Archive for the ‘Anything Goes’ Category

Deductible Auto Mileage Expense Increase

The IRS has issued the new mileage rates.  Beginning January 1, 2013, the standard mileage rate for business purpose is 56.5 cents per mile (a 1 cent increase).  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 to 24 cents per mile.  The charitable mileage rate remains at 14 cents per mile.

All $250,000 taxpayers may be the Wrong Target…Too important for such a broad brush.

All $250,000 taxpayers will often be the wrong target if the goal is to rebuild the economy with private sector jobs.

I have served small and medium sized private companies for over 35 years. The proposed tax increase on those so called “wealthiest Americans” is one of those broad brush solutions that will turn out to be counter-productive.

We know that employment is driven primarily by small to medium size privately held companies.  This makes sense.  These are usually owned by someone who lives in the U.S., works in the U.S. and does business primarily in the U.S.  Simply put, most small businesses exist to create a job for their owners and employees.  Contrast this “business purpose” with the purpose of a public company.  Public companies strive to build shareholder value.  Ever increasing pressure to create earnings tends to push labor intensive processes overseas and eliminate jobs through automation.

A study of most business classes will indicate that profit margin (net profit) generally runs between 5% and 10% if the business is profitable.  This category called “small to medium” size will have revenues somewhere between $2 million and $200 million.

Most of these businesses report their income and pay their taxes on the owner’s tax return.  Most of these business owners will tend to take salaries in the low 6 figures….say between $100,000 and $300,000.  Now let’s say that a typical “expanding” business grosses $5 million and nets 5%.  That net is $250,000.  When you add that to the say, $200,000 in salary, you are right in the cross hairs of the president’s proposed tax increase.  What may not be understood is that the $250,000 in profit is not in the owner’s hands.  It is in the business.  These earnings pay for things like new equipment, additional employees, debt principal and owner draws for taxes which are not deductible. 

In the accounting business, we call the $250,000 in my example “pass through” income.  The taxable income is passed to the shareholder’s or partner’s tax return, but the cash generally, is not.  When you tax it, the money has to come out of the company’s working capital leaving fewer dollars for expansion, hiring new employees, etc.

Also, when this “pass through” income is added to the owner’s salary, it is taxed at the owner’s highest rate which will be higher than the corporate rate if the President’s proposal is accepted by Congress.  It should not be taxed at a higher rate than the large corporations pay.  To do so will further cripple our economy.

An Individual who makes $200,000 per year in salary or a couple that makes $250,000 without adding any jobs to the economy probably ought to pay more tax.  But a business that employs people should not be subject to the same level of tax.  Fairness is not at issue here.  Our struggling economy is the issue!  There should probably be some sort of exemption or maximum rate of tax (like the current treatment of capital gains) for business pass through income that will help stimulate job growth in the economy.

Unusual Year for Tax Planning

Today is the day.  It’s VOTING day and likely one to go down in history as a game changer.  We have two very different options and two very different paths for our future.  I find it interesting how much social media has contributed to this election.  Almost everyone is talking about it and I feel it has increased the conversation that was lacking in prior years.  My generation (20-35 year olds) needs to step up, and I feel social media has helped start it.  When you see people talking about politics, it encourages you to pay attention and maybe even do some research.  I personally have done more research this year than all my prior voting years combined, and I for one think it’s a good thing.

 

Why am I talking about the elections? Because depending on who wins tonight (both president and congress) decides how we start guessing what the future holds… as far as taxes, that is.  Everyone agrees, our combined tax rates are at the lowest levels in recent history (some of you may remember the days when the top federal tax rate was 91%!).  It’s very likely that tax rates will increase, especially for the “wealthy”.  Usually tax planning involves finding ways to reduce the tax liability by deferring income and accelerating deductions.  It may not be the right choice this year.  Believe it or not, it may be a year to INCREASE the tax liability!  You read it right!  Pay more taxes.  Why?  Because you may be in a higher tax bracket next year and in future years.  This isn’t the right strategy for everyone.  Tax planning is complicated and should always involve your tax advisor.  We will start discussing possible strategies in the weeks to come that may be helpful to you when developing a tax plan with your tax advisor.

Don’t forget to vote!

Whistleblower gets a Payday

According to the National Whistleblowers Center, the Internal Revenue Service (IRS) has awarded former UBS banker Bradley Birkenfeld a whistleblower reward of $104 million which is believed to be the largest reward ever given to an individual whistleblower in the US.

The IRS is authorized to pay rewards from 15% to 30% of the collected proceeds if information provided by a whistleblower substantially contributes to the detection and recovery of taxes, penalties and interest. While the IRS was aware of the compliance issues and the illegal offshore banking scheme, it was Mr. Birkenfeld’s disclosures that “formed the basis for unprecedented actions against UBS” and resulted in a fine paid to the US by UBS bank for $780,000,000 (that’s a lot of zeros!). The IRS also launched the amnesty program for taxpayers to voluntarily disclose their offshore accounts which resulted in 35,000 taxpayers participating and paying over $5 billion in back taxes, fines and penalties.

This is Your Blog Too!!

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!

IRS Announces Cost of Living Adjustments

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.

Time may be running out for large tax-free gifts!

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 23rd (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 23rd 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!

Year End Tax Planning Time!

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!

The Dry Cleaner

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.

Micah Dean Dorsett is here!

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!

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