Thursday, June 28, 2012

Don't let the tax tail wag the economic dog

Some tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.

Here’s one example of the tax tail wagging the economic dog. Let’s say that you run an unincorporated consulting business. You want some additional tax write-offs, so you decide to buy $10,000 of office furniture that you don’t really need. If you’re in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you’ll still be out of pocket $7,200 ($10,000 minus $2,800) -- and stuck with furniture that you don’t really need.

There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example:

* Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

* A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.

* Someone turns down extra income, because it might “push them into a higher tax bracket.”

* An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

Tax-cutting strategies are usually part of a bigger financial picture. If you are planning any tax-related moves, we can help make sure that everything stays in focus. For assistance, give us a call.

Monday, June 25, 2012

Tips for starting a home business

In these tough economic times, many people are taking a hard look at employment alternatives -- some, because they've lost their seemingly stable jobs in the corporate world; others, because they dream of striking out on their own. In addition, as the Internet gains in popularity and employees discover the advantages of telecommuting, home-based alternatives are becoming increasingly attractive.

If such an alternative appeals to you, don't quit your day job just yet. Take time to fully investigate the pluses, minuses, and ramifications of starting a company in your home. Here are five questions to consider.

* Is there a market for your product or service? Just because your co-workers or relatives rave about your new business idea, don't assume that everyone shares their enthusiasm. If you really expect the business to thrive, cast a skeptical eye on your potential product or service. Investigate the market, both locally and outside your geographic region, and ask whether people will pay their hard-earned money to buy your stuff.

* Are you excited about the business idea? To be successful, you'll need to dedicate yourself to the business day in and day out. If, deep down, you aren't enthusiastic about the firm's product or service, you may find it difficult to weather the storms that confront every business.

* Is it a good fit? If you don't like working with the public, a retail business probably doesn't make sense for you. Or perhaps your home-based business will require hours in front of a computer. If your forte is face-to-face interaction with people, you may need to rethink your strategy.

* How will you allocate time for the business? For many people, a home-based business begins as a part-time venture. Do you have the discipline to stick to a work schedule after hours?

* How will you finance start-up costs? As a general rule, you should have funds set aside to cover at least six months of operating expenses before opening the doors to your new venture. Without an adequate financial buffer, you may spend many unproductive hours just trying to keep the business afloat.

For those willing to take the plunge, a home-based business can provide great satisfaction. But as with any business venture, it pays to do your homework. If you would like to discuss issues related to starting a home-based business, give us a call.

Thursday, June 21, 2012

Watch out for bogus e-mails

The e-mail from your bank gets your attention right away. It says you need to log into your account in the next 48 hours to continue your online privileges. Something about a system upgrade. You wonder, is it legitimate? How can you know for sure?

Bogus e-mails designed to steal your identity, also known as phishing, are becoming a bigger problem these days. While they can take many different forms, most scams are designed to trick you into revealing personal information such as your social security number or online account password. Through clever use of logos and familiar-looking web addresses, these e-mails often appear to be an urgent message from your bank, mortgage lender, or e-mail provider.

You may not realize it, but thieves are especially eager to gain access to your web e-mail account. Why? Once a scammer has access to your e-mails, he or she can often figure out where you bank and detect clues to passwords you might use.

So what can you do to protect yourself? Take a moment and think before you click. Never respond to an e-mail asking for your social security number or birth date. You can almost bet that it is a scam. If an e-mail contains a website link that you are not familiar with, do not click on it. Instead, either go directly to the company’s trusted website, or contact them by phone.

Also remember that e-mail scams become more prevalent following a significant public event, such as a natural disaster or sudden stock market drop. Thieves will prey on your sympathies or fears during these times, so be extra careful when responding to appeals for charity or notices to update your financial records. Also, be leery of e-mails with demanding language or incorrect grammar -- both are potential signs of a counterfeit e-mail.

For preventive measures, try to use a different password for every online account, and change your passwords regularly. Make your passwords stronger by using combinations of letters, symbols, and numbers. Also, keep your computer anti-virus software up to date.

Finally, do your part to thwart these crimes by reporting any suspected scam e-mails to If you receive a bogus tax-related e-mail, forward it to the IRS at And of course, feel free to contact our firm if you need a second set of eyes on any suspicious-looking e-mail.

