How will the Presidential Election affect your Tax Bill?

Taxes are going up sooner or later--sooner if you're well-off and Democrats take the White House. Here's the canadiates positions and what actions you can take.

As president, Senator John McCain (R-Ariz.) aims to balance the budget while extending the Bush-era income tax cuts, doubling the personal exemption and eliminating the alternative minimum tax. The Democratic candidates say they'll raise taxes only on the well-off-those making over $200,000 for Senator Barack Obama (D-Ill) while showering tax breaks and health insurance on working families.

What about income taxes? A Democratic President is likely to return the top stated rate on ordinary income-salary and interest- to the 39.6% that Bill Clinton's presidency ended with.

That would put the real salary tax bite at around 50% if, as Obama has suggested, the 6.2% Social Security tax is applied to wages above the current $102,000 cap and two sneaky provisions make a comeback- the phaseout of personal exemptions and a haircut to itemized deductions. Under a Democrat, the top capital gains tax rate, now a historically low 15%, will likely rise to 28% or higher whereas McCain would keep taxes where they are and fight to reduce rates. Given the budget gap, even Republican McCain may well resort to closing loopholes and curbing deductions.

John McCain

Republican

Tax Proposals

Reduce top corporate tax rate from 35% to 25%

Allow First-Year Deduction, Or "Expensing", Of Equipment And Technology Investments for businesses

Calling for congress to suspend the federal gas tax (18.4 cents per gallon) from this Memorial day until Labor Day

Raise the personal exemption for each dependent from $3,500 to $7,000

Keep capital gains and dividend rates at 10/15%

Make the Bush income and investment tax cuts permanent

Ban internet and cell phone taxes

Permanently repeal the Alternative Minimum Tax.

Barack Obama
Democrat

Tax Proposals

Universal Mortgage Credit - 10% credit, refundable

American Opportunity Tax Credit: create universal and refundable credit for first $4,000 of a college education, tax credit available at time of enrollment

Increase capital gains to 10/20 or 10/28%

Crack down on offshore tax havens, create an International Tax Evasion Watch List;

Eliminate special interest loopholes and deductions, limit the ability of large multi-national corporations to use tax havens to hide income overseas

Repeal tax cuts those making over $200,000 or $250,000, restore PEP and Pease phaseouts for households making more than $250,000, restore 36 and 39.6% statutory income tax rates

Social Security/payroll taxes: increase the maximum amount of earnings covered by Social Security

Tax-Planning Ideas

None of this is cause for panic, but with higher taxes on the horizon it does make sense to prepare now.
1) Contribute to a Roth. A Roth Individual Retirement Account or Roth 401(k) can be a great hedge against higher rates. You put in aftertax dollars, the money grows untaxed and all withdrawals in retirement are tax free.
2) Do a Roth conversion. This strategy involves taking money out of a traditional IRA, declaring the taxable income and depositing it in a Roth, where all future growth is tax free. Only taxpayers with gross income below $100,000 are eligible, but that limit will end in 2010-unless Congress reneges.
3) Relocate assets. Investors may have been lulled into complacency over capital gains taxes in the three years through 2005 as their mutual funds used losses booked over the previous couple of years to offset gains. The holiday's over. Last year funds distributed $393 billion in long- and short-term gains to taxable shareholders, up 270% from 2005, estimates Thomas Roseen, a senior analyst at Lipper.
4) Buy munis. If you're in a high tax bracket, tax-exempt municipal bonds are a buy, says Robert Gordon, president of Twenty-First Securities. While off their peak of this year, muni yields are still high relative to Treasurys, even at current tax rates (see story). Avoid private purpose bonds-the kind whose income is taxable in the AMT. Vanguard, which offers some of the lowest-cost funds around, eliminated most of these bonds from its muni funds last year.

Simplify your life: Organize your tax records

Did you spend hours pulling together your tax records
in preparation for filing your 2007 tax return? It
doesn't have to be that way. Avoid the problem next
year by taking a few simple steps now.

FIRST, DECIDE WHAT RECORDS...you need to keep for the current year. Generally speaking, you'll need records of income items and deductible expenses. Use your 2007 tax return as a guide.

* YOU'LL ALSO NEED TO KEEP SOME ITEMS for longer
periods. For example, you may need purchase records
for your house and other investments years later to
calculate your capital gains.

* SET UP A FILING PLACE for each category. Use folders
or plastic pouches for paper records, such as
charitable receipts, property tax payments, and
mortgage reports.

