Terry Lockie

Has Your Roth IRA Lost Value?

Cheri — Thu, 29 Sep 2011 13:54:18 +0000

Did you convert a standard IRA to a Roth IRA in 2010? Has your Roth IRA lost value since the conversion? If so, you may want to reverse the conversion. You have until October 17, 2011 to re-characterize your Roth conversion for 2010. If you decide to re-characterize, you will need to amend your 2010 income tax return.

Steps To A Golden Financial Future

Cheri — Fri, 09 Sep 2011 16:35:15 +0000

In just a few hours, you can start a financial plan. This simple method works if you’re just starting out or haven’t given planning much thought in the past.

Mind Your Spending. Budgets don’t work for many people. A spending plan is better. Start by writing down your fixed monthly costs, debt balances, and personal expenses. Now see if your monthly income covers those costs. If not, try to find a way to trim your spending.
Weigh Your Dreams. Jot down your major financial goals, such as buying a house, paying for college, and saving for a comfy retirement. Then figure out how much you’ll need by specific dates.
Shave & Save. Cut back on expenses and set aside assets each month in appropriate accounts to achieve dream goals. Even saving a little is better than saving nothing. Over time, any sum will compound due to the effect of interest, and will benefit from market surges if invested wisely.
Know The Details. A 529 education savings plan and all retirement plans are great deals. But some are better than others. For example, not all state 529 plans are alike, some have better investment options and lower fees. A 401(k) often beats an IRA given the higher maximum contribution level, contribution of pre-tax dollars, and possible employer match, which is free money. Find out the differences between plans.
Rainy Day Money. It pays to plan for uncertainty, such as job loss or health crisis. Figure out how much you spend each month on bills and necessities. Then make sure you have access to three to six month’s worth.
Ditch The Debt. Choose credit cards with low interest rates, and avoid carrying excessive credit card balances. The easiest way to do this is to track your spending each month and know when your balances are getting out of control and need to be paid down aggressively.

Surviving 2011’s Destructive Weather

Cheri — Fri, 09 Sep 2011 16:26:41 +0000

If you have suffered property damage from 2011’s destructive weather, remember the rules on casualty loss write-offs. You can deduct losses resulting from disasters such as floods, tornadoes and the like, to the extent not reimbursed by insurance. However, if the property is insured and you don’t file a claim, you can not take the deduction. For nonbusiness filers, your loss starts as the smaller of the property’s tax basis or its decline in value, less any insurance proceeds that you received or expect to receive. Two offsets also apply to personal losses: The loss is first reduced by $100. The balance is deducted only to the extent it tops 10% of your adjusted gross income. Only itemizers can claim a deduction for damage to nonbusiness property. The rules for deducting casualty losses on business assets are more liberal. The $100 and 10% of AGI offsets do not apply, and non itemizers can claim losses. Special rules apply to losses in presidentially declared disaster areas. You can deduct 2011 casualty losses on your 2010 or 2011 return, whichever saves you more money. Your 2010 return should already be filed but you can amend it and get a refund check from the IRS. The benefit to you is that you receive any accompanying tax refunds a year earlier which will provide additional funds to re-build after the casualty. Go to www.fema.gov/news/disasters.fema to view a list of federally declared disaster areas.

The Internal Revenue Code is filled with general rules, exceptions, and sometimes requires detail that is quite cumbersome. The IRS definition of a casualty loss is a sudden, unexpected, or unusual event, such as flood, fire, tornado, earth quake, or hurricane. If your records meet all the general rules and exceptions, you may have a deductible loss on your federal income tax return.

The related expenses you have due to a casualty loss, such as for the treatment of personal injuries, temporary house, or rental car, are not deductible as casualty losses. However, they may be deductible as business expenses. Disaster unemployment assistance payments are taxable unemployment benefits. A loss of future profits is not deductible. Insurance and other reimbursement for your loss must be subtracted from the loss when you figure your deduction. You cannot deduct the reimbursed part of the casualty loss.

Casualty losses are a red flag for an IRS audit and you will need to produce documents supporting the values, basis, and depreciation. The IRS auditor is not sympathetic to a “I lost my records” excuse. First you will need to prove that you owned each and every asset. Secondly, you have to show that each individual asset was lost or destroyed. The amount of information you need to support your loss is very voluminous and detailed. You should have the following available: Contracts or purchase receipts for the original cost basis plus any improvements; Copies of old tax returns complete with detailed depreciation taken on each asset; Fair market value of each asset before the casualty; Fair market value after the casualty; Salvage value of surviving assets.

Protecting your records before a casualty occurs is often overlooked by individuals and business owners. A fireproof filing cabinet or safe on location is preferable to leaving records in an exposed area. The success or failure of your casualty loss standing up under an IRS audit will be determined by the quality of your records.