Tuesday, June 19, 2012

Partners need a written partnership agreement

If you are operating your business as a partnership, you should have a written partnership agreement. This is true for family partnerships as well.

The need for a partnership agreement can be summed up in two words: things change. You and your partner/s may agree about everything now, but disputes could arise later. Or one of you could die unexpectedly, leaving the survivor/s to deal with the deceased partner’s heirs.

The basic provisions of a partnership agreement should include the parties to the agreement, the company name, purpose, location of the business, and the division of management responsibilities. The agreement should also indicate the following:

* Initial capital contributions (or services in lieu of capital).

* How and when additional capital contributions may be required.

* How profits and losses will be shared.

* How much of the profit is to be distributed and how much is to be left in the company for growth.

Beyond the basics, the agreement should anticipate major events and spell out how to deal with them. For example, if one partner dies, what are the rights and obligations of the other partner/s? Under what circumstances can a partner leave, retire, or be expelled? What are the financial arrangements for departing partners? How long must an ex-partner wait before starting a competing business?

A partnership agreement can't address every possible contingency, so consider an arbitration clause to handle disputes that you and your partner/s can't resolve on your own. Without such a clause, you may face a very expensive lawsuit to settle disputes.

You and your business will benefit from a properly written partnership agreement. See your accountant and your attorney for assistance in getting it done right. Give us a call; we are here to help you.

Thursday, June 14, 2012

Who needs to make quarterly income tax payments?

Any taxpayer that has income that is not subject to withholding may need to make quarterly estimated income tax payments.

If you have just started a new business or have income from investments, you need to determine if you are required to file tax estimates. Failure to pay quarterly tax estimates can lead to sizable tax penalties and interest. This is above and beyond the added income tax that is due at filing time.

Even if you have a regular job that pays wages subject to income tax withholding, you might have enough additional other income to necessitate paying estimates. Estimates are computed and filed on a quarterly basis with IRS Form 1040-ES.

If you have had a sizable increase in your interest or dividend income, sold an asset, or started a small business, let us assist you with your tax estimate determination.

Tuesday, June 12, 2012

Hiring family can cut taxes

As a boss, you may hire family members and pay reasonable salaries for the work they do in your business.

For example, you could hire your son or daughter to perform routine clerical or cleanup tasks. Your child’s salary would be a tax-deductible business expense, and your child’s income would be tax-free up to that year’s standard deduction amount for a single taxpayer ($5,950 for 2012). Wages in excess of that amount would be taxed at your child’s rates, which are probably lower than yours.

You can compound the benefits of this strategy by having your child contribute to an IRA, which is likely to enjoy many years of tax-deferred growth.

Wages paid to a spouse by a sole proprietor are subject to payroll taxes; those paid to your children who are under the age of 18 are not. Compensation paid has to be reasonable for the services performed.

Friday, June 8, 2012

Take cash discounts in your business

Don’t miss the cash discounts offered by your suppliers. A 2% discount for payment in ten days, versus net payment in 30 days, computes to an annual rate of return of 36%. If you can get a 10% discount for paying twelve months of payments in advance, you will earn 23% on your prepayment.

Wednesday, June 6, 2012

Midyear planning is a must this year

Major tax change is just months away: the Bush-era tax cuts are scheduled to expire at the end of this year, and the payroll tax cut ends after December 2012. The general expectation is that tax rates will go higher in 2013, at least for wealthier taxpayers. Whenever major tax change is about to occur, the opportunities for tax-cutting multiply. That makes midyear planning critical this year if you want to keep your 2012 and 2013 taxes as low as the law allows. Contact our office for your midyear review.

Monday, June 4, 2012

Report foreign investments by June 30

If you have foreign bank, savings, or investment accounts that exceeded $10,000 in 2011, you are required to file "Treasury Department Form 90-22.1" by June 30, 2012. This is not a form that you file with your income tax return. Rather, it is a separate form filed with the Treasury Department in Detroit. The report must be received by the Treasury Department, not postmarked, by the June 30 due date. Penalties for failing to meet this filing requirement are severe and can include jail time. Contact our office for details or filing assistance.