Tax Tip: Consider making tax-free gifts

Tax Tip: Consider making tax-free gifts

If you are in a position to give, making annual gifts can be an excellent strategy for reducing both your estate and income tax liability. Doing your gift-giving well before year-end is especially smart if you are giving income-producing property. You will then remove more income from your 2015 tax return. The annual tax-free limit for 2015 gifts is $14,000 to as many individuals as you like.

Back to school? Check this tax credit

Back to school? Check this tax credit

If you or a member of your family is off to college this fall, you may be eligible for the American Opportunity Tax Credit. Eligible students may take this credit for the first four years of higher education. The credit can be up to $2,500 annually. Expenses that qualify for the credit include tuition, fees, and related expenses. Forty percent of the credit is refundable, meaning you may be able to get up to $1,000 of the credit as a refund even if you don't owe any taxes.

IRS gives worker classification criteria

IRS gives worker classification criteria

Since independent contractor payments are not subject to payroll taxes, there is a temptation to classify some employees as independent contractors when they should not be. The IRS uses certain criteria to help determine who should be classified as an employee subject to payroll taxes and eligible for employee benefits. Here's a partial list –

*                 Who controls when, where, and how the work is to be done?

*                 Who sets the working schedule?

*                 Is the payment by the hour or by the job?

*                 Whose tools will be used to accomplish the work?

*                 Does the contractor provide services to the general public?

Accurate inventory numbers are crucial for your business

Accurate inventory numbers are crucial for your business

For many companies, inventory is a significant dollar amount on the company's financial statements. So it's crucial that recorded inventory balances reflect actual values. When such accounts aren't properly stated, the cost of goods sold and current ratios – numbers that often matter to decision makers – may be skewed. If banks discover that your company's inventory accounts are overstated, they may not extend credit. If, when necessary, inventories aren't "written down" (their values lowered in the accounting records), fraud may go undetected or the company's net profits may appear unrealistically rosy.

Inventories decline in value for a variety of reasons. You might be in the business of selling electronic equipment to retail customers. Over time, yesterday's "latest and greatest" gadgets become today's ho-hum commodities. Such goods still have value, but they can't be sold at last year's prices. Your inventory is experiencing "obsolescence."

Inventory "shrinkage" is another term that's often used to describe declining inventory values. Let's say you run a construction materials company. Unbeknownst to you, a dishonest supervisor is skimming goods from your shelves. A periodic inventory count that's compared to your company's general ledger might show that inventory is declining faster than it's being sold. As a result, you may decide to investigate and to reduce inventory values in your accounting records.

Other examples of shrinkage might include a clothing store that loses inventory due to shoplifting or a warehouse facility that's hit by a storm. In both cases, inventories may need to be written down in the company books to more accurately reflect actual values. Under another scenario, a shady supplier might bill your company for goods that aren't actually shipped or received. If invoices are recorded in your accounting records at full cost, your inventory may end up being overstated.

For some companies, several sources feed into inventory values. A manufacturing concern, for example, might add all the expenses needed to prepare goods for sale – including factory overhead, shipping fees, and raw material costs – into inventory accounts. When those supporting costs fluctuate, inventory accounts are often affected.

To ensure that your inventory numbers remain accurate, it's a good idea to conduct regular physical counts and routinely analyze the accounts for shrinkage, obsolescence, and other evidence of diminishing value.

How to help your child get started in business

How to help your child get started in business

Perhaps you're thinking of helping one of your children get started in business. Since the failure rate for new businesses is high, you need to do whatever you can to increase your child's chances of success. That includes considering three M's: motivation, money, and mentoring.

* Motivation. To succeed, your child must be motivated. He or she may like the idea of self-employment but lose interest when confronted with the realities of planning and preparation.

Before involving yourself, find out how much time, thought, and effort your child has already devoted to the proposed business. If the enterprise is no more than an idea, you can suggest approaches to researching the market and determining the resources, knowledge, and skills that will be needed. However, your input should be limited to guidance and ideas. Your child should do the work.

Once your child has completed the necessary groundwork, and if the project still seems reasonably feasible, you'll be ready to consider the next steps.

* Money. Whether you're making a loan or buying an ownership interest, never put up more money than you can comfortably afford to lose. Try not to be the sole source of capital. Risk is part of the business experience, and your child should have some personal assets at stake. Although loans from outside sources may also be part of the mix, they should be limited in order to keep the debt service from becoming overwhelming.

Set limits. Make it clear that you'll lend or invest a specific amount and no more. You also may wish to set restrictions on the use of the funds within the business.

Put everything in writing. Loans should be supported by signed notes that stipulate repayment terms and require interest at market rates. Investments should be supported by partnership agreements, shareholder agreements, or similar documents that describe operating arrangements, profit and loss sharing, buyout provisions, and closing contingencies.

Don't forget tax planning. You probably will want to allocate any taxable income to your child, and you certainly will want to be able to write off your loss if the business goes bad. Proper documentation will be paramount, since the IRS closely scrutinizes family transactions.

* Mentoring. Remember that the primary objective is to give your child business experience. Explain the reasons behind each of your requirements, and make it clear that the child must consider your input as a condition of accepting your money. You should offer advice freely, but let your child make most of the business decisions. Mistakes are part of the learning process.

If you're thinking about helping your child get started in a business, give us a call. We'll be glad to offer guidelines to fit your particular circumstances.

Are itemized deductions worth the effort?

Are itemized deductions worth the effort?

Knowing the difference between the standard and itemized deduction might save you a lot of time and trouble, and some taxes to boot.

The IRS gives taxpayers a choice of using the standard deduction or an itemized list of qualified deductions to calculate their taxable income. For taxpayers with large mortgages or charitable donations, it's a no-brainer; they come out ahead by itemizing. For others, it boils down to a question of whether it's worth the trouble of sifting through all their records and receipts.

To put things in perspective, the standard deduction for 2015 will be $6,300 for single filers, $12,600 for those married filing jointly. If you or your spouse are over 65 or blind, the standard deduction is a little higher. So if your total mortgage interest, property taxes, and charitable donations are normally less than those figures, you will probably be better off with the standard deduction.

But that's not the end of it. If you have a large out-of-pocket medical bill in one year, it might tip the scale toward itemizing. Only qualified medical expenses exceeding 10% of your adjusted gross income (AGI) are deductible, but the threshold is 7.5% of AGI through 2016 if you are age 65 or older. After 2016, it's 10% for everyone. If you think you will qualify for a medical expense deduction this year, consider adding other deductions such as extra charitable donations before December 31 to maximize your tax savings.

Take note that if someone else can claim you as a dependent, you cannot take the full standard deduction, so you might be better off itemizing. Another wrinkle: Itemized deductions are limited when income reaches $258,250 for single filers, $309,900 for married filing jointly.

Keeping track of potential itemized tax deductions may be unnecessary in your situation, but before you make that call speak with a tax professional.

Postpone taxes with this strategy

Postpone taxes with this strategy

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can't swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don't qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a delayed exchange, the replacement property must be specifically identified in writing within 45 days and must be received within 180 days (or by your tax return due date, if earlier), after sale of the exchange property.

With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn't a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

When done properly, exchanges let you trade up in value without owing tax on a sale. There's no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.