IRS increases mileage rate to 55.5 cents per mile

Cheri — Thu, 23 Jun 2011 20:30:26 +0000

The IRS announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes. The rate will increase to 55.5 cents per mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011.

“This year’s increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices,” said IRS Commissioner Doug Shulman. “We are taking this step so the reimbursement rate will be fair to taxpayers.”

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

Small Business Jobs Act of 2010:

Cheri — Mon, 07 Feb 2011 22:48:47 +0000

The Small Business Jobs Act of 2010, signed into law by President Obama in late September, is designed to tackle America’s continuing high unemployment rate by bolstering that sector of the American economy that has traditionally been responsible for the creation of the most American jobs: the small business sector. Small businesses, defined by the Small Business Administration (SBA) as any commercial concern with fewer than 500 employees, employs slightly over half of all private sector employees and over the past 15 years have generated close to 65% of all new jobs.

It’s no secret that the recent economic downturn has hit business where it hurts. Even in prosperous times, business formation is a risky endeavor: over half of all small businesses fail within the first year, in part because their owners have incomplete knowledge of the business law and tax code necessary to guide them through a business start. In 2008, the first year of the recession, almost as many of these businesses closed as were started, and many of those businesses had been in operation over ten years.

We hope the Act helps. Some of the small business tax cuts in the Act are:

S Corp. Holding Period for Built-in Gains. When a C corporation converts to S corporation status, the corporate-level built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is normally the 10-year period that begins on the conversion date. For tax years beginning in 2011, the new law exempts gains from the built-in gains tax if the 5th year of recognition period has gone by before the start of the 2011 tax year. Therefore, deferring asset sales that would generate built-in gains until 2011 is something to consider.

Deductibility of Health Insurance Costs From Self-Employment Income. Self employed individuals will be able to reduce self-employment income for the cost of health insurance for themselves and family in computing their self-employment tax, but only for their first taxable year beginning after December 31, 2009.

Increase Deduction for Start-up Expenditures. The amount deductible for 2010 as start-up expenditures is increased to $10,000 subject to a $60,000 phase-out threshold.

Removal of Cellular Phones From ‘Listed Property’. Cell phones will no longer be subject to the strict substantiation requirements for depreciation. And cell phones and other similar devises provided to an employee for business use will be excludible from gross income.

Provisions to Provide Loans to Small Businesses. The centerpiece of the bill is the creation of $30 billion lending facility that would direct taxpayer money to regional banks on the condition they lend it out to small businesses. Unlike the emergency financial rescue package implemented at the height of the crisis in 2008, banks would have to volunteer to participate in this

program.

The Act includes numerous tax breaks aimed at small businesses and a number of provisions designed to give small businesses access to credit. Most of the tax breaks are short lived and many may expire before small businesses can fully take advantage of them.

If you are a small business owner, take advantage of our free 1 hour consultation and come in to discuss how these new tax changes can benefit you. Just give our office a call to set up an appointment.

Tax Myths That Can Cost You

Cheri — Fri, 04 Feb 2011 15:14:18 +0000

The US tax code is massive and complicated, but many people believe they know the parts of the tax codes that affect them.

Myth 1: Students are exempt.

There is no special tax status afforded to students. They are subject to tax on all their income, regardless of whether they’re fully enrolled. Students do get special tax credits, the Lifetime Learning Credit and the new American Opportunity Credit, which has replaced the Hope Credit for 2009 and 2010. Many students who work over the summer check the box “exempt” on their W-4’s. If they had no taxable income the previous year and don’t expect to have any the current year, that’s OK. However, if that student owes more than a $1000 or actually fails to file, he/she will be subject to tax and penalties.

Myth 2: My child is working, so I can’t claim him as my dependent.

As long as you provide more than half that child’s support the child qualifies as your dependent.

Myth 3: I’m over age 55, so I can sell my house tax-free.

It used to be that if you were older than 55 you could exclude as much as $125,000 in gains from taxes, but only once. The rules are actually better now. Under current law, age no longer matters. If the property sold was your principal residence for at least 2 out of the last 5 years, you can exclude from tax as much as $250,000 in gains and $500,000 in gains on a joint return.

Myth 4: I can deduct my sales tax.

Starting in 2004 and renewed through the 2011 tax year, you can deduct either your personal sales tax or your state income taxes from your federal income return, but not both. If the sales taxes paid were for purchases made in the course of business and the items bought would be allowed as a business deduction, then the sales tax on that item would be allowed as well.

Myth 5: I’m married, so I have to file a joint return.

