What's New in Financial Strategies – June 2011

Unemployment benefits: Are they taxable?

Unemployment compensation can provide a welcome buffer while you're transitioning to a new job. But with the help comes a tax effect, because the benefits provided under federal or state laws are usually includable in your income in the year you receive them.

As a result, you may want to complete Form W-4V, Voluntary Withholding Request, to have federal income tax withheld from your benefits. You can also ask the unemployment office to withhold state income tax. Alternatively, you can adjust or begin making quarterly estimated tax payments.

If you receive and repay benefits in the same year, you can subtract the repayment from the total you received. However, if you make repayments in a year following the receipt of the benefits, the tax treatment depends on how much you repay, and can be claimed either as an itemized deduction or a credit against your current-year tax.

Please contact us if your employment situation changes. We can help with tax and benefit related issues such as severance pay, retirement account rollovers, and deductions related to job hunting.

New job? What to do with your 401(k) plan

Changing jobs can be a stressful event. A new boss, new co-workers, and new benefits to sign up for. These days you might well have one more decision to make - what to do with your 401(k) plan.

You'll have several choices. Unfortunately, the easiest choice is the worst choice: that is, to take a distribution from the old plan and put it in the bank. It may be tempting, because who couldn't use some extra cash. But if you do, you'll owe taxes on the balance and usually a 10% penalty as well. You'll lose the benefits of future tax-deferred growth on your savings. And if you spend the money, you'll have to start from scratch in saving for retirement.

Instead, consider the following three options:

* Ask your new employer whether you can roll your balance into the new company's plan. If you can, arrange a direct transfer between plans. You may have to complete a probationary period before you can join your new company's plan.

* Explore whether you can leave your balance in the old plan, at least for a while. That removes the pressure for an immediate decision. Later you may be able to transfer to your new plan or follow the third option.

* Roll over your balance into an individual retirement account (IRA). This avoids immediate taxes and lets your savings continue to grow tax-deferred. It also gives you maximum flexibility for future investments. You even have the flexibility to later convert into a Roth IRA. Be sure to ask for a "trustee-to-trustee" transfer to avoid any short-term tax risk.

The bottom line: Do all you can to keep your savings in a tax-favored account. You'll be glad you did when you reach retirement age.

Please call our office at 408-879-9990 if you're facing this situation. We'll be happy to advise you.

New/Smart Business – June 2011

 

Small companies get additional time for reporting benefits

The IRS has just announced that small companies will get an additional year before being required to report the value of employee health benefits on their employees' W-2 forms.

Health reform legislation passed in 2010 included a requirement that employers report on W-2 forms the value of health coverage they provide to employees. The IRS had already provided relief for all businesses by making reporting optional for 2011 W-2 forms.

Now, small companies that file fewer than 250 W-2s need not report the value of benefits until filing 2012 W-2 forms early in 2013.

Why it's important to keep an eye on your company's cash

Do you regularly monitor your company's cash accounts? You should. Even if you leave the job to your bookkeeper or accountant, you should stay aware of where the cash is going and how the spending is approved. Along with inventory "shrinkage," theft or improper expenditures of cash are among the chief sources of loss for small companies.

Periodically, you hear about a huge loss caused by an employee who's been quietly embezzling cash for years. But many smaller cases are never noticed. And it's not always employees at fault. In fact, the vast majority of employees are scrupulously honest and loyal. Outsiders can be stealing your cash too, by submitting false or inflated invoices that are paid without proper review.

How to reduce risk of loss

What can you do to reduce the risk of losses? The textbook answer is "internal controls." This refers to things such as standard procedures for approving and paying bills. It includes segregation of duties - having more than one person involved in preparing, signing, and reconciling checks. Unfortunately, many small companies don't implement proper controls - either because there's not enough staff or because they think it's too much trouble.

Regardless of the size of your business, here are some steps you can take:

* Maintain a strict rule that all invoices must have an approval signature before being paid. Nothing focuses a person's mind like having to sign his or her name on something.

* Have a policy that all employee expense reports must be signed off by a higher-level employee.

* Make it a rule that the person who prepares a company check can't sign that check.

* Ask your bookkeeper or accountant to give you a signed note each month affirming that the bank statement has been reviewed and balanced.

* Follow up personally to make sure that these procedures are being followed.

* Every few months, ask to see the bank statement and canceled checks for the prior month. Review them in detail. Not only will this increase your chances of spotting fraud, but it will also remind you just what the company's cash is being spent on. The owner/manager's review of the bank statement puts a bookkeeper on notice that the boss is keeping an eye on transactions.

Please contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com for details or for assistance in improving controls over your company's cash. You can also visit our website www.cpasllp.com for more details.

What's New in Taxes – June 2011

Make summertime tax-saving time

Summertime fun can be made even more enjoyable by adding tax savings. Here are some tax-saving ideas to consider.

