Archive for the ‘Around Town’ Category

The IRS enacted a nonrefundable income tax credit for “new qualified plug-in electric drive motor vehicles”. For each qualifying vehicle, the credit is $2,500…. plus $417 for vehicles with at least five kilowatt hours (kwh) of rechargeable battery power, and an additional $417 for each additional kwh above five, to an additional credit of $5,000. This brings the maximum credit to $7,500. 

This is great news considering the 2011 Chevy Volt is advertised as having a battery capacity of 16 kwh, the 2011 Nissan Leaf 24 kwh, and the Ford Focus Electric 23 kwh. For example, Volt owners would be eligible to receive a whopping $7,500 tax credit ($2,500 plus $417 (for kwh of at least 5), plus $4,587 (for the extra 11 kwh (16-5)). 

Electric model requirements for the credit are that the qualified plug-in vehicles must be powered ‘to a significant extent’ by an electric motor drawing power from a battery with a capacity of at least 4 kwh that can be recharged from an external source of electricity. Cars with the ability to use both a plug-in electric engine and gasoline engine, technically known as plug-in hybrid electric vehicles (PHEVs) are eligible. 

Vehicles with fewer than 4 kwh or weighing more than 14,000 pounds are not eligible. 

The credit will have a production phase-out similar to the previous hybrid vehicle credit. The phase-out per manufacturer begins once the total qualifying vehicles manufactured and sold for use in the U.S. since the beginning of 2010 reaches 200,000 units. From there, the applicable credit per vehicle will be cut in half for two calendar quarters, then reduced by 25% in the third and fourth quarters and fully eliminated after that. The phaseout is more generous than the Hybrid credit which started to phase-out at 60,000 vehicles per manufacturer produced and sold after Dec. 31, 2005. 

To claim the credit Form 8834, “Qualified Plug-In Electric and Electric Vehicle Credit” will be filed with the taxpayer’s returns.

Do you own a small business using QuickBooks or Peachtree as your accounting software?  Most likely you have stored critical unrelated financial information within the framework of the software.  By unrelated financial information we are referring to customer/client lists, personnel data, confidential client information, and other information used for business purposes.

Jump forward a few months from now and imagine receiving a letter from the IRS giving your business an examination notice (meaning you’re under audit).  How concerned would you be, or your clients for that matter, if the IRS requested your software database containing all this unrelated financial data?  Unfortunately this request is occurring more frequently and is being explained as the IRS’ attempt to modernize.  The IRS has purchased copies of various small-business accounting software to accomplish this task.  Requesting the electronic files is now standard operating procedure.

In recent years the IRS has ramped up efforts to more aggressively collect taxes from small businesses.  Statistics show that small businesses are one of the largest contributors to the “tax gap” (taxes owed but not paid or reported).  What better way to close the gap than to increase audits on small businesses where non-compliance is an issue?  Let’s face it…large corporations have their own accounting armada to keep everything straight with laws, regulations, and the taxes they pay.  Small businesses don’t have that luxury.

The main concern we have in providing IRS access to an accounting database is whether the auditor will stay within the scope of the requested information.  Do you want to IRS potentially contacting one of your clients?  Seeing what they purchase from you? Seeing what you purchase from vendors?  The fact that you are being audited is not something to brag about, but client relationships could be affected if some of their private information is handed over.  How would you feel if your personal information was handed over to IRS?  What would you do if you found out?  Another concern would be your reputation if  word got out that your business was under audit.  Questions could arise regarding the circumstances of the audit (randomly selected as opposed to improper filing). 

If a company turns over complete electronic records, there is no way of knowing what the IRS will do with that information.  The IRS has not addressed this issue except to say “privacy of return information” is of utmost importance to the agency.  Virtually all professional organizations in our industry are vehemently opposing this policy.

In subsequent posts we will discuss ways to approach this dilemma if you are audited and IRS requests your data base.

Steve Harrington is a local banker our firm has worked with for years.  His articale below provides very valuable information about potential SBA loans for commercial real estate.  Finally, some positive banking news during this slow economic recovery.

By the way, if you are interested in contributing to our blog, email Mary for more information.  mmm@politoeppich.com  

Steve Harrington
Senior Vice President
California Community Bank
sharrington@calcommunitybank.com
(760) 542-4230
(760) 542-4289 fax
(760) 390-4771 cell

I came across an interesting accommodation the SBA is allowing due to the challenging times in which we have found ourselves.  Many business owners utilize the SBA 504 loan program to purchase commercial real estate.  This program’s key benefit is 90% financing of the real estate and the improvements.  The financed portion is split between a bank loan in 1^st trust deed position for 50% of the property value or proposed project cost and an SBA loan in 2^nd position for 40%.  

