New/Smart Business – March 2011

Make your S corporation election by March 15

If you own a small business corporation that operates on the calendar-year, you have until March 15, 2011, to choose S corporation status for this year. In order to become an S corporation, you'll need the unanimous approval of all shareholders.

The principal advantage of an S corporation is that you avoid paying double taxes. In a traditional C corporation, profits are taxed at the corporate level and then they're taxed again when paid to individual shareholders as dividends. In an S corporation, there are generally no taxes on earnings at the corporate level. Instead, profits or losses flow directly through to the shareholders. They pay taxes only once, when they report their share of earnings on their individual tax returns.

Another advantage: Doing business as an S corporation can be attractive in the early, unprofitable years of a start-up business. That's because operating losses flow through your personal tax return, perhaps offsetting other taxable income.

There are some trade-offs for these tax benefits, though. If you're an owner-employee and own more than two percent of the company, you'll receive less favorable tax treatment of some fringe benefits. There are also ownership limitations. The company can have only one class of stock, there can't be more than 100 shareholders, and all of the shareholders must be U.S. citizens or residents.

Despite these drawbacks, doing business as an S corporation can still offer some tax planning advantages. If you can meet the ownership requirements, it might be well worth considering an S corporation election. Contact our office for an in-depth analysis of the pros and cons for your company.

Cash in on the new business rules

Get an early start to maximize the new tax breaks for your business. The 50% bonus depreciation was increased to 100% - but only for assets purchased from September 9, 2010, through December 31, 2011. While this increase makes it seem there's little difference between bonus depreciation and Section 179 expensing, each election has distinct rules that can impact decision making. One example: Bonus depreciation is available only for new assets; expensing applies to both new and used assets.

Another depreciation break is the reinstatement of the 15-year expensing period for qualified leasehold improvements, restaurant property, and retail improvement property.

Qualified businesses with fewer than 25 full-time employees can receive a tax credit of up to 35% of employer-paid health care costs.

Another fringe benefit to consider is the tax-free reimbursement of employees' mass-transit commuting expenses. Workers can be reimbursed up to $230 per month for qualified highway vehicle transportation and transit pass expenses, and up to $20 per month for bicycle commuting costs.

While it doesn't reduce your tax bill, you might raise your workers' morale by informing them that they no longer have to account for the personal use of their company-provided mobile phone. Such recordkeeping requirements were eliminated last year.

What's New in Taxes – March 2011

IRS changes filing deadline

This year the deadline for filing various tax returns normally due on April 15 is being changed to April 18, 2011. The reason? Washington, D.C. is observing its Emancipation Day holiday on April 15, and though that's not a national holiday, the Treasury Department has extended Tax Day 2011 to Monday, April 18. The new deadline applies to individual and partnership tax returns, extension requests, and other tax deadlines such as making 2010 IRA and education savings account contributions, and making the first 2011 estimated tax payment.

A new baby can bring a lower tax bill

If you had a baby in 2010, or you're planning on having one in 2011, you are not only getting a little bundle of joy, but you're also getting a significant tax deduction. The amount of the deductions and credits certainly won't cover the cost of raising your child, but every little bit of tax savings helps. A few of the tax issues that you should be aware of include the following items.

* Additional exemption. Your new baby generates an additional exemption to claim on your return, and with the 2010 exemption level at $3,650 ($3,700 for 2011), that could equate to some significant tax savings.

* Child tax credit. You are also allowed a $1,000 credit against your taxes for your new family addition. And if your tax liability is less than the maximum credit, Uncle Sam will give you a refund for the difference.

* Dependent care credit. If you pay for child care to allow you to work or look for work, you may qualify for the dependent care credit.

Don't overlook savings for college. The sooner you can start saving, the more you can accumulate to be used for future education expenses. Here are three tax-advantaged ways to save for your new baby's future college expenses.

* Coverdell education savings account. You can deposit up to $2,000 annually into this account with withdrawals treated as tax-free if used for education.

* 529 college savings plan. This is another savings vehicle that allows you to put away even larger amounts for college expenses, with the earnings on the account treated as tax-free if used for education.

