Archive for the ‘Tips’ Category

Are you getting the most out of your accountant?

Often, clients put their accountants in a box like this and won’t let them out.  I have experienced this.  Once a client gets it in their head that “Polito is our tax guy”, it’s really hard to shake that image.   Our profession has so much more to offer!

When I was in the publishing business, before I knew what accountants did, I was the same way.  I called my accountant for tax stuff and little else.  I failed to take advantage of his years of knowledge and experience.  That business never flourished!

Many CPA’s start their careers as auditors for national firms auditing financial statements.  That is an extremely valuable experience.  Frequently, after between 2 to 5 years, these auditors  join public companies as controllers and chief financial officers….. and,  a significant number go on to become CEO’s of large public companies.  Indeed, there is a lot more to accounting than financial statement preparation and tax compliance!

About 10 years ago, we developed a service for a number of clients who had what I  term “technician syndrome”.  These clients  knew their particular trade or business and were fairly successful at it, but knew nothing about  the financial condition of their company.  They had no idea how they were really doing.  If there was cash in the bank, things were ok.  Actually, they were in a contest with their competitors but they weren’t keeping score!  In many cases, they didn’t understand the scoring system!

With the help of  my associates, I developed a series of graphs and reports tailored to each particular business.  We find elements of the financial records that if measured, could provide tools to gauge the success of various strategies.  We call these” Key Performance Indicators” (KPI’s).  We  model the effects of slight changes in these measures.  What would happen , for example if the company could increase margins by one percent?   What it would mean to the company, its owners, its employees, and other stakeholders.  We benchmark the clients by industry and size so they can see how they are doing compared to their peers.

We meet with these clients quarterly to go through the financial statements and the special reports that we designed specifically for that client.  At first, these meetings were the only time the clients seriously looked at their financial data. The meeting  is a really important part of this service.  It takes fairly deep study and analysis to really utilize the data.  This analysis coupled with the prodding of a seasoned professional outside the business, provides a stimulating atmosphere for new ideas on how to improve the business.  The brainstorming that goes on in these meetings is extremely valuable.

How do we use the data?

Using break-even analysis, we illustrate profitability scenarios.  We work with clients to develop budgets that support their strategies and we develop financial tools to measure the effectiveness of new strategies.  We develop forecasting models which our clients can use to project income and cash flow, and finally, we do tax projections with cash analysis so that the demand on cash for any suggested tax strategy can be quantified in cash required and cash saved.

To a non-accountant, this stuff is daunting.  I am convinced that one  reason some businesses can never “break through” to that proverbial “next level” is because they fail to make full use of their financial data.  By meeting regularly, even on a quarterly basis, for the sole purpose of assessing the performance of the business, clients tend to be more engaged, execute strategies more consistently, and frankly, make a heck of a lot more money!  In the final analysis, we are helping them keep themselves accountable by orchestrating  the reading of the scorecard.

At this time of year when we “resolve”  to improve, it’s a great time to develop tools to measure business performance and get very intentional about the way we run our companies!  How’s this for a New Year’s resolution…call your accountant and ask him or her how they can help you better measure your performance.  You might be amazed at the untapped resource on your team!

Fiscal Cliff Deal

Just as I predicted, taxes are going up.  While we were bringing in the New Year with our loved ones (or sleeping if you have little kids like me), the Senate agreed on a deal and the House passed it as well.  You may or may not know the details of the “fiscal cliff” deal by now.  Since it’s the New Year and I’d like to start it out on a positive note. I’ll try to approach the deal with the most optimistic tone as possible (though there is quite a bit to be pessimistic about in this deal). 

One thing I was glad to see was the permanent AMT patch.  Past legislation has only applied temporary patches to the AMT mess and made tax planning very difficult (2012 was no exception).  They finally made the “patch” permanent and indexed for inflation each year.  AMT still needs a serious overhaul, but this will help us in the mean time and saved over 60 million Americans from being subject to AMT (myself included!).  While I’m happy this patch is permanent, I’m concerned it means Congress won’t be as eager to redo or eliminate the AMT issue since it’s no longer urgent. 

Part of my prediction was correct on the income tax rates; rates for lower and middle income taxpayers were extended, however they were set permanently which I wasn’t expecting.  While I’m happy with the permanent nature because it helps with tax planning, it doesn’t mean Congress won’t change it again. The debt ceiling issue is again quickly approaching and tax rates may be thrown into the negotiations once again.  The other “positive” in the tax rates was the apparent compromise on the top tax rate level.  The President was proposing the 39.6% tax rate to be effective for income (based on adjusted gross income (AGI)) over $200,000/$250,000 (single/married).  The compromise ended up setting the 39.6% rate on taxable income (after deductions) of $400,000/$450,000 (single/married).  I see two positives in there.  While I disagree whole-heartedly with increasing taxes on the wealthy (a.k.a. usually the job creators), it’s a compromise that seemed inevitable and ended up better than I expected. 

While the income tax rates for the lower and middle income taxpayers are not going up, the payroll taxes did increase.  The 2% payroll tax holiday we’ve been enjoying was allowed to expire.  If you make $50,000 a year, you will bring home $1,000 less this year. 