The impact of the economic challenges we have faced over the last couple of years is that the value of the real estate, in most cases, has fallen more than the 10% equity.  I have a customer that would like to refinance his 1^st trust deed loan, but assumed that the SBA would be reluctant to subordinate to a new first trust deed.  This assumption was based upon his opinion that SBA would see that the current value of the real estate has exposed their 2^nd and would not approve a subordination request for a new 1^st trust deed.

 What I found through conversations with the local SBA representatives is that the SBA will require a copy of the new appraisal, but will not base their decision to approve a subordination request on the current loan to value ratio.  What is of concern is whether their loan is current and handled as agreed, and whether the new first improves the cash flow of the business.

We were introduced to Brendan Foote and his company, Cal Tax Group, Inc., through a client of ours who was able to claim quite a bit in California tax credits related to the Enterprise Zone.  This article gives the quick facts of what you need to know about the Enterprise Zone credits. 

By the way, if you are interested in contributing to our blog, email Mary for more information. mmm@politoeppich.com

Brendan Foote, Partner

Cal Tax Group, Inc.,  San Diego, CA  92101   

619-202-4198; bfoote@caltaxgroup.com

 “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” We are clearly in the midst of difficult economic times that limit our ability to grow a business, but for companies in certain areas of San Diego County, there is one program that may be the perfect catalyst to take steps in the expansion direction. The San Diego Regional Enterprise Zone is a California funded tax incentive program that encourages businesses and business owners in certain parts of the state to create job opportunities and buy equipment. Through lucrative tax incentives, companies creating eligible jobs and purchasing qualified equipment can look forward to tens of thousands of dollars in state income tax credits. 

San Diego’s Enterprise Zone is concentrated south of Interstate 8, stretching from Downtown and east, including the majority of the South Bay and border regions as well. Companies located “in the zone” can obtain state income tax credits for each new employee they hire who meets one of thirteen qualifying criteria. Among these criteria include; former military, those hired off unemployment, residents of the local communities and those laid off from their previous place of employment. For each employee that meets one of these qualifying criteria, companies can receive up to $38,000 in credits over a five year period. 

For qualified equipment purchased, namely manufacturing equipment or computer based equipment; companies can convert California sales tax paid on such expenditures into an income tax credit. 

All California income tax credits obtained can be carried forward indefinitely and used against any tax liabilities resulting from Enterprise Zone income. For pass-through entities such as S-Corporations and LLCs, the income tax credits flow directly to the shareholders of the company and can be applied against personal income taxes resulting from W2, K-1 and rental or other passive income sources generated within the Enterprise Zone. 

One of the best parts about this program is companies who have not yet participated can identify and claim credits retro-actively on amended tax returns for up to four years against taxes they have paid to the State. Refunds will be issued and any remaining credits can be carried forward for future use.

 In short, if you aren’t taking advantage of the Enterprise Zone Program, you are passing up “free” money.

We’ve had a few clients ask us about this “real estate sales tax” currently flying around on the World Wide Web.  Is it true?  Sometimes.  The new health care law made some changes to include a Medicare tax of 3.8% on investment income for the high income earners.  Investment income includes taxable gains on the sale of real estate.  You still get to exclude $250,000 of your gain on the sale of your principal residence ($500,000 if married) from taxable gains.

A tax attorney from Pennsylvania who calls herself “Taxgirl” wrote a great blog on this topic a little while ago.   See http://www.taxgirl.com/ask-the-taxgirl-real-estate-tax-in-health-care-law/ .

She did a thorough job in explaining what you need to know if you are selling real estate.  Of course, if congress repeals the health care law in its entirety, this could become a non-issue.  Call your tax professional for assistance in determining if this “surtax” on investment income is likely to apply to you.

Jeff Vistica, one of our business associates from Gradney & Vistica Financial Management offers this post with a comparison of my golf game to some other people’s investment behavior.   Enjoy!

By the way, if you are interested in contributing to our blog, email Mary for more information. mmm@politoeppich.com

What’s your take on golf?

Jeff Vistica,  CFPjeff@gradneyvistica.com www.gradneyvistica.com

You may be for or against the sport or maybe you’re not going to adopt a stance either way. Regardless, I hope you’ll chuckle at a comment by Santa Clara University Professor of Finance Meir Statman, in which he opined, “Golf seems stupid to me — a cognitive error that misleads avid players into spoiling a good walk.”