* Roth IRA. When your little one gets a bit older and begins to work, consider depositing some of that income into a Roth IRA account. This account can be used for education, or just for general investment, with no taxes due on qualified withdrawals.

So don't overlook the benefits in the tax code if you have a new addition to the family! Contact us 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.

Major Tax Deadlines – March 2011

* March 1 - Farmers and fishermen who did not make 2010 estimated tax payments must file 2010 tax returns and pay taxes in full.

* March 13 - Daylight Saving Time begins.

* March 15 - 2010 calendar-year corporation income tax returns are due.

* March 15 - Deadline for calendar-year corporations to elect S corporation status for 2011.

* March 31 - Deadline for payors who file electronically to file 2010 information returns (such as 1099s) with the IRS.

* March 31 - Deadline for employers who file electronically to send copies of 2010 W-2s to the Social Security Administration.

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.

What's New in Financial Strategies – February 2011

Time your IRA contributions for maximum growth

The tax rules give you a period of 15½ months to make contributions to an IRA for any given year. For example, you could contribute to a 2010 IRA as early as January 1, 2010, and as late as April 18, 2011.

The timing of your contributions can have a significant effect on the amount your retirement fund can grow to, and if you're contributing to a tax-deductible IRA, the timing can make a tax difference too.

Here are two bits of advice.

* First, if you didn't reach the 2010 contribution limit ($5,000 if you're under age 50; $6,000 if you're over) by December 31, 2010, designate 2011 contributions as being for 2010 until you reach the dollar limit or April 18. Then you can deduct these contributions on your 2010 return for a quicker tax benefit. Use that reduction in your tax bill to fund your 2011 IRA.

* Make your contributions for each year as early in the year as you can. That gives your fund more time to benefit from tax-deferred growth. If you can't manage a lump sum at the beginning of the year, fund your IRA with a set amount each month.

Talk finances with your elderly parents

One day you may find yourself taking care of an elderly parent who is in declining physical or mental health. This can be stressful, both emotionally and financially. On the financial side, there are steps you may want to take to prepare for this situation.

Talk to your parents about their financial affairs. Parents may be reluctant to discuss their finances, but someone needs to know the names of their lawyer and accountant. Someone needs to know where their important financial papers are located. Chances are that much of the information will be in your parents' heads, or scattered in various places around their house.

Here's a general overview of the topics you might want to cover with your parents.

Vital statistics

* Where are social security cards, driver's licenses, and passports kept?

* Where are marriage or divorce records and family birth certificates?

* Where are military service records and pension records?

Financial records

* Help your parents make a list of their financial assets, bank accounts, investments, etc.

* Review the beneficiaries they have designated and how accounts are titled.

* Do they have a safe deposit box? Record the location and box number.

* Find the name of their accountant and copies of tax returns.

Physical assets

* Locate mortgage records and the deed to their house or other property.

* Locate vehicle titles.

* Do they own any assets stored elsewhere?

Insurance

*Locate records for home, vehicle, health, and life insurance.

Estate planning

* Do they have a will or living trust?

* What is the name of their attorney?

* Discuss any special wishes for bequests; encourage your parents to put them in writing.

* Have they set up directives for medical care (living wills)?

* Have they set up a Power of Attorney in case they become disabled?

Don't try to find all this information in one exhausting session. Instead, use the list as a starting point for a series of conversations. Wherever possible, involve your parents in putting their own affairs in order. You may find it's a great opportunity to bond with your parents in their golden years.

For more information 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 – February 2011

IRS announces two changes to tax requirements

The IRS has announced changes to federal tax deposit rules and nonprofit filing requirements.

* Businesses can no longer use paper coupons (Form 8109: Federal Tax Deposit Coupon) to deposit federal taxes to an authorized bank. Instead, deposits must be made using the Electronic Federal Tax Payment System (EFTPS) online or by telephone. This change affects all federal tax deposits including employment and unemployment taxes, corporate income taxes, excise taxes, and backup withholding. Businesses with taxes below certain thresholds may still remit taxes due with the tax return being filed.

