Archive for the ‘Anything Goes’ Category

I can’t believe this blog will celebrate its two year anniversary in April.  I think we should have a party!  Oh wait, we already do… it’s our “end of tax season” party.  We’ve had our ups and downs but I’m proud of us for sticking with it.  Our staff stays very busy and sometimes posting a blog is challenging.  Things got pretty quiet during my four months of maternity leave last year, but I’m back!  I know you are excited! 

We created this blog to help you; our readers, our clients, our friends.  We know you are bombarded with information.  Tax and accounting can sometimes be intimidating topics.  Our goal is to keep you informed so you can be better business owners, employees and asset managers.  You can help us by giving us your feedback and requests.  If you have a question related to a particular blog already posted, leave a comment.  You can always email us questions on requested topics.  There are no dumb questions.  I’d bet money that if you have a question, many others have the same one.

One of my personal goals this year is to ramp up the blog again.  I want it to be resource for our readers. 

So bring on the questions!

The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other tax benefits for Tax Year 2012.  The highlights include: 

• 401(k), 403(b) and most 457 plans elective deferral increased from $16,500 to $17,000 (Catch-up contribution limit for those aged 50 and over remains unchanged at $5,500) 
• Defined benefit plan limitation increased from $195,000 to $200,000 
• Limitation for defined contribution plans increased from $49,000 to $50,000 
• The definition of a highly compensated employee is increased from $110,000 to $115,000 
• The definition of a key employee in a top-heavy employee benefit plan is increased from $160,000 to $165,000 in compensation
• Personal and dependent exemption increased from $3,700 to $3,800 
• Standard deduction for married filing a joint return increased from $11,600 to $11,900 
• Standard deduction for singles and married filing separately increased from $5,800 to $5,950 
• Standard deduction for heads of household increased from $8,500 to $8,700 
• The foreign earned income deduction increased from $92,900 to $95,100 
• Exclusion from estate tax amount increased from $5,000,000 to $5,120,000 (The annual exclusion for gifts remains unchanged at $13,000) 
• Standard Continental United States  per diem rate increased to $123 ($77 lodging, $46 meals and incidental expenses) 

New business, medical and charity mileage rates have not been released as of this writing.

Early this year, Congress passed a two-year revision of the Estate tax law.  One of the elements of this “two year wonder” is that the amount exempt from gift tax was increased to $5 million.  This meant that a married couple with proper estate planning in place could gift up to $10 million to heirs without any gift tax.  We have never seen an exemption of this magnitude.  The law as passed earlier this year expires 12-31-2012 when, if congress doesn’t act, it returns to $1 million. 

The congressional “super committee” charged with balancing our budget is seriously considering  changing this $5 million exemption back to $1 million THIS MONTH!

Rumor has it that for a variety of reasons, this is a compromise Republicans appear willing to accept.

The fear is that the change will take place in a bill which will get an immediate yea or nay vote in the senate.  If passed as expected, it will be enacted as part of a deficit reduction measure which will become law as of the vote….likely on November November 23^rd (Thanksgiving is early this year).

Those who have been planning to make large gifts to take advantage of this $5 million exemption need to complete these gifts by November 23^rd to be safe.  If you had planned on revising your estate plan to put a large gift into play before the end of 2012, I think you should move on those revisions quickly. 

Gifts of this magnitude should never be made without careful thought and planning.  If you have that sort of wealth and you wish to pass it to your heirs at some point, it would be extremely wise to get started on the planning.  If this pending reduction doesn’t become law this month and it is being considered as a deficit reduction measure, there is little chance that the $5 million exemption will survive into 2013 and beyond as many estate planners initially thought.

We always suggest that you seek professional assistance when considering strategies like this.  It is MOST IMPORTANT in the area of estate and gift planning!

As the end of 2011 approaches, it is a good time to start year-end tax planning to minimize your individual and business taxes.

Here is a list of Year – end strategies for individuals:

1. Realize losses on stock while substantially preserving your investment position. For example, you can sell the original holding at a loss, then buy back the same securities at least 31 days later.
2. Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year. However, in some cases, it may pay to actually accelerate income into 2011 if a person’s marginal tax rate is much lower this year than it will be next year.  Bush tax cuts apply through 2012. If Congress does not act rates will go up in 2013.
3. Consider using a credit card to prepay expenses that can generate deduction for this year.
4. Estimate the effect of any year-end planning moves on the AMT for 2011 keeping in mind that many tax deductions allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction of property taxes, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. As a result, in some cases if you pay Alternative Minimum Tax, these deductions should not be accelerated.
5. If you believe a Roth IRA is better than a traditional IRA, and wish to remain in the market for the long term, consider converting all or part of your traditional IRA to a Roth IRA. Keep in mind, however, that such a conversion will increase your taxable income for 2011. If you are expecting a business loss in 2011 that could offset the income realized on the Roth conversion, your tax consequences may be minimal.
6. If you are a homeowner, make energy saving improvements to the residence. You may qualify for a tax credit.
7. If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by your IRA trustee.  This is more tax efficient than taking the IRA distribution in cash then making a cash contribution.
8. Purchase qualified small business stock (QSBS) before end of this year. There is no tax on gain from the sale of such stock if it is purchased after September 27, 2010 and before January 1, 2012, and held for more than five years.