* If you have summer travel plans and the primary purpose of your trip is business, you can deduct all the travel costs to and from your business destination and all other business-related costs even if you add on a few extra days for pleasure. You can't deduct costs related to the pleasure portion.

Including a spouse or friend on your trip is permissible, but you can't deduct the additional costs for that person.

* If you itemize your deductions, you can deduct the mortgage interest and property taxes paid for your vacation home. A boat or RV can qualify as a vacation home if it has sleeping quarters, cooking facilities, and a bathroom. If a retreat also serves as rental property, you can control your tax deductions by changing the number of days you use it for vacation.

* If you and your spouse work, the cost of sending your children to a summer day camp may qualify for the child care credit.

* If you own a business, consider hiring your child for the summer. Your child can earn up to $5,800 tax-free this year, and your business is entitled to a deduction for the wages paid. You must pay your child a reasonable wage for the work performed. If your business isn't incorporated, a child under 18 is not subject to FICA taxes.

Tax breaks can help when disaster strikes

Recent events here and abroad are reminders that disasters can occur at any time - often with staggering human and financial costs. If you're an unlucky victim of a disaster, you may receive help from insurance and federal disaster aid. But the tax code also offers some relief. You may be able to take an itemized deduction for part of your loss. In tax terms, it's a "casualty loss," and it can also apply to events such as a car crash, a house fire, or theft. Here are the basics.

* The loss or damage must be due to an unexpected and sudden event. Losses due to slow deterioration over the years, such as rot, rust, or insect damage, don't qualify.

* Your tax deduction won't equal your total loss. You must subtract any insurance or other reimbursement. Then you must also deduct $100 for each loss and 10% of your adjusted gross income.

* Your loss may also be limited by your adjusted basis in the property. That's generally what you paid for it, plus or minus any improvements or previous losses.

* In a widespread disaster, the area may be classified a "Presidentially declared disaster area." If that happens, you have a special option. You can claim your casualty loss against the current year's taxes. Or you can amend the previous year's return and claim your loss against that year's taxes. That usually generates a faster refund, but it may change the amount of your deduction.

If you suffer a casualty loss, please contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. We'll explain the rules and help you claim the maximum possible tax benefit. You can also visit our website www.cpasllp.com for more details.

Major Tax Deadlines – June 2011

* June 15 - Second quarter 2011 individual estimated tax is due.

* June 15 - Due date for calendar-year corporations to pay second installment of 2011 estimated tax.

* June 15 - Due date for calendar-year trusts and estates to pay second installment of 2011 estimated tax.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.

* Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

* Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

New/Smart Business – May 2011

New law repeals expanded 1099 reporting rules

On April 14, 2011, President Obama signed legislation - the "Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011" - repealing expanded reporting rules for businesses and landlords that had been created by laws passed in 2010.

* Business reporting. The Form 1099 reporting rules were changed by the 2010 health care legislation. Under the "Patient Protection and Affordable Care Act of 2010," every business, charitable organization, and governmental unit was required to file a Form 1099 for payments to any vendor or supplier of goods or services (other than a tax-exempt organization) totaling $600 or more for the year. Both the recipient and the IRS had to receive a copy of the Form 1099. These rules were scheduled to take effect for payments made after December 31, 2011.

Before the passage of the health care law, payments to corporations were generally exempt from the Form 1099 reporting requirements. The 1099 law just signed by President Obama completely repeals the expansion of business reporting requirements, and the reporting rules return to what they were before health care legislation.

* Rental property reporting. Similarly, new Form 1099 reporting requirements were recently imposed on landlords. Under the "Small Business Jobs Act of 2010," owners of rental properties were generally required to file a Form 1099 for rental-related payments to any provider for services totaling $600 or more for the year. These reporting rules were to apply to recipients who provided professional services, such as accountants, as well as workers like plumbers and electricians. They were to be effective for payments made after December 31, 2010.

The new law repeals these Form 1099 reporting rules for landlords. As with the repeal for business reporting, it's like the requirements never existed.

Repeal of the expanded business and rental property expense reporting rules will eliminate a flood of paperwork for most small business and rental property owners.

Check out disability-related tax breaks

A variety of tax breaks are available to help disabled taxpayers cope with the financial burdens of disability. Businesses that improve access for the disabled are also eligible for tax credits and deductions.

For example, business owners who pay an interpreter to assist the hearing-impaired could qualify for a tax credit. The cost of services, materials, and equipment purchased to assist the visually impaired or those with other disabilities may also qualify for credit.

The credit, which reduces the taxes you owe, can be as much as $5,000, and you can carry unused amounts forward to future returns. Your company is eligible if prior-year gross receipts were no more than $1 million or you employed no more than 30 full-time workers.