* Tax-exempt organizations are required to file annual reports with the IRS. Those with gross receipts below a certain threshold amount can file an E-postcard rather than a longer version of Form 990. The IRS has just raised that gross receipts threshold amount to $50,000, an increase over the previous filing threshold of $25,000. The deadline for nonprofit filings is the 15th day of the fifth month after their year-end. For calendar-year organizations, that filing deadline for 2010 reports is May 16, 2011.

Give your business a competitive edge

It's a fact. When competition is based on price alone, smaller companies often find themselves squeezed by high-volume, low-priced competitors. How do you, as a small or mid-size business owner, survive in such an environment? You survive by differentiating yourself from the competition, creating a niche or identity that isn't based on cut-rate pricing. In other words, you offer something that your competitors don't offer, something that's different.

To truly differentiate your business, you need to identify your target customers and their needs. Let's say your firm sells stereo speakers. You might decide to focus on serious audiophiles only. Such customers will likely pay a premium for higher performance, technological innovation, or customization. Perhaps you've dined at expensive restaurants that offer an unusual menu, a remarkable atmosphere, or superior service. Such eating establishments are often packed at the dinner hour. Why? Because customers perceive value in the products and services that these businesses offer, a value they're willing to pay for.

The key is to identify the qualities that make your company different. How do you discover such qualities? One way is to study your competition. Clip their ads, examine their websites, buy their products and services. Determine what makes your product or service different and more valuable than that of your competitors.

Once you've identified the qualities that could set your company apart, it's time to prioritize them. Decide which would be easiest to develop, which would address your customers' most important buying criteria, and which would be hardest for your competitors to emulate.

Finally, seek to convey that value to your target customers. The goal is to "brand" your product, being clear about what you want to be in your customers' minds.

If you need help identifying the qualities that could set your business apart, give us a call at 408-879-9990.

What's New in Taxes – February 2011

More savings bond options for your tax refund

Last year, you could use your tax refund to purchase U.S. Series I Savings Bonds in your name. This year, there are some new options for purchasing savings bonds with your income tax refund.

You can buy savings bonds for yourself and up to two other individuals. Form 8888 is used to designate the person or persons in whose name the bonds are to be issued. The savings bonds will then be mailed to those individuals.

Up to $5,000 in bonds can be purchased, and they must be bought in $50 increments. This year, you no longer need to use direct deposit for any remaining refund amount; you may request a paper check for the balance if you prefer.

What's your status?

While gathering information to complete your income tax return, you may give little thought to your filing status. But there's a reason "filing status" choices appear at the beginning of tax forms: They're important.

Why? Because filing status can impact exemptions, reportable income, deductions, credits, tax rates, liability, the type of form you file, and whether you need to file at all. In addition, some states require that you use the status reported on your federal return, which can affect the amount of state tax you pay.

Here are facts to consider when determining filing status.

1. Your status generally depends on whether you're married or single on the last day of your taxable year (typically December 31). In cases of divorce or separate maintenance decrees, the laws of your state determine whether you're considered married or single. Same-sex marriages are not recognized for federal income tax purposes.

2. As a married couple, you can choose joint or separate returns. When you file separately, you can change your mind later and amend your return to file jointly. However, you can't switch from joint status to married filing separately after the due date of the original return.

3. If you were widowed during the year and have not remarried, you have the option of filing jointly with your late spouse. When you're widowed and have dependent children, you can continue to use joint tax rates for two additional years following the year your spouse died.

4. Head of household status is intended for single taxpayers with dependent children. It may also be available when you're single and maintaining a separate household for a parent - including one living in a nursing home.

Questions about your filing status? Please contact us 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.

Major Tax Deadlines – February 2011

* February 15 - Deadline for brokers to provide Forms 1099-B and 1099-S to customers.

* February 28 - Payors must file information returns (such as 1099s) with the IRS. (Electronic filers have until March 31 to file.)

* February 28 - Employers must send W-2 copies to the Social Security Administration. (Electronic filers have until March 31 to file.)

For March 2011

* March 1 - Farmers and fishermen who did not make 2010 estimated tax payments must file 2010 tax returns and pay taxes in full.

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.