Although I have covered a number of topics in this blog, I did not address every issue.  We recommend that you always, see a professional when considering tax planning strategies for your personal situation.  There are very important details underlying each of these strategies which must be thoroughly understood before you employ them!

One morning I stopped by my dry cleaners to drop off some clothes. There was a sign on the door thanking the loyal customers of so many years, and due to an equipment breakdown, same day service was no longer available.  Also, the prices were increased by about 40%. The reason I have been using this cleaner for the past 20 years is that he offered same day service.  The convenience of only having to remember “CLEANERS” one day a week made this dry cleaner very appealing to me.  He was also the cheapest cleaner in town.

One day I asked the owner what happened.  He told me that his equipment was very old and he had never been able to save enough money to replace it.  Now, with credit markets as tight as they are, he cannot get financing to purchase new equipment. 

There are valuable lessons here for business owners: 

It is critical that you know your competitive advantages and disadvantages, in the customers’ eyes.  This business owner thought that he had to have the lowest price to compete.  So he priced his service about 16% to 30% below the competition. He was the only cleaner that offered same day service without an extra “same day” charge.  Now, he no longer has either the price advantage or the service advantage; he is just like his competitors. 

I wonder how much business he would have lost if he raised his prices to a point midway between the competition’s regular price and their “same day” price?  Certainly, he would have lost the “bottom feeders”, but by observation, most of his business was “going out” or office work clothes and uniforms…..clothes people need every day for work.  I’ll bet he wouldn’t have lost much business at all.  You are talking about 50 to 75 cents per garment. 

Here are some lessons in this unfortunate story:

1. Know your costs…..including the wasting cost of the assets used in your business.  Nothing lasts forever.  Manufacturers have data they are more than willing to share.  Also consider the obsolescence risk.  Due to the high cost of labor, most manufacturers are automating equipment to greater degrees to limit labor inputs.  Many business owners think of depreciation as something you do for taxes.  In reality, it is “a rational method of allocating the cost of an asset to the periods it is used in the business.”
2. Know your customers.  Ask them why they like to do business with you.  They will tell you.  If my cleaner friend had asked me I would have told him that it was worth a premium to be able to pick up my cleaning the same day I dropped it off.  If most customers were like me, he could have earned more over the life of his business and been in a position to replace the equipment.  When he is ready to retire, he would have had a saleable business.  I’m not sure he has that anymore.  He’s just another dry cleaner now.
3. Find differentiators other than price.  Someone else can always do what you do cheaper.  Find a unique value proposition you can offer your customers and set your price based on that value proposition.  Regularly review your cost of providing the goods or services you sell and make sure you protect your margins. Frequently we help our clients in this regard by illustrating “cost, volume profit analysis” at various price points with various volume assumptions.  It is much easier for a small business to achieve and retain profitability at low volume and high margins than attempting to ramp up volume and hold down prices.
4. Always keep an eye on technology as applied to your business.  Don’t be afraid to adopt new technology if your due diligence indicates that it will improve your value proposition. 

Michael Gerber, author of the “E Myth” and several other best selling business books, has built an empire based on a simple concept:  An owner must work “on” his business, not “in” his business.  

We must all work smarter, not harder.  Working hard at the wrong thing frequently leads to exhaustion, burnout and failure.

Jessica Dorsett, CPA and Senior Accountant at Polito Eppich Associates, adds proud mom once again to her resume.  Jessica founded our blog and is a major contributor to our firm so…Congratulations to Jessica and Brett on the birth of their son, Micah!  He was born on 8/29/11 at 10:35 p.m. and weighed in at 7 lbs. 13 oz.  Mother and father are well and adjusting to sleepless nights for a while.  2-year-old Chase has a new little brother and will have to share mom but is warming up quickly.  Brett is helping out until Grandma comes in this week!  Our best wishes on the blessed addition to your family!

Well, it finally happened.  Sort of.  A deal has been made on the debt ceiling issue and supposedly there will be no new taxes.  Congress agreed to make $917 billion in spending cuts (over 10 years) and the President is able to raise the debt ceiling by $400 billion.  Future debt ceiling increases of $500 billion have also been authorized.  No one actually likes the deal, but apparently it is as good as it’s going to get according to Congressional leaders.

Where are the $900 billion in spending cuts going to hit?  Well, that is up to a joint committee to determine.  This “committee”, which has not yet been established, has until November to make its recommendations for a vote by Congress.  If unsuccessful, automatic spending cuts would occur which have already been established.

