Small Business Profit Explosion

Client Question: Can Those Companies That Advertise on Cable TV Really Eliminate My tax Problems?

Every year I hear this question many times from taxpayers who are behind in their taxes. It’s understandable, the IRS has scared them and they are looking for a quick and easy way out.

The problem is that many of these tax problem resolution companies have been found guilty of deceptive trade policies where they overpromised, collected tons of money upfront and then failed to perform. In fact, many of their customers had bigger problems after they were hired then they did before.

Checkout this link to an article written by David Leeper (an excellent tax attorney if you ever need one) for the El Paso Times that goes into more detail specifically on this point. http://bit.ly/JP0sME

 

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

 

Client Question of the Week: What should I do if I can’t pay my taxes by the due date?

Answer: Most importantly – File your return on time! The penalty for not filing is 5% of the tax due per month up to 25%. The penalty and interest for not paying on time is around 1% of the tax due per month.

If you think you will have the balance due within the next three to four months I would recommend that you send in what you can with the tax return. Then every time you receive a collection letter from the IRS (about every 30-45 days) send in another payment and a letter requesting more time. If you still have an unpaid balance that you cannot pay by the time you receive the “Intent to Levy Letter”, you should then request an Installment Payment Agreement.

If you have a balance owed that you know you cannot pay in the next three to four months (or if you received the “Intent to Levy” letter) you should file form 9465 to request an Installment Payment Agreement. This assumes 1) that the balance due is less than $25,000, 2) that you will be able to pay the tax (plus penalties & interest) within five years and 3) you do not have an Installment Agreement in effect for a prior year. There is a user fee of $105 ($52 for taxpayers who pay their payment using a direct debit from their bank account).

If you do not qualify for the Installment Payment Agreement you should contact your tax preparer for help working with the IRS to reach an agreement that works for you.

Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Tax Tip of the Week: Is money I received from an inheritance taxable? Will I Owe Tax if I sell my parent’s house that I inherited?

These are common question from my clients. Like most things in tax law the answer is not simple.

First, property received from an inheritance is not taxable. This includes cash, property, stocks & bonds, below-market sales, debts that are forgiven and partial interests in property.

But income in respect of a decedent is taxable. These are items that would have been included in decedent’s gross income if received before death. These include IRA distributions, accrued interest and dividends, tax-deferred annuities, Series EE bond interest, etc.

As to selling your parents House - If you sell property that you inherited it is taxable. But, the gain is calculated using the fair market value (FMV) at the date of death (or the FMV on the alternate date if an Estate Tax Return is filed and alternate valuation is elected).

So, if your parent’s house is sold within a few months of you inheriting it is very unlikely that you will have a taxable gain unless the value has dramatically increased in the short amount of time that you owned it. But, if the value has increased since you inherited it than you will be taxed on the increased value.

 Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Jump-Start Profit Tip of the Week: Cash is King!

The storm clouds are on the horizon! Multiple times in the last month business owners have complained to me that sales have dropped in the last two to three months. There are a multitude of reasons that I would point to. The main ones:

• The consumers are nervous and not buying.
• Higher inflation in gas, food and clothing is limiting funds available for non-essentials. Seniors & veterans, in their third year without as cost of livings increase, are really feeling the pinch of this inflation
• Continued high unemployment. Don’t believe the 9% number! When you count those who have given up looking, those who are working less than 40 hours, or those who have had to take a job at a much lower pay than what they were used to working (the “under-employed”) the rate is closer to 18%-20%.
• Smaller employers, burdened with increased audits and regulation and uncertain about future tax rates and the regulatory burdens of ObamaCare, are delaying expansion and hiring plans.
• Reduced government spending as states and local governments are forced to cut their budgets.
• Large Federal deficit spending that is sucking credit out of the market. This is making it almost impossible for both the consumer and the business owner to get the credit needed to kick-start the economy with spending.

So what should the small business owner do? Prepare for the storm now of course! The smart business owner should immediately buckle down and get back to basics. This means:

• Run your business by the numbers. Profits and cash are the only measure of how successful your business is.
• So, you must run accurate cash based profit and loss weekly. If it is accurate – fix it! If you don’t know how pay to have your CPA fix it.
• Focus on cash flow and cut expenses NOW! If survival is on the line – be brutal about the cuts. You cannot afford any sacred cows.
• Collect on your receivables. You must get the profits into the bank. Review your policies and require upfront deposits and payment upon delivery. Remember – Cash is King.
• Run lean! Keep your inventory as low as possible. Work with your suppliers to get product only when absolutely needed.
• Control payroll costs! Get rid of any deadwood. Cut every employee’s hours by 4-8 hours per week. Make sure they understand that you are doing this to save the company and to make sure they all have a job during this hard time. When an employee quits – don’t replace them right away. See if the work can be spread around or what can be eliminated without hurting customer service and the quality of your product or service.
• Increase marketing and sales efforts. Focusing on sales is the easiest way to grow your business during good times and sustain it during the bad times.
• Work harder. As the owner of the business you have the most to lose if your business fails. So, get back to work. Come in early, leave later, work weekends and forget the golf for awhile. Set the tone that this is an emergency.
• Don’t panic. You have a plan and the will to survive and thrive. So, let the country have a recession (or whatever the politicians want to call it this time) just decide not to participate!