What's New in Financial Strategies – January 2011

New law sets estate tax rates and exemptions

The 2001 tax law eliminated the estate tax for 2010. The tax was scheduled to return in 2011 with a 55% top rate and an exclusion amount of $1 million. Under the new law, the estate tax is retroactively reinstated for 2010 with a maximum estate tax rate of 35% and an exclusion amount of $5 million ($10 million for married couples). The new rate and exclusion amount will apply through December 31, 2012. Along with these changes, the new law reinstates the step-up in basis for inherited property.

For deaths occurring in 2010, estates have a choice between applying the estate tax with a step-up in basis to fair market value for estate property or no estate tax with a modified carryover of the decedent's basis.

The new law allows a surviving spouse to utilize the unused portion of the deceased spouse's estate tax exclusion amount, providing the surviving spouse with a larger exemption from the estate tax.

Under the new law, the gift tax maximum rate is set at 35%, with an exclusion amount of $5 million, effective through 2012.

Where you hold an investment matters

You'll probably be doing a 2011 review of your investment portfolio for tax and rebalancing purposes. As part of your review, check to be certain you are holding your specific investments in the right type of account. Your goal is to hold investments that produce ordinary taxable income in tax-deferred accounts and to hold those that produce tax-free or tax-favored income in your regular taxable accounts.

Consider this situation. If you hold tax-free municipal bonds in a tax-deferred retirement account, you are "sheltering" interest income from taxes that never would be taxed in the first place. Withdrawals from the retirement account will be taxed as ordinary income at ordinary income rates, and that includes interest from the municipal bonds. The result is that normally tax-exempt earnings eventually become subject to income tax.

Another example: Long-term capital gains are taxed at lower rates than interest income. So investments generating interest might be better held in retirement accounts, while investments generating capital gains might be better held in taxable accounts. Remember, withdrawals from retirement accounts (other than Roth IRAs) are taxed at ordinary income rates even if the income comes from long-term capital gains.

Tax-deferred retirement plans should outperform an investment account that is exposed to annual taxation. But if you're not careful where you hold specific types of investments, you could end up with less rather than more income.

For more information 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 – January 2011

New law includes business provisions

The "2010 Tax Relief Act" includes several provisions that will affect businesses. Here are the highlights.

* 100% bonus depreciation. The new law increases the current 50% bonus depreciation to 100% for qualified business equipment purchases made from September 9, 2010, through December 31, 2011. 50% bonus depreciation will be available for purchases made in 2012.

* Section 179 expensing. The first-year expensing option was increased to $500,000 for 2010 and 2011 by the "Small Business Jobs act of 2010." The investment limit was set at $2 million. The new law just passed provides a $125,000 expensing limit for tax years beginning in 2012. The investment limit for 2012 is set at $500,000; both limits will be adjusted for inflation.

* Research tax credit. The research tax credit had expired at the end of 2009. The new law extends the credit retroactively through 2010 and 2011.

* Work Opportunity Tax Credit. The new law extends the Work Opportunity Tax Credit through 2011. It had been scheduled to expire after August 31, 2011.

Reducing business overhead: How to fight the battle of the bulge

You may not realize this, but one of the best opportunities to increase your business's bottom line can be found by reviewing its overhead. These expenses, consisting of mundane but necessary essentials such as office supplies, utilities, credit card processing, and insurance, each have their own unique savings opportunities. Business owners and managers often get complacent and let these recurring items grow over time, eventually bloating their company's overhead costs. So, how do you harness these potential savings opportunities to fight this overhead battle of the bulge?

Consider these practices as a way to cut your costs.

1. Get new bids from vendors in such competitive industries as credit card processing and shipping. They'll be eager for your business, thus allowing you to negotiate better rates on these items.

2. Review insurance policies that may need updating. As your business's circumstances change over time, it is important to determine if you are over-insured or if certain types of coverage are not needed anymore.

3. Learn to buy strategically. Many common items used in your business can be purchased at deep discounts through wholesale clubs or trade associations which usually have pre-negotiated discounts on many goods and services.

4. Develop a cost reduction mindset and discard the flawed notion that profitability only comes through a sales-oriented strategy.

5. Involve all your employees. Those employees performing day-to-day tasks are often better equipped to spot money-saving opportunities. Offer a cash or time off reward to motivate employees.

Learn to be prudent and resourceful in managing your overhead, and you'll see immediate results in your bottom line.