Is the man crazy; clearly doesn’t get it? Or are you nodding your head in sympathy? Don’t worry, I’m not suggesting there’s a right or wrong answer. In fact, his challenge to golf enthusiasts along with his editorial title — “What Investors Really Want” — got me thinking about the value of differing perspectives.

When you take your leisure time, what is it that you enjoy the most? The competitive nature of sport…achievement…or perhaps a restorative pastime? What you choose doesn’t matter much to me. What does matter is whether you know deep down which is the right answer — for you. Wherever you find your reward should be the driving force for how you choose to play.

Translate that into the world of investing: like most years, 2010 offered up the usual frenzy of financial distractions that threatened to ‘hook and slice’ us into unforeseen sand traps. For example, consider this sampling of 2010 headlines:

• May 29: “May 6 brought the ‘Flash Crash,’ a bewildering nearly 1,000-point slide that still defies explanation.” — The Wall Street Journal
• July 23: “The equity markets are not working on a scale that is truly shocking.” — Financial Times
• September 27: “Some 279 banks have collapsed since September 25, 2008.” — The Wall Street Journal
• December 3: “The unemployment rate unexpectedly rose to 9.8 percent last month.” — The Wall Street Journal
• December 29: “Housing market is still facing a blizzard.” — The Wall Street Journal

How did we respond to these and other reports? All too many investors reacted by swinging wildly at the risks and rewards from the previous hole, so to speak. Investors pulling their money in and out of the stock market documented this behavior. According to Morningstar, average stock mutual fund flows over the 36 months through November 2010 saw outflows of $414 billion, with $132 billion of these outflows occurring between November 2009 to November 2010.

Is this a wise strategy? Stocks in the S&P 500 Index ended the year up just over 15 percent. The Russell 2000 (U.S. small-cap) Index returned nearly 27 percent. International stock returns varied widely by country, with Peru and Thailand in the lead, and Greece and Spain in the basement. As a whole however, international stocks as measured by the MSCI EAFE Index, provided positive returns of just under 8 percent.

Investors who knew their game were best positioned to capture these sorts of returns in accordance with their personal risk/reward goals.  Those with a clearly established diversification plan realize a sound portfolio is built to ignore these distractions. They recognized that predicting market movements based on current events is nearly impossible and that a properly diversified portfolio is the winning strategy.

I was listening to talk radio yesterday morning and they were discussing the BYU suspension of Brandon Davies for having sex with his girlfriend.  The host ended the discussion by saying this quote from Maeser, the founder of BYU… it struck a chord and made me think.  I know this isn’t normal accounting talk, but I thought it was worth repeating Maeser’s quote: 

“I have been asked what I mean by ‘word of honor.’ I will tell you. Place me behind prison walls–walls of stone ever so high, ever so thick, reaching ever so far into the ground–there is a possibility that in some way or another I may escape; but stand me on the floor and draw a chalk line around me and have me give my word of honor never to cross it. Can I get out of the circle? No. Never! I’d die first!”

– Karl Maeser, Founder of BYU

Religious differences aside, think about this quote.  One’s word isn’t what it used to be. Society’s standards have been lowered and it’s a shame. (Geez, I sound like my mom!)

As auditors, we always consider the “tone at the top” set by management of the companies we audit.  If management holds itself to high ethical standards, they usually hold their employees to the same standards without hypocrisy.  Thus, if we determine that management does not put importance on high ethical standards, our audit risks increase… so we have to do more work… so the cost goes up.

Clearly BYU set the tone at the top and expects its students to adhere to those standards without exception.  Do we do the same in our companies?  How do you value your word?  What value do you place on honor?  Would you cross over “Maeser’s line” if you gave your word that you wouldn’t?  Would you die to keep your word?  Now it’s an extreme statement, because let’s be honest… why would you promise to never cross the line? Nonetheless, it’s something to think about!

Jessica Dorsett

Saturday is Jessica’s birthday and she is the thoughtful person who posts all the Happy Birthdays on our blog so here’s my feeble attempt to honor hers! 

Jessica has been with the firm over 5 years.  Paul recruited her on her wedding day!

Here’s the story…. 

Paul’s daughter Regina and Jessica are good friends.  A spot had opened up on our audit staff a week before Jessica’s wedding.  Paul knew that Jessica was a high achiever from years of connection when Regina and Jessica got together at the Polito house.  As often happens, Jessica had been recruited before graduation by a firm in San Diego and hadn’t even thought about our firm.  Literally on her way out the door to Jessica’s wedding, Paul asked Regina, “Do you know where she is going to work?”  “Some firm in Sand Diego, she’s not looking forward to the drive from Escondido”.   Paul told Regina to let Jessica know that “We would make her an offer she couldn’t refuse”, which Regina relayed to Jessica at her wedding.  After the honeymoon, Jessica interviewed with Don and decided to join our firm. 