* IF YOU MANAGE YOUR BANKING AND FINANCES ONLINE,

open up a series of folders on your hard drive. Save
copies of electronic statements or transaction
receipts in the relevant folder. Remember to make
regular data backups.

* THEN STAY CURRENT with your records as you go through
the year. It's easier to spend a few minutes each
month than to have to spend hours reconstructing
everything at the end of twelve months.

* AT THE END OF EACH MONTH, highlight income and deduction items in your check register. Use one color for charitable contributions, another for work
expenses, and so on. You can do this whether you keep your register on paper or on a computer. Make sure any associated receipts are filed away correctly.

* AT YEAR-END, you should know exactly what falls into
each category and where the records are.

Remember, the better your recordkeeping, the better your
chances of maximizing tax breaks. If you have questions
about the records you need to keep, give us a call.

Buying or Selling a Business

For the purchase of a business to be successful, there can be no room for surprises. A review of the business being acquired needs to be done to determine if there is anything that should be known before the deal takes place.

This checklist provides an outline of the types of documentation and infromation that should be reviewed. Of course each business is different so every industry will have its own peculiarities.

Sample Due Diligence Checklist

1. Corporate Documents

• Copies of incorporation, bylaws, and shareholder agreements
  
  
  
• Stock ledgers, including information on all outstanding stock

2. Contracts and agreements

• Recent copies of all employment , consulting, and compensation contracts, agreements, plans, and programs.
  
  
  
• Recent copies of all retirement plan documents
  
  
  
• Copies of all noncompete agreements
  
  
  
• Details on all related-party receivables or payables
  
  
  
• Details on any (prior) owners who have left company within last five years

3. Customer matters

• List of customers lost in the last three years, customer billing and reason for loss
  
  
  
• For the last three years, a list of the top ten current customers in revenues, percent of standard, nature of services, and how long with company
  
  
  
• List of top ten new customers and their current status with company in terms of billing, receivables, and satisfaction
  
  
  
• List of major proposals that are outstanding, including budgeted standard and fee quoted.
  
  
  
• List of aged accounts receivable.

4. Reputation and litigation

• Files on any known or anticipated litigation
  
  
  
• Copies of all correspondence pertaining to litigation matters.
  
  
  
• Inquiries of local sources on company reputation.

5. Company Stability

• Owners - List of all owners who left in the last five years and the circumstances behind the departure
  
  
  
• Staff - List of managers and other key employees who have left in last three years and any loss in company revenue due to loss

6. Insurance coverage

• Copies of all current insurance polices
  
  
  
• Copies of all recent correspondence from insurance companies

7. Credit and related documents

• Copies of all agreements, bank lines of credit, and other debt obligations
  
  
  
• Copies of all material financing documents, such as capitalized leases and installment transactions
  
  
  
• Copies of all material guarantees, indemnification or loans
  
  
  
• Credit and reference checks on all owners

8. Real estate

• Copies of all deeds, mortgages, title policies on property owned
  
  
  
• Copies of all leases
  
  
  
• Copies of all insurance polices related to property owned

Buying and selling a business should always be reviewed with us before committing to a deal as there are always tax consequences to be considered. We have extensive experience in helping clients with the due diligence on both the buy and sell side of the transaction.

FAQ's on Tax Rebate's

 

As rebate bill heads to Bush's desk, time to talk numbers

The Associated Press

Congress passed an economic-stimulus plan last week that provides rebates.

Who gets a rebate?

Anyone who pays taxes or earns at least $3,000 (including Social Security or veterans' disability benefits), with income-cap limitations.

Who doesn't get one?

People earning less than $3,000; illegal immigrants; singles earning more than $75,000; and couples earning more than $174,000. The caps rise by $6,000 per child.

What do you have to do to get the rebate?

File a 2007 tax return with a Social Security number for each person listed.

How much is the rebate?

Singles get a rebate of at least $300; couples get at least $600. The rebate will be equal to the taxes paid, up to $600 for singles and $1,200 for couples (plus $300 additional per child). The rebate will be cut by $50 for every $1,000 above the income cap of $75,000 for singles and $150,000 for couples.

Should you have any questions about the tax rebates or if you qualify please feel free to contact our office for more information. As always please contact us with any tax, accounting, or financial questions you may have.

Making Sense of your Financial Statements

Financial statements provide an overview of the economic situation of a business or individual. While many small business owners often keep themselves busy well beyond an eight- or 10-hour workday and "live and breathe" their business, the nuts and bolts facts of their financial condition are often overlooked.