What's New in Taxes – January 2011

Congress extends Bush-era tax cuts for two years

After weeks of wrangling over the details, both the Senate and the House passed a bill that will extend the tax rates in effect in 2010 for another two years. President Obama signed the "2010 Tax Relief Act" into law on December 17, 2010.

Here's an overview of the key provisions in the law.

* Tax rates. The existing tax rates established in the 2001 and 2003 tax laws will continue for all taxpayers through 2012. This means the top tax rate for 2011 and 2012 will remain at 35% instead of reverting to 39.6% as it would have done had the "2010 Tax Relief Act" not passed.

* Capital gains and dividends. The top rate for long-term capital gains will remain at 15% for taxpayers in all but the two lowest ordinary income brackets; those taxpayers will continue to have a 0% rate on capital gains. Dividends will continue to be taxed at the 15% and 0% rates instead of reverting to ordinary income rates as high as 39.6%.

* Itemized deductions and personal exemptions. Higher-income taxpayers will not have their itemized deductions limited and their personal exemptions phased out for another two years.

* Education tax breaks. The law extends the American Opportunity Tax Credit through 2012. The income exclusion for up to $5,250 of employer-provided education assistance to employees is continued for two years. The higher contribution limit of $2,000 and other enhancements to Coverdell Education Savings Accounts were extended for two years.

* Alternative minimum tax (AMT). The AMT was given another "patch" for 2010 and 2011, a move that will keep the tax from hitting millions more taxpayers. For 2010, the exemption amount is $47,450 for individuals and $72,450 for married couples filing joint returns. For 2011, the exemption is $48,450 for singles and $74,450 for couples. Without this adjustment, the exemption amounts for 2010 and 2011 would have been $33,750 for singles and $45,000 for couples.

* Payroll tax. A new tax break is created for workers who pay social security taxes. For 2011, the employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. Self-employed individuals will pay 10.4% on self-employment income up to $106,800. Employers will continue to pay 6.2% on employee wages. This payroll tax rate cut does not affect the Medicare portion of payroll taxes for either employees or employers.

* Extenders. Tax breaks that have come to be called "extenders" because they're typically extended retroactively every year, but just for a year, are again extended by the new law. Effective for 2010 and 2011 returns, taxpayers have the option of deducting state and local sales taxes instead of state and local income taxes. The deduction for up to $4,000 of higher education expenses and the deduction for teachers who buy classroom supplies are extended. Those age 70½ or older may again contribute up to $100,000 tax-free from an IRA to a charity.

* Other provisions. The law extended several tax breaks for businesses, set the estate tax top rate at 35% with a $5 million exclusion, and extended unemployment benefits for 13 months.

Do you owe the "nanny tax"?

You might owe the "nanny tax," and if you overlook it, you could be hit with additional interest and penalties.

* What is the nanny tax? It's simply employment taxes on the wages you pay to certain domestic workers, such as babysitters or housekeepers. If you paid a domestic worker more than $1,700 in 2010, you may be required to report and pay social security and Medicare taxes on their wages. You might also owe federal unemployment tax.

* To whom does the tax apply? It doesn't matter what type of work is performed (gardening, babysitting, nursing, or general household chores). What does matter is whether your worker is considered to be your employee or an independent contractor. Independent contractors are typically self-employed and, therefore, exempt from the nanny tax. Generally, if you control how and when workers do their jobs, they're probably your employees. Independent contractors operate their own businesses. For example, a nanny who takes care of your kids in your home is probably an employee, but a day care provider who cares for many children is not.

Some employees are exempt. For example, you generally don't have to pay nanny taxes on wages paid to your spouse, your child under age 21, or any part-time employees under age 18. But there are exceptions, so you should check the rules carefully.

* Avoid penalties and interest. If you fail to pay the tax, you could be liable for interest and penalties on the tax owed, and possibly even a penalty for underpaying estimated taxes. You might also have obligations to pay state employment taxes.

If you hire someone to work in your home, it's worth contacting our office to discuss your tax obligations. January 31, 2011, is the deadline for sending W-2 forms to your workers if the nanny tax applies for 2010.

For more information 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.