She is thorough, professional and proactive and her contributions to our firm grow each year.  Her clients love her and often take the time to let us all know what a great CPA and person she is. 

She has propelled the firm’s baby boomers into the 21^st century leading development of our website design and blog content.  She also monitors our quality control program on the attest side of the practice. 

She is a dear friend to us all and raises the bar by her dedication.  This is going to be a great year for her as she and her husband Brett are expecting a new brother or sister for their 21 month old son Chase!

Paul Polito

Many of you who know me personally know that I am an amateur guitar builder.  I picked up this hobby when I was in high school back in the 60’s.  Every Christmas I usually receive gifts that “feed” this habit…….I mean hobby!  Most years its tools, gift certificates to woodworking equipment stores and the like.  This year, my lovely wife Helen gave me a new book written by Bob Taylor, founder and president of Taylor Guitars.  Bob grew up in about the same timeframe as me, loved the same music  I did and built his first guitar for the same reason I did…..he didn’t have the money to buy one!

In this very inspiring book called “Guitar Lessons” Bob shares with the readers the incredible story of how this tiny company started out and survived many years of no profits to become the most successful guitar manufacturer in the world.  I especially enjoyed hearing about how they hung on and improved the company during the 1980’s when acoustic guitars fell out of favor and the market dried up.  The market for acoustic guitars in the 1980’s was probably similar to the market for buggy whips in the roaring 20’s!

Each chapter recounts a lesson learned about things like lean manufacturing, automation and technology, employee relations, marketing, brand building, and more.  Any aspiring or struggling business person should read this book.  For years Bob and his partner Kurt couldn’t rub two nickels together so this book will definitely be a source of inspiration for anyone struggling to get a business off the ground.  There are many great lessons in this book about how perseverance eventually pays off and how listening to others can be the key to a breakthrough.  There are also great lessons in this book about risk and reward and doing the right thing no matter what.  The fact that it involves a very “hip” company makes it a valuable book for young people.

One of the nice features of the book is the short chapters which make “Guitar Lessons” a very easy book to read.  For someone like me who takes over a year to build one guitar, hearing about how Taylor Guitars got from one guitar a month to 500 per day was truly inspiring!  This is honestly one of the most enjoyable books about business I have ever read!

“Guitar Lessons, A Life’s Journey Turning Passion Into Business” is available at  Barnes and Noble both in hard cover or as a Nook Book.  I will send a free copy of Guitar Lessons to the tenth new subscriber to our Blog after this book review is posted.  New subscribers email your subscription request to Mary McDannold at  mmm@politoeppich.com .

We are very excited to have our first guest blog post.  Stephen Friedman with Regents Bank presented to our firm a few months ago about the changes in the banking environment.  Hopefully this is the first of many guest blog posts to come. If you are interested in contributing to our blog, you can e-mail Mary at mmm@politoeppich.com for more information. Thank you!

Stephen Friedman, SVP, Regents Bank

http://www.linkedin.com/pub/stephen-friedman/11/742/55a

A recent report by TowerGroup indicated that in 3Q10 for the first time in four years, the supply of commercial and industrial loans (C&I loans), measured by a loosening of bank credit standards, and the demand for business loans by all sizes of companies, is back in equilibrium.  While I don’t know if I fully buy into those statistics, the pendulum is definitely swinging back to normalcy in the commercial lending arena.

On the bank side of the equation, the past two years of negative growth can only last so long.  After wrestling with regulatory issues and troubled loans during the recession, bank shareholders and boards now expect growth from their management teams.  Banks currently have too much cash invested in Treasury Bills earning .25%, instead of in loans earning 6.0%.  Commercial loan balances at San Diego banks will drop organically just from loan repayments by approximately $2 billion over the next year.  Therefore local banks have to book at least this much in new credit extensions just to stay even.

On the company side of the ledger, every month that takes surviving business owners further away from the eye of the financial storm, 9/08 – 6/10, the more credit worthy these companies are and the more prepared they are to re-invest again in their business for growth rather than funding losses.   However, regulators are encouraging banks to wait to see at least one year’s worth of profitability and positive cash flow before considering an extension of credit.   Accordingly, businesses should consider preparing trailing twelve month financial statements, so that they can potentially access bank credit sooner than if they wait until they achieve satisfactory fiscal year end results.  Businesses can further improve their chances of qualifying for credit by improving the quality of their financial reporting, to help banks get a clearer picture of their financial position.