They say that there will be no tax increases.  The problem is, those Bush-era tax cuts that were extended last minute… (remember that chaos?) are set to expire December 31, 2012.  Do you think they forgot about that?  I highly doubt it.  In addition, there are tax increases which will mostly affect the high income earners that are set to begin in 2013.  I’m sure Congress is counting on those tax increases. 

I personally struggle with the continued last minute deals that really don’t make a difference except to calm down the immediate crisis.  Politicians are letting their political aspirations limit their actual potential impact for good in our government.  Everything they do and pass is for a temporary fix.  They extended the Bush tax cuts for only two years… they extended the estate tax and AMT issues out for two years… they refuse to actually take on the tax system and give it a much needed tax reform.  I can’t be too harsh.  The “Gang of Six”, made up of six Senate members, has been working on a comprehensive tax reform plan.  However, it’s far from being ready for proposal to Congress.  At this point, it’s hard to say where those efforts will lead us. I understand that with the two main parties having such differing opinions on tax issues, this task is not an easy one.  But no one can deny that something has to be done.  

For more information see the ‘Debt Ceiling breakdown of deal’ on CNN’s website

The continuing unemployment news makes it obvious to me that we must find a way to compete again in the manufacturing sector.  There are long lists of reasons why we don’t make things in America anymore, but the fact is, we must if we want a vibrant economy. 

Not all of us are capable of being “knowledge workers” or similar highly educated people employed in high tech or service industries.  There will always be a portion of any population that thrives by making things – performing physical labor.  We cannot continue to “legislate” or “collective bargain” the value of that labor; the world economy has set the value.  The market always sets the value of goods and services. 

During the great depression, the organized labor movement got a huge boost as the government came to the aid of the then under-represented American laborer.  Over the years the protections and bargaining rights have developed to the point where in many industries our labor has simply priced itself out of the market.  Labor unions have in many cases, caused manufacturers to move manufacturing off-shore or to “right to work” states” in the U.S.  It appears to me that unions are now costing their members more jobs than they are saving. 

I have made it my business to look for US manufacturing companies that are flourishing.  It seems that those few (and the numbers are growing) have developed a niche, are fanatical about quality, and happy enough to make a profit.  Their goal is not necessarily to go public or make gazillions of dollars.  They are typically small, efficient businesses who have identified a need in the marketplace and filled it….with high quality, appropriately priced products.  They do not compete on price; they compete on quality and service. 

Typically the stakeholders of these small companies are the owners’ families, their customers and their employees; not investment banks and shareholders.  This is the way most businesses get started; identify a need and meet it, making a good living and return on investment in the process. 

I now find myself looking carefully at where the things I buy are made.  If I can find a product made in USA that meets my needs, I buy it over the foreign made competition.  Thus in my own small way I am supporting my fellow Americans.  There is a growing movement to increase support for U.S. manufacturers.  Check out Diane Sawyer’s  Made in America Challenge.   Also there is an interesting blog called   “China Ate My Jeans”  written by my cousin, Tina Parsons, who has made 2011 the year she will try to purchase nothing unless it is made in the USA.  She has identified many US companies who are slowly beginning to rebuild our manufacturing sector. 

It may never be possible for U.S. manufacturers to compete on price in the world marketplace.  However, on a local or “close to home” level, niche manufacturers are beginning to flourish.  In my experience, the quality of the U.S. made products reward my extra shopping effort required to find them.  You won’t find these products at the local big box retailer.  You will have to look online buying direct from the manufacturer or at specialized “niche” retailers.

The IRS has issued the new mileage rates.  Beginning July 1, 2011, the standard mileage rate for business purpose is 55.5 cents per mile (was 51 cents from January 1 through June 30).  The most common uses of the rate include:

• Mileage reimbursement to employees using an accountable reimbursement plan (can be less than the federal rates, but never greater)
• Mileage deducted on schedule C
• Unreimbursed business miles deducted on Schedule A 

The IRS publishes these rates as a guideline, not a requirement.  Businesses are allowed to use a lower rate if they choose.  However, you cannot use a higher rate.  If a business reimburses its employees using a higher rate, the difference would be taxable to the employee. 

The mileage rates for medical or moving expenses also increased 4.5 cents from 19 cents to 23.5 cents per mile.  The charitable mileage rate remains at 14 cents per mile.

You may remember a few years ago when the sales tax in California increased by 1%.  That increase expired June 30, 2011 and as of July 1, 2011, we are back to a 7.25% state sales tax.   We’ve been waiting to see if the California legislature was going to extend it, since they can’t balance the budget. 

In San Diego, we have an additional 0.50% local tax which brings our sales tax to 7.75% in most areas.  Vista has an additional 0.50% city sales tax on top of that, bringing the new rate to 8.25%.  Click here to view the Board of Equalization’s chart of all cities in California and the sales tax rates effective July 1^st.  

Make sure your accounting software, POS systems, accountants, etc. are updated on the change. 

Be sure to see your tax advisor if you are uncertain of your responsibilities.  Any excess sales tax collected must be remitted to the state.