The “wealthy” Americans will also be subject to the following tax increases (not inclusive):

  • Capital gains/ Dividend tax rates: from 15% to 23.8 %
  • Personal exemption phase out (previously eliminated), starts at $300,000 for married couples   ($250,000 single)
  • Limitation on itemized deductions (previously eliminated), starts at $300,000 for married couples ($250,000 single)
  • Estate taxes permanently increased from 35% to 40%, although they did set the exclusion at $5million (adjusted for inflation) which was set to expire back to $1million at 55% 1/1/13. 

The following items were set to expire, but have been extended (not inclusive):

  • Child tax credit of $1,000 was made permanent
  • Earned income credit was extended through 2017
  • Adoption credit/assistance was made permanent at $10,000
  • Child and dependent care credit was made permanent
  • Employer-provided child care credit was made permanent
  • American opportunity tax credit (higher education) was extended through 2017
  • Above-the-line deduction for qualifying tuition and expenses extended through 2013
  • Teachers’ classroom expense deduction extended through 2013
  • Exclusion of cancellation of indebtedness on principal residence extended through 2013 

Business related items in the deal include (not inclusive):

  • Section 179 deduction of $500,000 with a $2million investment limit for 2012 and 2013
  • Extended 50% bonus depreciation through 2013
  • Research tax credit was extended through 2013
  • Work Opportunity Tax Credit was extended through 2013
  • 100% exclusion for gain on sale of qualified small business (Sec. 1202) stock (see Paul Polito’s website article here)
  • A number of green energy tax incentives 

Not the perfect deal, but at least one was made.  We were saved from the “fiscal cliff” and now maybe we don’t have hear that term again… for the time being. 

Happy New Year everyone!

 

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.

Is a Roth IRA Conversion Right for You?

We’ve been discussing ideas to accelerate income and pay taxes with 2012 tax rates rather than with the anticipated future increased tax rates.  Converting a traditional IRA to a Roth IRA has been a hot topic for the last few years, and continues to be in the current conditions.  This is a complicated decision and should include discussions with both your tax advisor and financial advisor.

In the past, it was almost always a recommendation for younger tax payers to make the conversion in years with large ordinary losses.  When you make a conversion, you have to pick up the entire amount as income and pay tax.  If you could pick up the income in a year with large losses, you might have accomplished the conversion with little or no tax cost.  If you anticipate ordinary losses in 2012, this is still a strategy to consider. Capital losses don’t count!

It’s also a strategy to consider for taxpayers in the higher brackets even if you don’t have losses to offset the income.  Depending on your financial forecast, it may be beneficial for you to pick up the income this year with low 2012 tax rates and have tax free distributions later in life, rather than have taxable distributions in the future at potentially higher tax rates.

There is speculation that Congress might close this “loophole” soon.  There is no other tax advantage like this where you can grow money tax free.  Therefore, if you’ve been considering a conversion or starting a Roth IRA from scratch, I strongly suggest you do it now and put as much money into it as possible. Generally limitations on Roth IRA contributions are the same as traditional IRA contributions.

Tax planning involves a lot of hypothetical considerations and future predictions.  Tax planning is about paying as little tax as legally possible over your entire life, not just year to year.  This year in particular is a good example.  We are taking a close look at our clients and asking, should we pay more tax this year to save in future years?  Not all taxpayers have the cash flow to consider these options, but if you do, this is the year to think about it.

As always, seek advice from your tax advisor when considering your planning strategies.

 

 

Blog facts correction: Capital Gains Harvesting

The tax harvesting blog had an error that we’d like to correct.  The concept is still important to consider.  However we were comparing short term capital gain tax rates to long term capital gain tax rates.  

Long term capital gains tax rate is currently maxed at 15%.  It will go back to 20% in 2013 and is subject to the 3.8% investment surtax for higher income individuals (for a total of 23.8%).  

Short term capital gains are taxed at your ordinary income rate which is current maxed at 35%.  It will jump up to 39.6% if Congress doesn’t act.  When you ad the 3.8% investment surtax for higher income individuals, the total is 43.4%. 

Historically capital gains harvesting has been a strategy to use up large capital losses.  This year, it’s a strategy to pay federal capital gains tax at a lower rate (15%) rather than pay tax at the projected rate of 23.8%. If you sell the asset, thus harvesting the capital gain, you can turn around and purchase the asset again.  Now you have a higher basis so that when you sell it in the future, you are paying less tax. 

Here is the simplified example: 

Stock X purchased 1/1/2005  $      5,000 Stock X purchased 1/1/2008  $          5,000
Value on 11/30/12  $    75,000    
Projected value on 12/31/14  $  105,000 Projected value on 12/31/14  $     105,000
       
If sold on 11/30/12 and then repurchased:    
2012 capital gain  $    70,000    
Tax on capital gain  $    10,500    
New Stock X basis  $    75,000    
       
Then sold again on 12/31/14   Sold  on 12/31/14  
2014 capital gain  $    30,000 2014 capital gain  $     100,000
Projected tax on gain  $      7,140 Projected tax on gain  $       23,800
       
Total tax paid on investment  $    17,640 Total tax paid on investment  $       23,800
Total gain after taxes  $    82,360 Total gain after taxes  $       71,200

 Tax saved from harvesting capital gains is $11,160. 