With increased scrutiny of financial documents for even closely held companies, financial statement analysis and forecasting programs are an excellent resource for owners of businesses. Use of such tools will help the owners gain a better understanding of their present and potential financial condition and can ease the process of acquiring additional funding, whether through loans or private investors or provide insight to how well the company is performing against its industry peers.

Several ratios can give insight to a companies performance. In the following article we can explain the liquidity, efficiency, operating, financing, and profitability ratios.

Liquidity Ratios

Liquidity is a company's ability to meet its maturing short-term obligations. Liquidity is essential to a business when confronted with unforeseen events, such as a strike, recession, supply interruption, and so forth. Favorable liquidity is also necessary for taking advantage of certain business opportunities that may develop. Determining the liquidity of a company is particularly important to creditors, since it may affect timely payment of principal and interest payments, and payment of trade debt, as well as overall solvency.

From the firm's perspective, the liquidity ratios measure the management of working capital, which includes activities with current assets and current liabilities.

Working Capital to Sales Ratio is computed by subtracting current liabilities from current assets (equivalent to calculating working capital), and then dividing the result by net sales. This measures the working capital a company is carrying relative to its sales volume, and is an indicator into how much working capital is required for a certain sales level. It also provides insight into the degree of protection afforded current creditors.

Although there are differences of opinion, it is generally accepted that the higher this value the better, because it means that the company is doing a good job of creating working capital for day-to-day operations and to guard against any sudden downturns in business. Extremely high values, however, may indicate that the company could be generating higher sales with the available working capital.

Efficiency Ratios

Efficiency ratios usually indicate how well a firm is managing its accounts receivable, accounts payable, inventory and operating cycle. Because these ratios are based upon a snapshot of certain balance sheet accounts (to total annual sales), they will not reflect seasonal fluctuations.

Days in Accounts Receivable is defined as the average number of days required to collect an account receivable. The ratio is calculated by dividing (Trade) Accounts Receivable by average Daily Net Sales and is expressed in days. Firms should strive for a low number of days in accounts receivable, because it means receiving payments quicker and enhancing cash flow.

Accounts receivable turnover is sometimes used as another benchmark in this area, and is defined as Annual Net Sales divided by Accounts Receivable.

Operating Ratios

Operating ratios are designed to assist in the evaluation of management performance and its effectiveness in utilizing the resources available.

Asset Turnover is calculated from Net Sales divided by Total Assets. This ratio measures a firm's ability to generate sales from the total asset base. Higher ratios suggest a greater capacity to create sales with given assets. This ratio is particularly helpful in conjunction with other asset utilization measurements.

Financing Ratios

Financing ratios analyze the relationship between a firm's debt load, its fixed asset base and net worth. Essentially, they explore the financial structure of a company.

A high level of debt can make a firm vulnerable to business downturns for reasons beyond the firm's control. Two ratios are commonly used for this analysis: Debt to equity and cash flow to current maturities of long-term debt.

Cash Flow to Current LT Debt Ratio is computed by dividing Cash Flow (as measured by net income before taxes plus depreciation, amortization, and depletion) by Current Maturities of Long-Term Debt. This ratio provides insight into how well the company is able to meet its current obligations on long-term debt through its cash flow. The higher the value, the better.

Profitability Ratios

Profitability ratios are useful in expressing the company's earnings relative to what created them, whether it is sales, owners' equity, or total asset base.

Return on Sales (Net Profit %) measures a company's ability to generate profits relative to the sales volume. It is definitely one of the key indicators of the success of a business. Return on Sales is calculated by dividing Net Income before Taxes by Net Sales, and expressing the result as a percentage. Obviously, the higher the value, the more successful the company is at generating profits from its sales.

In short, business owners need to be able to identify negative and positive trends. They need to know not only if cash flow is dropping, but why, and how to increase it before it dries up completely. We can help you with a complete review of your financial structure to give you ideas of were your company stands against the industry and what actions plans could be taken to improve performance in some areas. As always, if you have any questions or concerns please contact our office.

Do You Have a Deductible Home Office?

Whether you are self-employed or an employee, if you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction.

You can deduct certain expenses if your home office is the principal place where your trade or business is conducted or where you meet and deal with clients or patients in the course of your business. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.

Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities associated with your trade or business. There must be no other fixed place where you conduct substantial administrative or management activities. If you use both your home and other locations regularly in your business, you must determine which location is your principle place of business, based on the relative importance of the activities performed at each location. If the relative importance factor doesn't determine your principle place of business, you can also consider the time spent at each location.