Major Tax Deadlines – January 2011

* January 18 - Final 2010 individual estimated tax payment is due, unless 2010 tax return is filed and taxes are paid in full by January 31, 2011.

* January 31 - Employers must provide 2010 W-2 statements to employees.

* January 31 - Payers must provide 2010 Form 1099s to payees. (Brokers have until February 15 to provide Form 1099-B and consolidated statements to customers.)

* January 31 - Employers must generally file Form 941 for the fourth quarter of 2010 and pay any tax due.

* January 31 - Employers must generally file 2010 federal unemployment tax returns and pay any tax due.

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.

What's New in Financial Strategies – December 2010

Check gift cards carefully before you give

For years, gift cards have been a popular way to solve the problem of what to give at holiday time. But too often the cards had expiration dates, inactivity fees, and other restrictions that cut into the joy of giving.

New rules enacted last year will eliminate some of the issues consumers have had with gift cards. Under the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act), gift cards purchased after August 22, 2010, cannot have expiration dates of less than five years. Inactivity fees can't be charged unless the card hasn't been used for at least 12 months.

But its still advisable to check the details on any gift card you're thinking of buying. Watch for fees charged just to purchase the card, inactivity fees, and outdated disclosure information about the card. Also be aware that if the retailer whose card you buy goes bankrupt, the gift card is likely to be worthless.

As with any purchase, the key to getting your money's worth is knowing exactly what you're getting before you buy.

Is it time to refinance your home mortgage?

Mortgage interest rates are at historic lows. According to the Mortgage Bankers Association, the average interest rate for 30-year, fixed-rate mortgages dropped to 4.25% in September, 2010, and the average rate for 15-year mortgages fell to 3.73%. These are the lowest rates in almost 50 years.

If you're currently paying mortgage interest at a higher rate, you may be tempted to refinance your existing mortgage, even if you already refinanced once or twice before. But should you do it? The decision may not be as simple as it first seems.

Comparing interest rates is not enough. Here are some other factors to consider before you refinance.

* Compare apples to apples. Always request a good-faith cost estimate from any lender. This report should disclose all the fees and closing costs, such as points, credit report fees, inspection fees, private mortgage insurance, and appraisal fees. Use this information to evaluate competing loan proposals.

* Calculate your breakeven period. This is the length of time it takes you to recover the costs a lender typically charges to refinance your mortgage. To do this, divide your refinancing costs by your monthly savings (your current loan payment minus your new loan payment). If you plan on selling your home in the near future, refinancing may not save you money because it usually takes several years to recover refinancing costs through a lower monthly payment.

* Check for prepayment penalties. Before you pay off your existing loan, check for an early payment penalty clause. Your note agreement will spell out the exact terms of the prepayment penalty, if any, or you can check with your lender. A prepayment penalty will lengthen your breakeven period.

* Analyze the loan term. To save interest, avoid stretching out your total loan period when you refinance. Let's say you've been paying for ten years on a 30-year loan. If you take out a new loan with a 30-year term, you will increase your total payoff period to 40 years. Instead, consider making your new loan term coincide with the remaining term of your old loan (in this example, 20 years).

Another alternative is to continue making the same monthly payment toward your new 30-year loan. If you do that, you'll pay off your loan in a shorter period of time. This could save you a substantial amount of interest.

* Take taxes into account. In evaluating a refinancing, don't overlook the potential tax deductions.

* Loan points. Most lenders charge points, also known as a loan origination fee, on home loans. If you itemize deductions on your tax return, you can generally deduct points paid on a refinancing, but not all in the first year. Instead you must spread your deduction pro rata over the life of the new mortgage. To qualify, paying points must be an established practice in your area, and the amount paid can't be more than what is normally charged in the area.

If you've refinanced in the past, you could be eligible for another deduction. When you pay off a prior refinancing, you can immediately deduct any remaining points from the previous mortgage.

If you refinance to get a lower interest rate or shorter loan term and also to tap your equity to make improvements to your home, points attributable to the home improvement portion can be deducted immediately. Any remaining points must be deducted pro rata over the loan's term.