Thank you for your continued support and let’s make this year are most profitable year ever.

P.S. Call me if you need help putting together a profit improvement plan.

Jump-Start Profit Tip of the Week: Never Totally Trust Your Bookkeeper!

Over the years I have spoken to literally hundreds of business owners who have had problems with their bookkeepers. The lucky ones only had incompetent or lazy bookkeepers who only provided financial statements that were so wrong that they were useless as a management decision tool.

The unlucky business owners hired bookkeepers who stole thousands of dollars from them. Most of this theft resulted from the business owner totally trusting them. Why? Well the main reason is that the business owner just hates anything to do with bookkeeping! They would rather be out making a sale and working on producing the product or service so that they can get paid. Who can blame them? But, this trust can go way too far! I have seen business owners let their bookkeepers run the business finances in total. This often includes receiving the money, paying out cash, making deposits, signing checks, using the company & personal credit cards and then relying on them to prepare all the bookkeeping. I know they trust them but do they have to tempt them?

Though some employers are unlucky enough to hire a professional embezzler, most theft starts small as a onetime thing when the bookkeeper has a problem. But, they don’t get caught and they realize how easy it is so it grows. The bookkeepers rationalize it by saying they are running this company and are not being paid what they are worth. So, they deserve the money since they “earned” it!

The employer often thinks their CPA will find it. Wrong! We are hired to do tax returns or financial statements not to perform an audit. Often theft occurs before the cash is ever booked. Most often the theft is payments to cover the bookkeeper’s personal expenses that the CPA has no way of knowing they are not business expenses. There are at least a dozen ways a smart bookkeeper can cover their tracks.

So, what should the business owner be doing?

1. The business owner should sign all checks. Before they do, every check that is given to them to sign should have attached all relevant backup data so the owner knows what is being paid and who ordered it.
2. The business owner should make the daily deposit and compare it to the daily cash receipts report. (If you don’t have one you better call your CPA for help in designing one!)
3. The business owner must control all access to company & personal credit and debit cards. Be sure not to share passwords!
4. The Owner must get the bank statements and open them personally. Better yet, they should review the bank credit card activity on line daily or at least weekly.
5.  The owner should reconcile their bank monthly. If not them, they should hire someone else like their CPA to reconcile their bank accounts. Just be sure it is not the bookkeeper.

Remember, the job of a good professional embezzler is to become the trusted bookkeeper! Never ever totally trust your bookkeeper.

Thank you for your continued support and let’s make this year our most profitable year ever!

P.S. If you don't believe me, google embezzlement and bookkeeper.

Tax Tip of the Week – Donation Straight from Your IRA results in Extra Benefits

The following is an article from The Tax Strategist newsletter that does a very good job of explaining the advantages of donations straight from an IRA. Contact me if you think this is something that might help you.

Charitable-minded retirees have another chance to do a good tax deed with benefits. The 2010 Tax Relief Act retroactively reinstates the tax break for "charitable rollovers" to Jan. 1, 2010 and extends it through 2011. So you still have a short window of opportunity to take advantage of this unique technique.

How it works: If you're age 70 1/2 or older, you can exclude from tax “qualified charitable distributions” of up to $100,000 that would otherwise be taxable as IRA distributions. A qualified charitable distribution isn’t reported as taxable income or claimed as a charitable deduction. Similarly, the distribution won't increase your adjusted gross income (AGI) for other tax purposes.

Here's what you can accomplish tax-wise by making this move:

• Deductions for charitable donations may also be restricted by other rules based on 30% and 50% of AGI. The IRA payout is exempt from these ceilings.
• If a taxpayer is carrying over charitable deductions from the prior year, he or she may receive the full benefit of the deductions this year. Otherwise, the regular charitable limits are applied before the carryover is allowed.
• The charitable distribution is never realized as taxable income. This can lower your AGI for the deduction floors for medical expenses and miscellaneous expenses.
• An IRA withdrawal would normally result in taxable income that could increase tax on Social Security benefits. Using the charitable distribution technique avoids the problem.
• The distribution counts toward required minimum distribution (RMD) amounts. Thus, if you take the exact amount of the RMD and transfer it to charity, you can leave the IRA intact for another year.
• This tax provision might also benefit taxpayers who claim the standard deduction. It is the equivalent of taking a tax deduction as an itemizer.       