If you are an employee, you have additional requirements to meet. You cannot take the home office deduction unless the business use of your home is for the convenience of your employer. Also, you cannot take deductions for space you are renting to your employer.

Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses.

Expenses that you can deduct for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs. However, you may not deduct expenses for lawn care or those related to rooms not used for business.

There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

For more information, see IRS Publication 587, Business Use of Your Home.

If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction and report those deductions on line 30 of Schedule C, Form 1040. Employees can use the worksheet in Pub. 587 to figure their allowable expenses and claim them as a miscellaneous itemized deduction on Schedule A, Form 1040.

To be on the safe side, you may also want to review IRS Publication 4035, Home-Based Business Tax Avoidance Schemes, which describes schemes that claim to offer tax relief but which actually result in illegal tax avoidance.

If you're thinking about deducting your home office our office a call. We can help you lower your tax bill by using this deduction along with several others.

Your business plan is your blueprint to success

No two business plans look alike but they all share the important common attribute of being your blueprint to success. A business plan is a living document that combines your goals and aspirations with the practical realities of starting and operating a business. It's a document that will grow with your business and help you identify new opportunities.

A good business plan serves multiple purposes, such as a:

• Reality check when you first examine the feasibility of your business idea, which forces you to consider all relevant factors
  
• Resume, which will be vital in dealing with lenders and outside investors, and an important tool in negotiating with vendors and attracting employees
  
• Timetable to help you to coordinate all the diverse activities that go into running your own business
  
• Modeling tool that helps you evaluate the variable factors that affect your business, so you can better prepare to deal with situations that may arise as conditions change
  
• Vehicle to track the progress of your business in order to achieve your goals

Life cycle

Your business plan will reflect where your business is in its life cycle. A business just starting has to project its future without the benefit of experience that a business that has been operating for some time has. An ongoing business might require a plan that relates primarily to a new market that it wants to enter or a new product that it wants to introduce.Common elements

Business plans customarily follow a certain format. There are four common key elements: (1) a description of your product or service; (2) your marketing plan; (3) an action plan; and (4) your financial projections.

Here's a look a typical format:

• General format and presentation: first, remember that the business plan is a clearly recognizable type of document, and your audience will have some expectations with respect to style and contents.
  
• Cover page and table of contents: these identify your business and make it easy for readers to find and examine particular documents.
  
• Executive summary: this is arguably the most important single part of your document. It is a high-level overview of the entire plan that emphasizes the factors that you believe will lead to success.
  
• Business background: this section gives company-specific information, describing the business organization, history, and the product or service the business will provide.
  
• Marketing plan: here is an analysis of the market conditions that the business faces, sets forth the marketing strategy that the business will follow, and provides a detailed schedule of marketing activities to support sales.
  
• Action plan: this is where you detail how operational and management issues will be resolved, including contingency planning.
  
• Financial projections: this is another extremely important section. Your projections (and historical financial information) show how the business can be expected to do financially if the business plan's assumptions are sound.
  
• Appendix: here you present supporting documents, statistical analysis, product marketing materials, resumes of key employees, and so on. first, remember that the business plan is a clearly recognizable type of document, and your audience will have some expectations with respect to style and contents. these identify your business and make it easy for readers to find and examine particular documents. this is arguably the most important single part of your document. It is a high-level overview of the entire plan that emphasizes the factors that you believe will lead to success. this section gives company-specific information, describing the business organization, history, and the product or service the business will provide. here is an analysis of the market conditions that the business faces, sets forth the marketing strategy that the business will follow, and provides a detailed schedule of marketing activities to support sales. this is where you detail how operational and management issues will be resolved, including contingency planning. this is another extremely important section. Your projections (and historical financial information) show how the business can be expected to do financially if the business plan's assumptions are sound. here you present supporting documents, statistical analysis, product marketing materials, resumes of key employees, and so on.

You don't have to follow this exact format if another way makes more sense because of the nature of your business. For example, the financial part of a plan for a business with a 10-year track record would be more comprehensive than the financial part of a start-up company's business plan.

Your product or service also affects the content of a plan. Issues relating to inventory, production, storage, etc., become less significant as the product/service mix moves toward a purely service business. For example, a business that relies on the services of many professional employees would provide substantial details about acquiring and retaining these vital workers.

If you're thinking about starting a business - or you want to expand your current business - give our office a call. We can help you develop a business plan or fine-tune your existing plan