell account, "use it up," Weltman says. "That way, it's all going to be tax-free."

Five Rules for Collecting Late Payments

2010-09-07T05:38:00.000-07:00

The warning signs of a customer's cash-flow woes are easy to detect. Reduced orders, slowing payments, a change in phone number or business name, and a reluctance to get on the phone are all signs that trouble is brewing. Requests for duplicate invoice documentation or claims that "the check is in the mail" are also obvious stalling techniques. How should you respond to delinquent customers to improve your odds of getting paid? As business bankruptcies near a 16-year high, an informed response and a thorough credit policy are fundamentally necessary. Consider adopting the following five rules:

1. Initiate direct contact after a payment deadline is missed. The biggest mistake small business owners make is waiting too long to follow-up. The probability of collecting on a delinquent account drops dramatically each month following the due date, from 81 percent after two months to 52 percent after six months, according to the Commercial Collection Agency Assn. If an invoice remains outstanding for 12 months, the chance of collection drops to less than 25 percent, the trade group says.

"Demand letters rarely make a difference. Instead, get on the phone. Find out why the customer is late and nail down a defined payment arrangement," Steven Harms, a Birmingham (Mich.)-based attorney and collections expert, advises. Inquire about the state of the customer's affairs: Is business slow? Why are payments late? Customers operating in good faith will use this conversation as an opportunity to discuss their inability to pay and try to negotiate a revised arrangement.

Offering a discount for quick payment may also work in your favor, bumping your invoice to the front of a potentially growing chorus of creditors. Keep in mind that if things are going south for the delinquent customer, a bankruptcy court can claw back anything paid out within 90 days of a filing.

Before concluding the call, make sure you pinpoint a specific payment arrangement—including the amount to be paid, the deadline receipt, and the method of payment delivery. Ask your customer to sign off on a document summarizing the revised arrangement to make sure you are both on the same page; this documentation will be crucial should you find yourself in court.

2. Take broken promises seriously. If the new due date arrives and a check is nowhere to be found, the broken promise indicates that the customer is untrustworthy. At this point, you can hold back future deliveries, warranties, and service requests. Unless the customer is relying on your continued cooperation, however, you may have little leverage without taking more serious action. A past due bill will not show up as a strike on a credit report unless you take steps to file a claim in court.

3. Contemplate hiring a collections agency or attorney. Collections professionals specialize by industry and geography and are paid on their ability to collect—typically 10 percent to 25 percent of the invoice value. The bread-and-butter claims for the collections world range from $1,000 to $50,000, with smaller, younger claims usually being the easiest to collect. The best way to find a reputable agency or attorney is by seeking a referral from someone within your industry. Major industry trade associations, the Association of Credit and Collection Professionals and the Commercial Collection Agency Assn., can also offer recommendations.

4. Review legal options. Invoices under $5,000 can be pursued inexpensively in small claims court. Larger claims must be filed in civil court, a process that is far more complicated and will require the assistance of an attorney. If the action goes undisputed, you may secure a court judgement within a matter of weeks. If the debtor decides to fight back, the resolution can take several months or longer.

As defaults rise, more and more claims are making their way to court, creating a backlog in many jurisdictions. Be prepared for the process to take longer than it has in the past.

Even with a signed invoice and proof of delivery, the debtor still has the ability to fight back. The most common defense is to claim that the goods delivered were late, defective, or not as promised. Debtors tend to fight harder on claims over $50,000. This is when the terms and conditions in your invoice, the steps you take to enforce those terms, and documentation of your correspondence—particularly anything in which the debtor admits in writing that it owes you for a past due invoice—will come in handy.

If the court awards a favorable judgement, the collections process is still far from complete. A judgement is worthless without assets that can be seized, and the creditor's attorney will now be forced to play detective. This is where a detailed credit profile can make or break the process. A social security number, name of a banking relationship, trade reference, or old credit report can lead the way to property, bank accounts, or other assets that can be garnished by the creditor.