Note that the tax break for charitable distributions applies to Roth IRAs as well as traditional IRAs. Roth IRA distributions to individuals who are over age 59 ½ are usually tax-free. But a portion of a distribution may be taxable for a Roth in existence less than five years. Therefore, you're usually better off using a traditional IRA rather than a Roth for this purpose.

Tax Tip of the Week - “You owe $25,000 in taxes!!!”

“You owe $25,000 in taxes!!!”

Is the last thing you want to hear your accountant say on April 15^th. With new tax law changes and failing to plan, your tax bill can easily equal $25,000 or more!!

Tax planning is the best way to avoid steep tax bills and heart stopping surprises. Every year, I have a few clients that are floored when they see how much they owe. The first question they ask is “Is there any way to get this down?” The truth is no! If we got all your information, that is it.

Tax planning before the end of the year is the only true way of lowering your tax. By evaluating your current standing, projecting sales to the end of the year and taking law changes into considerations, we can create a plan that can drastically lower your tax bill. I have been helping clients do this for over 30 years and have been able to save them thousands in taxes in a single tax year.

The three major benefits of tax planning are:

1. Saving Money! With the current economy everyone needs to make sure they’re pinching every penny.
2. Educate yourself on new law changes. As a business person, you need to know the current law changes in order to make the best financial decisions.
3. Eliminating the element of surprise. If you know your financial standing before the tax deadline you can prepare and save money. Most business owners can come up with the cash if they have a six months warning. Finding out you need $25,000 in 5 days, doesn’t make anyone happy.

My experience has shown me, business owners who tax plan gain better insight into their business and current affairs. With this combination, they are able to make the best choices for them and their business. There are a lot of different factors that affect your bottom line and taxes are one of them. By taking the time to meet with me, you can easily put more money in your pockets, instead of forking it over to Uncle Sam.

This year I am setting a limited amount of appointments for tax planning and they are on a first come, first serve basis. Unfortunately, with my current work load, my time is very limited. But, I do want to help my clients who feel like they’ll benefit from tax planning. Call 915-857-8158 to schedule your appointment as soon as possible, to make sure to save a time slot.

I hope to hear from you soon.

Tax savings tip of the week- New homebuyer credit rules

The "first-time homebuyer credit" isn't just for first-time homebuyers anymore. Thanks to a new tax law change, longtime homeowners may also qualify.

 

Under the new "Worker, Homeownership and Business Assistance Act of 2009,"  you must complete the purchase of the home before May 1, 2010. If you secure a binding contract before May 1, you actually have until June 30, 2010 to finalize the sale. Best of all, you don't have to wait until you file your 2010 tax return to reap the rewards. You can claim the credit on your 2009 return -- even if you buy the home in 2010. Taypayers who claim the first-time homebuyer credit on their 2009 returns will not be able to file electronically.

 

The new law includes the following changes effective as of Nov. 6, 2009 (the date of enactment).

 

• The deadline for the credit is extended from Dec. 1, 2009 to May 1, 2010. No further extension is expected.
• The credit is available to more taxpayers. Previously, it was limited to "first-time homebuyers" who did not own a principal residence for three years prior to purchasing a home. For purchases after Nov. 6, 2009, you may qualify for a maximum $6,500 credit if you've owned and used a home as your principal residence for any five consecutive years during the last eight years. The replacement home doesn't have to cost more than the old one.
• The phase-out ranges are increased. The new phase-out ranges are between $125,000 and $145,000 of MAGI for unmarried filers, and $225,000 and $245,000 for joint filers.
• The price of the home is capped at $800,000 for all purchases after Nov. 6, 2009. No credit is allowed for homes priced above this threshold.
• The credit isn't available for a home purchased from your spouse or your spouse's relatives. This extends the rule denying the credit for purchases from your own lineal ancestors or descendants.
• To curb abuses, homebuyers must provide proof of purchase (i.e., an HUD-1form). The homebuyer (or spouse) must be at least 18 years and can't be claimed by someone else as a dependent.

 

If you have any questions relating to the new homebuyer credit, please do not hesitate to call me at 857-8158 or email me at wayne@wjb-cpa.com.

Tax Tip of the Week - Have a college age kid? You may want to skip dependency exemption.

The Hope and Lifetime Learning tax credits are great tax savers, but people with high-income can’t take advantage of them because of the phase-out rules. These rules do exactly as they say, phases out your tax credits as your income increases! If your income pushes you over those phase-out limits, you may want to let your dependent college students claim themselves on their tax return and take the valuable credit instead. This may not cost you anything if your income is high enough; the phase-out rules most likely are phasing out your exemptions already! This of course assumes your college student has taxable income. Remember this tax credit is not refundable! It can only reduce the income tax you owe to zero.

Any tax advice in this blog is general in nature and may not be appropriate for you. Be sure to speak to your tax advisor for specific advice for your situation in writing.