* Other deductions. If the lender charges a prepayment penalty for paying off the previous loan early, you can generally deduct the amount paid. Most other closing costs, such as appraisal or title insurance fees, are not deductible. However, you should bring your loan documents to your tax appointment because there could be additional deductions.

Other factors may also come into play. For instance, after you refinance, you may have to adjust your tax withholding or estimated tax payments to reflect a lower interest deduction. And lenders now require more detailed financial information and documentation. We can help you with the paperwork and with making the best choices in your particular circumstances.

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 http://www.cpasllp.com/ for more details.

New/Smart Business – December 2010

New 1099 reporting rules may be repealed

The recent health care reform legislation included a new reporting requirement for businesses. Beginning in 2012, a Form 1099 must be filed with the IRS for payments of $600 or more made to corporations. Previous law required such reporting only for amounts of $600 or more paid to unincorporated businesses.

"The Small Business Jobs Act of 2010" added another reporting requirement, this one to take effect January 1, 2011. Landlords will be required to file Form 1099s with the IRS for payments of $600 or more made for rental property expenses.

Responding to the complaints from businesses that these new reporting requirements would be very burdensome, Senate Finance Committee Chairman Max Baucus has announced legislation that would repeal both of these provisions.

Stay tuned to see if repeal will actually happen. If it doesn't, get your business ready for these new requirements.

What's New in Taxes – December 2010

Save energy and taxes: An IRS reminder

The IRS recently issued a bulletin reminding taxpayers that making energy-saving improvements to their homes before the end of the year can lower their taxes for 2010.

The credit allows you to claim up to 30% of the cost of energy-efficient windows, doors, certain roofs, high-efficiency heating and air conditioning systems, water heaters, and other energy-saving improvements to your principal residence. The maximum credit for amounts spent in 2009 and 2010 is $1,500.

A second energy credit is available to encourage investment in alternative energy equipment such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

The IRS cautions homeowners to check the manufacturer's tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer's website or with the product packaging. Not all energy-efficient improvements qualify for the tax credits. The manufacturer's certification is different from the Department of Energy's Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

How to deal with an audit notice

The number of IRS audits has doubled over the past ten years. Coupled with the new informational filing requirements for businesses, your chances of an IRS audit notification are not insignificant. If the IRS should come calling, here are some things to consider.

First, be aware that the IRS can contact you either by mail or phone. The majority of audits take the form of a mailed notice requesting certain information. These are often easily handled, but don't automatically assume that you know what the IRS wants. The best first step is to contact our office and provide us with a copy of the notice. It's critical to reply to the request by the deadline shown on the notice. For added safety, respond using certified mail.

However, the IRS might first notify you of an audit by phone. Phone notifications are on the rise, and, unfortunately, scam artists are taking advantage of this fact. The call you receive might not be from the IRS at all, but instead from an imposter hoping to gain access to your personal information.

If it is truly the IRS on the line, be aware that the agent will carefully document every word you say and perhaps use those words against you. To protect yourself, simply take down the agent's name and contact information, and tell the agent that your professional representative will be following up with him or her. Don't engage in idle chitchat or answer any questions, even innocent-sounding ones.

Later on, the audit might result in a personal visit to your home or business to allow the agent to gather more information. These audits are referred to as field audits. You could also be summoned to the agent's office. In either case, never go it alone. Keep us and/or your attorney abreast of all developments. And never just ignore a notice - that could make matters much worse.

Your best defense against an audit might be to take steps to minimize your risks. Maintain complete and accurate records. Save important tax receipts for seven years. And stay familiar with the latest tax rules.

The odds of an IRS audit might be rising, but knowing what to do, and who to contact first can make the experience less stressful. Our office stands ready to assist you should the IRS ever call your number.

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 http://www.cpasllp.com/ for more details.

Major Tax Deadlines – December 2010

* December 15 - Fourth estimated tax payment for 2010 is due for calendar-year corporations.

* December 31 - Last day to set up a Keogh retirement plan for 2010. Deductible contributions for 2010 can be made any time up to the filing deadline for your 2010 return.

* December 31 - Deadline to complete 2010 tax-free gifts of up to $13,000 per recipient.

* December 31 - Deadline for paying expenses you want to be able to deduct on your 2010 income tax return.

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.