If this all sounds painful, that's because it is. "Your best defense against bad debt is a sound credit policy," advises Jocelyn Nager, a New York-based credit collections attorney with Frank, Frank, Goldstein & Nager.

5. Create a credit policy. Don't operate by the seat of your pants. To start, take a look at the International Association of Credit Collectors' guidelines. Collect extensive data at the onset of a credit application, with even tougher requirements for new businesses. Get credit-card details as a backstop to late payments. Invoices should contain detailed terms and be signed by buyers. Require late, damaged, or incomplete shipments to be reported in writing within days of receipt. Update your credit file every few months, particularly if the customer moves or changes phone number or company name. Also maintain a dialogue with your competitors, sharing news on customers. It's in everyone's best interest to cooperate.

Tax Reform Report A Letdown For Actual Reform

2010-08-31T05:59:00.000-07:00

Tax Reform Report A Letdown For Actual Reform

By BRIAN WINGFIELD

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Q: What do former Federal Reserve Chairman Paul Volcker, AFL-CIO boss Richard Trumka, General Electric CEO Jeffrey Immelt and billionaire Penny Pritzker have in common?

A: They’re all part of an exhaustive effort to examine the problems with the U.S. tax code–an effort that is likely to be ignored by Congress, at least in the near term.

These folks and other notables (including Harvard economist Martin Feldstein, venture capitalist John Doerr, TIAA-CREF chief executive Roger Ferguson and UBS Americas Group CEO Robert Wolf) are members of the President’s Economic Recovery Advisory Board, a panel that that President Obama set up in the earliest days of his administration. On Friday, the group released its long-awaited report on tax reform options.

Now we know why there was little fanfare surrounding the release, which occurred on a sleepy August afternoon while Congress is in recess and Obama was away on vacation. The problem with the 130-page report, as Tax Policy Center research associate Howard Gleckman points out, is that it includes no recommendations about how to reform America’s increasingly Byzantine tax code. “[T]his report is a huge missed opportunity,” writes Gleckman. “Obama might have used this exercise to jump-start a debate over fundamental tax reform. Instead, the report does nothing to fill the policy vacuum that is being filled by an argument over what to do about the decade-old Bush tax cuts.”

So what does the report actually say? It discusses the advantages and disadvantages of an array of policy options, like eliminating the alternative minimum tax, lowering the corporate tax rate, modifying capital gains taxation and eliminating tax expenditures. It’s useful as a primer for anyone wanting to know more about the complexities of the U.S. tax code and probably should be required reading for anyone with a hand in creating legislation to overhaul the tax system, whenever that may be.

But it’s not likely to be anytime soon. With the economy still slumping and elections looming, look for lawmakers to take a pass on making tough tax decisions, such as whether to let the Bush-era tax cuts expire as scheduled at the end of the year.

“We think that an extension of the Bush tax cuts for all income levels is growing more likely by the day,” says Brian Gardner, a financial analyst with Keefe, Bruyette & Woods, in a research note out Monday. “The biggest remaining question in our mind is whether the extension of the tax cuts is two years or one year (more likely).”

Consider State And Local Taxes Before You Take Capital Gains

2010-08-27T06:34:00.000-07:00

Consider State And Local Taxes Before You Take Capital Gains

Thinking of selling before rates rise? First consider the state and local tax bite.

Should you rush to take long-term capital gains before Jan. 1, when the top federal gains rate is set to rise from 15% to 20%? That depends, of course, on many factors, including whether you'll be needing cash or otherwise wanting to liquidate a holding in the next few years anyway.