If you are married, you can always file “married filing separately.” That normally results in you having to pay more in taxes. But in some situations, it can be to your advantage. For example, if one spouse has substantial medical or miscellaneous deductions, those deductions are subject to the 7.5% and 2% floors, respectively. That is, only medical expenses over 7.5% of adjusted gross income and miscellaneous deductions over 2% of adjusted gross income are deductible. If I had $10,000 in income and my spouse had $90,000 in income, the first $7,500 in medical expenses and the first $2000 in miscellaneous expenses aren’t allowed. But if I file as “married filing separately”, the disallowance would apply only to the first $750 in medical expenses and $200 in additional deductions.

The US tax code is complicated and changes with painful regularity. Our culture is full of myths and our tax system is full of half-truths, untruths and myths that can cost you if you don’t understand the rules. Don’t get caught using old distorted rules or myths.

Why It’s Important to Keep Good Records and Save Your Receipts.

Cheri — Wed, 02 Feb 2011 22:45:38 +0000

Online entrepreneurs who believe that internet revenue isn’t taxable are in for a shock next year. That’s when credit card companies and groups such as PayPal must start reporting merchant sales to the IRS. Here’s the bottom line. It doesn’t matter where you do business. You can sell items in a storefront or on eBay. Income is income and the same rules apply. If you are selling a used TV in a yard sale, no one expects you to report that sale on your tax return. If you buy computers and resell them at a profit, that is income and must be reported. If you are selling art or antiques that have gone up in value significantly since you purchased them and sold them for a profit, it must be reported.

In a recent US Tax Court case, an IRS agent was trading on Ebay, with approximately 1200 transactions over a two-year period. She did not include any income or expenses from this activity on her Federal tax filing. The IRS determined that she had unreported income in excess of $32,000. The taxpayer argued that many of the items sold were her own personal property that she paid considerably more for than what she received when the items were sold. She explained that she liked designer clothes for which she

would pay over $350 but might get only $50 when sold. However, she never kept her original purchase receipts. The Court ruled in the IRS’s favor, noting that the burden was on the taxpayer to produce the receipts and prove that the original cost of the items exceeded the amount of income from the sales. The Court had little sympathy for the taxpayer’s arguments, given that she was an IRS Officer. The lesson in this case is that the taxpayer did not keep adequate records, consequently, she lost the case.

Another factor to consider is whether or not items you sell were depreciated for tax purposes in a prior year. The sale of office equipment or vehicles that were used for business and were subject to prior depreciation may result in a required recapture of depreciation, taxed as ordinary income.

A distinction must be made between an online business and a hobby. A person who buys items for resale and is trying to make a profit in online auctions may have a legitimate business. If your online sales are a hobby, the expenses cannot exceed the income from sales for tax loss purposes.

Don’t be afraid to clean out your attic and sell the items on eBay, just make sure to keep good records.

Nonprofit News January 2011

Cheri — Fri, 21 Jan 2011 17:58:00 +0000

By Dawn Mikkelson

So you’re a nonprofit corporation in the eyes of your state. You’ve filed the Articles of Incorporation, paid the fee and received a Certificate of Incorporation from the Secretary of State. But did you know that this does not make you a tax exempt organization in the eyes of the IRS? People often use the words “nonprofit”, “tax exempt” and “501c3” interchangeably. This is not accurate. Your state recognizes you as a nonprofit corporation, the IRS grants you tax exempt status for federal income tax purposes, and this status is granted under Section 501(c)(3).

To become exempt from federal income taxes, you must apply for exemption using Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This is an extensive form that proves to the IRS why your reason for forming is for charitable purposes. The timing for filing your application for exemption is important. If you are requesting exemption within the first 27 months of formation, you will need to report past years’ actual activity and project your next couple of years’ estimated financial operations. Yes, it can be difficult to project donations you hope to receive in the future. But, don’t worry, the IRS won’t hold you to it. It is merely used as a gauge by the IRS for potential filings of the Form 990 in the future and a basis for the fee they charge for filing Form 1023.

It is a different story if you’re requesting exemption after 27 months of operations. You risk not being granted exemption from the point of origination. The worst case scenario means that you may owe taxes for the time between your formation and the exemption date. And even if you didn’t have a profit (yes, nonprofits can make a profit), you could be assessed penalties for failure to file tax returns.

But don’t fret, you can still file and be granted exemption back to your date of formation. You just have to give them an acceptable reason for missing the filing date. And an acceptable reason can be that you were not aware of the filing requirements. However, it is important that the application for exemption is filed prior to the IRS discovering your failure to file.

This area of the tax code can be very complex. If you need advice in preparing your Form 1023, or even determining if you have ever received tax-exemption, please contact us.

We’re here to help.