Posts Tagged ‘tax planning’

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!

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.

 

 

Tax Planning Strategy: Capital Gains Harvesting

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

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!

B is for Bad Debt (Business)

In some instances bad debts may be written off.  Here we’ll look at what factors must be present in order to take a deduction.

For Accrual Method Taxpayers:

When using the accrual accounting method, management estimates an allowance for bad debts based on several factors such as prior experience, industry comparisons, the debtor’s ability to pay and/or appraisals of current economic conditions.  This is known as the allowance method.  Keep in mind; this is an estimate of an event that has not yet occurred.  When it comes to tax, the IRS does not allow you to make this estimate.  As you can imagine, it would be abused as a “tax planning” strategy.  Therefore, for tax purposes, we can only deduct actual bad debts.  The following factors must exist in order to deduct a bad debt:

  1. It must be a creditor-debtor relationship
  2. There must be a legal obligation to pay a fixed sum of money
  3. There must be an actual loss of money (loss of time spent rendering services is not a loss of money unless the uncollected fee has already been included in taxable revenues on the accrual method)
  4. Proof that the debt is and will remain uncollectible
  5. A business purpose for the debt

When using the specific charge-off method to deduct bad debt (unlike the allowance method previously discussed), management has to prove that the debt is uncollectible to expense it.

Recovery of previously written off bad debts in subsequent years is recognized as other income in the year received.  As always, see your tax preparer when determining what your business can deduct for bad debt expense.

For Cash Method Taxpayers:

Cash basis businesses cannot deduct bad debt since the related revenue was never recognized.  There would only be bad debt for actual cash lost, i.e. because it was paid in cash to a vendor, etc.

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, Part 2

I previously compiled a list of year-end tax planning strategies for individuals.

Here is a list of year-end strategies for businesses and business owners:

1.   Businesses should consider making expenditures that qualify for the business property expensing option.

Code sec. 179 expense: For tax years beginning in 2010 and 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000, and a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax year beginning 2012, the dollar limit will drop to $125,000 and $500,000 (both indexed for inflation) respectively, and expensing won’t available for qualified real property. Keep in mind, Sec. 179 deductions are limited by net income, thus, they cannot be used to create a tax loss.

Bonus depreciation: Property that does not qualify for an immediate tax write off under the Sec. 179 may qualify for bonus depreciation. Unlike the Sec. 179 deduction, there are no restrictions on the amount of qualifying property and there is no taxable income limit. The deduction is 100% of the cost for qualified property purchased and placed in service during 2011. This first year write off won’t be available next year (2012) unless Congress acts to extend it.

2.   Businesses that hire qualifying workers (such as certain veterans) before the end of 2011 can claim a credit up to 40% of the first $6,000 in wages paid to each such employee.

3.   Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post 2011 expenditures unless Congress extends the credit.

4.   If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

5.   If you own an interest in a partnership or S corporation, and the business incurs a loss in 2011, you may need to plan ahead to be sure you can take advantage of that loss. These rules can be complicated,  and you should consult with your tax adviser.

6. Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

Again, we recommend that you always, see a professional when considering tax planning strategies for your situation. There are very important details underlying each of these strategies which must be thoroughly understood before you employ them!

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 “Needs” Checklist for Small Business Owners

The small business owner is faced with many challenges during these economic times, and it’s important for the owner to “come up for air” and focus on issues that will help guide them on creating a successful business.

The following is a list of certain items the owner should review on a periodic basis to assess their current situation and implement changes if necessary:

  1. Business Profitability Improvement
  • How is business? What keeps you up at night?
  • Do you have a business plan?
  • What are your marketing activities?
  • Do you perform a budget analysis – compare actual vs. budget? Do you have a budget? If you answered “no”…
  • How do you compare to your industry?
  • Do you analyze the Income Statement for profit improvement potential? Consider cutting out some discretionary expense items.  (I wonder if we could get Congress to do the same thing… not likely)
  1. Taxation Planning
  • What are the current results and what are your expectations for year end?
  • What tax planning strategies can we implement for this year?
  • Is there enough cash to pay the tax and implement the tax savings strategies?
  1. Finance
  • Do you have a line of credit?
  • Do you need to increase your line of credit?
  • Do you need new financing? The banks are still being quite stingy with the funds so this could take some work.
  1. Wealth Creation
  • What investments do you have in your portfolio?
  • What is your current net worth?
  • What action needs to be taken to achieve your goals?
  1. Risk Management
  • Do you have a valid will that reflects your current wishes?
  • Do you have a partnership or shareholder agreement?
  • Do you have a buy/sell agreement?
  • Is adequate insurance coverage in place?
  1. Succession Planning
  • When do you want to retire?
  • What is your selling price for the business? You need to be realistic during down economic times; most businesses aren’t worth what they were in 2005.
  • What is the current value of the business?
  • Are you dispensable? While you’d like to say no, when trying to position your business to sell, it’s better if the answer is yes. 

The key is to develop a plan, measure it periodically, and implement changes as necessary.

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