But investors often overlook another key variable: the state and local tax bite. "It's kind of a forgotten-about tax," reports Carl DiNicola, an Ernst & Young partner in Irvine, Calif. It shouldn't be; 42 states tax gains and only a few of them have lower rates for long-term gains, making state tax a big deal when you take profits.

http://www.forbes.com/2010/08/25/state-capital-gains-taxes-personal-finance-10-highest-state-tax-rates_slide_2.html

At the federal level, ordinary income such as salary is taxed this year at a top 35% rate, more than twice the gains rate. But New York City residents pay the same top 12.9% state/local rate on salary and gains. Oregonians pay a top 11% rate and Californians a top 10.6% rate on both. In fact, among the highest tax states, only Hawaii, with a top 11% rate on ordinary income, cuts long-term gains a break; they're taxed at a top 7.25% rate.

In reality, then, you may not be deciding whether to pay a 15% tax now or 20% later but whether to pay, say, a 25% tax now or 30% later. "It may in many cases be unwise to sell something this year just to get the lower [federal] tax rate," say Kaye Thomas, a tax lawyer and author of Capital Gains, Minimal Taxes. Here are additional pointers:

Investigate the quirks.

Each state has little crazy rules," says Barry Horowitz, director of state and local tax for Eisner & Lubin in New York City. New Jersey, for example, doesn't allow taxpayers to carry forward capital losses, as is allowed for federal tax purposes. Tennessee taxes capital gains from the sale of mutual funds but not individual stocks. New Jersey, Connecticut, Kentucky and Ohio exempt gains on their own state's bonds from tax.

Auto expense allowance vs. expense reimbursements

2010-08-22T11:57:00.000-07:00

Auto expense allowance vs. expense reimbursements

Many employers provide certain employees with an auto expense allowance via a fixed monthly or periodic payment. Unless the arrangement meets the “accountable plan” business connection, substantiation, refund of excess payments and reasonable period rules under Treasury Regulation 1.62-2, the allowance must be treated as taxable wages to the employee, subject to withholding and payroll taxes. It also most likely is treated as compensation under the company’s 401(k) plan and is subject to the appropriate withholding election and employer matching contributions.

The employee is able to deduct the appropriate auto expenses incurred on his or her individual return per Internal Revenue Code (IRC) section 162, subject to IRC section 274 substantiation rules. The deductions are treated as miscellaneous itemized deductions under IRC section 67, which limits the deduction to the extent all such deductions exceed 2% of a taxpayer’s adjusted gross income. Also, the amount is not deductible for Alternative Minimum Tax purposes. These rules severely limit the benefit of the deduction to the employee.

Generally it’s better for the employee if the employer adopts a plan that meets the requirements of Treasury Regulation 1.62-2. If so, the allowance is not taxable to the employee. The employee must forgo claiming deductions for the expenses incurred; however, that’s not a big deal as noted above. Complying with such rules is burdensome for both the employer and employee and may result in the employee paying some of the allowance back to the employer.

I have a simpler solution. Provide the employee an expense reimbursement in lieu of the allowance. The reimbursement can be capped at the amount of allowance. The employer will reimburse the applicable employee using the IRS mileage rate times the number of substantiated business miles up to a maximum desired amount.

For example, an employer was providing an employee a $300 monthly auto allowance and treating it as W-2 wages because it did not have an “accountable plan” that complied with Treasury Regulation 1.62-2. The employer changed the arrangement to provide the employee a monthly mileage reimbursement using the IRS mileage rate up to $300 per month. This reimbursement is not treated as W-2 wages. However, the employee cannot deduct the expenses relating to the business miles being reimbursed. Again, not a big deal.

The savings comes from excluding the $300 from wages for the employee and avoiding payroll taxes on the payment for the employer. It also may reduce certain compensation based insurance premiums and other retirement plan contributions.

The mileage substantiation can include calendars, dictation transcripts, or daily mileage logs. I use a daily log. It’s easy. I have not heard that any of my clients who use the reimbursement system have employees who don’t turn in records substantiating the miles needed to obtain the employer’s maximum reimbursement.

Weekend

I spent it here in the office learning how to blog.