This strategy is easily executed with publicly traded stock.  It’s a bit trickier with other assets.  However, if you have been trying to sell a capital asset with a large gain, it might be worth sitting down with your accountant to find out if the tax savings justify lowering the price to affect a sale in 2012. 

We used an extremely simplified example to help illustrate the concept.  However, investments are usually much more complicated.  As always, see your tax advisor for help in applying tax planning strategies to your tax plan. 

We apologize for the error.

Tax Planning Strategy: Capital Gains Harvesting

This post is currently being updated for corrections, watch for the re-post.

San Diego Enterprise Zone Expansion

As of September 4, 2012 the San Diego Enterprise Zone has been expanded to cover parts of the following communities: Rancho Bernardo, Mira Mesa, Kearny Mesa, Mission Gorge, Linda Vista, Bay Park, North Bay and Chula Vista.  See our previous post on the details of the credit.

According to the Mayor’s office, approximately 920 local companies have used the program to hire over 31,600 local workers. They also state that four large companies moved to San Diego because of the city’s commitment to seek this expansion of the Enterprise Zone.  ATK, Kyocera, Soitec and Shire indicated the promise of the Enterprise Zone was an important factor in their decision to expand to San Diego creating 866 jobs.

If you think you are in the “zone”, contact your tax preparer to see how you can take advantage of these credits.

Failure to File and/or Pay Taxes

Most people know April 15th (April 17th in 2012) is the due date of your individual income tax return.  You may request a six month extension allowing you to file your return by October 15th without penalties.  However, if you fail to request the extension timely or if you don’t file your return by the extension date, you may be subject to late filing penalties.  The penalty is 5% (on the net amount of tax due) for each month not filed up to 25%.  If the return is more than 60 days late, the minimum penalty is the lesser of $135 or tax due.  Interestingly enough, there is no penalty if the return shows a refund.  I suppose this is because the IRS would be happy to keep your money, and the only way you can get it, is to file your return.

We remind our clients that even though the IRS will grant you an extension to file your return, the extension does not allow you more time to pay taxes.  You must pay your taxes on time.  Don’t ignore it because it will only get ugly!  You can set up an installment agreement with the IRS to pay your tax over time.  While it won’t eliminate the fee, they may reduce the rate by 50%. 

The failure to file timely penalty is 5% per month to a maximum of 25%.  The penalty for failure to pay timely is also 5% per month.  However, both penalties do not apply on the same liability.  If you are subject to both penalties in the same month, the failure to file penalty will be reduced by the failure to pay penalty.  (Aren’t they so kind?)  However, the entire time these penalties are running, additional interest is accruing on all tax and penalties owing.

My advice; file your return on time, even if you don’t have the money to pay the tax.  Contact the IRS to set up the installment agreement.  Don’t run from it.  It won’t help the situation.

As always, consult with your tax advisor!

It’s Your Money Not Theirs

Clients, Friends and Fans,
Sunday night Don and Paul were guests on the radio show “It’s your money not theirs” hosted by our good friend and former partner, Richard Muscio.  The show airs every Sunday at 7 p.m. on 760 KFMB.

We talked about entity selection and borrowing from traditional lenders like banks.

We have added some of the material to our website under articles of interest you can download the pdf here “Choice of Entity

Enjoy!

Listen to

 

B is for Bad Debt (Personal)

We often think of bad debt in the business sense.  However, from time to time we run into a non business or personal bad debt.  Believe it or not, the IRS allows you to deduct this loss… but there’s a catch.  It is treated as a short term capital loss and therefore is subject to the capital loss limitations (you cannot deduct more than $3,000 of net capital losses from income per year).

In order to deduct the loss, you must prove the debt had value at the beginning of the year and no value at the end of the year.  You must make a reasonable attempt to collect the debt and make a demand for repayment in writing.  If the debtor is unable to pay, request a written statement from him stating that he will not be able to meet his obligation and the reason why.

 A statement outlining the following must be attached to the tax return in order to take the personal bad debt.

  1. Description of the debt, amount and date due
  2. Debtor’s name and taxpayer’s relationship to debtor (cannot be a child or similarly related party)
  3. Description of efforts made to collect the debt and,
  4. Explanation of why the debt is now worthless (such as bankruptcy)

As always, seek advice from your tax preparer when writing of a non business bad debt.  If prepared improperly, the IRS likely will not allow the deduction.

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It's Your Money, Not Theirs

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April 21, 2013–Richard and Joe discuss the more than 800 celebrity interviews and his techniques with Entertainment Reporter, Fred Saxon.

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December 16, 2012–Richard and Joe welcomed Don Eppich of Polito Eppich. (Commercial free. 42 minutes.)

August 19th, 2012–Richard and Joe discuss tax policy and accounting services with Paul Polito, CPA and Don Eppich, CPA.

March 25th, 2012-Richard and Joe discuss the best accounting practices and strategic advice for businesses with Paul Polito, CPA and Don Eppich, CPA of www.PolitoEppich.com

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