You might also be able to take advantage of the barrier removal deduction when you make your company's vehicles, walkways, parking lots, and other facilities user-friendly and convenient for the disabled.

This deduction lets you claim up to $15,000 per year for certain modifications to business property you own or lease. The benefit: Instead of depreciating the cost of these changes, which spreads the deduction over a longer period, qualified expenses can reduce taxable income in the year you pay for them.

If you would like more details on the disability-related tax breaks your business might qualify for, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com for more details. You can also visit our website www.cpasllp.com for more details.

What's New in Taxes – May 2011

IRS increases dollar threshold for tax liens

The IRS recently announced that it will moderate its use of tax liens to collect back taxes. A federal tax lien gives the IRS a claim on a delinquent taxpayer's property for unpaid taxes.

This change means the IRS won't use a tax lien unless at least $10,000 in back taxes is owed; the previous threshold had been $5,000. In addition, the IRS says it will "withdraw" more tax liens once the back taxes have been paid. A withdrawal removes the lien from the taxpayer's credit record, whereas a lien "release" as previously used left the lien on the credit record for at least seven years.

Nonprofit organizations may have tax obligations

If you're an officer or on the board of a community organization, you may wonder about the tax requirements that apply to your group. Generally an organization will not owe taxes if two things are true:

* It has registered as an exempt nonprofit organization with the IRS, and

* It has no business income from activities unrelated to its exempt purpose.

Registration is quite straightforward. The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group's existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000 don't even have to register to be considered exempt.

More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization's exempt purpose. Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn't pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Generally, rents from leasing out real property, interest income, and dividends are not subject to tax.

Once it's registered, an exempt organization will have to file an annual information return on Form 990 or 990-EZ unless its yearly gross receipts do not exceed $50,000. Those exempt organizations with receipts of $50,000 or less must still file an annual return electronically on Form 990-N. Just as with a tax return, there are penalties for filing Form 990 or 990-EZ late or failing to file. There is no penalty on an organization that is required to file Form 990-N but fails to do so; however, if an organizations fails to file an annual return for three consecutive years, its exempt status is revoked.

Generally, the filing deadline is the 15th day of the fifth month after the organization's year-end. For 2010 returns, the deadline for calendar-year organizations is May 16, 2011. For assistance with this or any of your tax filings, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com for more details. You can also visit our website www.cpasllp.com for more details.

What's New in Financial Strategies – May 2011

It's not too late to convert to a Roth IRA

If you procrastinated on converting your regular IRA to a Roth last year, you can still do so in 2011. Although converting your IRA generates taxable income in the year of the transfer, later withdrawals of contributions and income from the Roth are tax-free. Making this transfer while income tax rates remain low could pay off big time. And your conversion opportunities are not limited to just traditional IRAs. You can also convert your 401(k), 403(b), or 457 plan to a Roth.

What you need to know about private mortgage insurance

If you're in the market for a home, you've probably heard of private mortgage insurance or PMI. It's insurance that protects lenders - not borrowers - if the mortgage goes into default. Lenders generally require PMI if you're unwilling or unable to make a down payment of at least 20% of the home's purchase price. Depending on your credit history, your income, the size of your mortgage and other factors, PMI can run from $50 to several hundred dollars a month. After building up equity in your home (in technical terms, when your loan-to-value ratio drops below 80% of the original loan balance), your PMI policy can be cancelled. But building up that much equity, especially with a conventional long-term mortgage, can take a decade or longer.

Is everyone who can't afford a 20% down payment required to take out a PMI policy? If you're financing a home with a conventional mortgage, the short answer is: probably. Homes financed with a Veteran's Administration (VA) or Federal Housing Administration (FHA) mortgage don't require PMI. That's because the federal government protects these lenders by paying off the outstanding mortgage balance if the borrower defaults. Lenders who finance conventional mortgages don't have that protection. From the lender's perspective, if you borrow more than 80% of the home's market value, you're more likely to default on the loan. To compensate for this greater perceived risk, conventional mortgage lenders generally require you to purchase PMI. Those lenders who don't require PMI will compensate for their risk in other ways, such as jacking up your mortgage's interest rate.

On the plus side, a conventional mortgage with PMI may enable you to acquire a home that's otherwise outside your budget. On the other hand, the availability of PMI may entice you to purchase a home that's more expensive than you can realistically afford. Consider also that PMI premiums add an extra cost to your monthly house payment.

So if you're looking to finance that dream home, be sure to consider all the factors - including PMI. If you need assistance, give us a call.

Major Tax Deadlines – May 2011

* May 16 - Deadline for calendar-year exempt organizations to file 2010 information returns.

* May 31 - Deadline for IRA, SEP, SIMPLE, Roth IRA, MSA, and education savings account trustees to file annual statements (Form 5498) with the IRS, with copies to participants.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.

* Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

* Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.