Sunday, March 6, 2011

Four Tax Breaks for the Entrepreneur

Entrepreneurs have far more sophisticated needs for tax and retirement planning than any other type of client. Not only do these individuals have needs for themselves but, for their employees as well.

Here are 4 credits/deductions for the self-employed

  1. Health Care Tax Credit - employers that pay at least half of their employees health care coverage can qualify for the credit. Employers with 10 or fewer full-time employees with an average annual wages of $25,000 or less will benefit most from the credit. The credit begins to phase out as the number of employees exceeds 10 and completely phases out at 25 employees with average annual wages of $50,000. The credit can be as much a 35% of the employers share of health-care costs. The credit is only available for a maximum of six years so, don't let this one slip by.
  2. Self-Employed Health Insurance Deduction - self-employed persons can deduct health insurance premiums from gross income. This is a far better opportunity than the standard medical expense deduction found on Schedule A. If you itemize deductions, to the extent that your total medical deductions exceed 7.5% of your adjusted gross income, the excess will be the deductible on Schedule A. If your prospect uses the self-employed deduction, it won't matter whether or not they can itemize their deductions. Remember, this deduction is for premiums only. All other medical expenses must be deducted on Schedule A.
  3. Section 179 Deduction - this deduction allows businesses to fully deduct the cost of qualifying equipment purchases in the year of purchase. For 2010 and 2011, purchases up to $500,000 qualify for the deduction. This deduction is like a double-edged sword. You can't have your cake and eat it too. If you take the full deduction for the purchase price, you don't get to depreciate it in future years. This deduction is a popular way to expense low-cost per unit purchases. It makes sense to completely deduct the $300 you paid for a license to QuickBooks in the year in which you purchased it rather than spread a small cost like this over future years.
  4. Car/Truck Depreciation - in past years, Congress enacted regulations that significantly limited the depreciation on cars and trucks. For 2010, business owners that place new vehicles into service can deduct depreciation as much as $11,060 for a car and $11,160 for a light truck or van. The rules are different for SUVs and heavy pickup trucks but, still a great benefit compared to prior years.

This information is a free service of:

J.T. Hicks & Co., PA
Certified Public Accountants
470 S. Main St
Brewer, ME 04412
(207) 990-3127
Notice: always consult a tax professional before implementing any tax reduction strategy.

IRS CIRCULAR 230 DISCLOSURE: Tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed in this communication.
© 2011 J.T. Hicks & Co., P.A.
All rights reserved

10 Ways to Avoid an IRS Audit

In my 28 years as a CPA, I've been asked countless times by clients "will this send up a red flag to the IRS?", "what are my chances of being audited?", "do you think I'll get caught?". Just about time that I think that I've heard it all somebody comes up with, what I call,the "I know a guy, who has a nephew that knows a guy that owns a business and he has a friend that once took an H&R Block course, and he said....." I'm sure I'll have enough to write a book by the time that I retire. There's all kinds if crazy ideas out there that have absolutely no merit at all. Here's 10 practical, common sense ways to help you avoid an audit:

  1. Choose your tax professional carefully - Beware of that person in your neighborhood that hammers a sign in the ground that reads "Tax Returns Prepared Here". CPAs and Enrolled Agents must possess and maintain a knowledge standard to keep their licensing. Your neighbor with his sign in the front yard is only required to sign the return as a paid-preparer. Effective May 1, 2011, these people are on their way out. IRS has revised their regulations to require that all paid preparers are CPAs, Attorneys or Enrolled Agents. The IRS also holds these professionals to a higher standard of ethical behavior.
  2. Report your income honestly. The IRS has stepped up their efforts with their Information Matching Program to check the income that taxpayers report. Common forms of income are reported to the IRS electronically by the payer. Wages, interest, dividends, state income tax refunds, investment sale proceeds, IRA distributions, pension distributions, Social Security and the like are all reported electronically. The IRS is able to match these records within just a few months after you file to determine if you reported all your income. That dreaded IRS letter could be in your mailbox's before the tulips pop out of the ground in the spring.
  3. Answer the questions. The number one reason that I see self-prepared returns come into my office is because the taxpayer did not answer all of the questions completely or check the right boxes. The conversation usually starts something like this "I was trying to save some money by doing my own return and following what the H&R Block guy did last year". I try to hold the big grin from coming across my space but, I know something that the he or she doesn't know. This person is likely to become what I call a "client-for-life". That's always good for me.
  4. Don't become a target. Many taxpayers believe that claiming a certain type of deduction will increase their odds for being audited. Many others believe that if you file your return early, you have a greater chance of being audited. There are all kinds of misnomers floating around about this issue. The truth is that the IRS uses a very sophisticated statistical profiling model which provides them with statistical probability of finding tax cheats. When your tax return triggers one or more of these statistical pointers, it is likely that you'll get audited. Best advice I can give is be honest. Keep good documentation about your expenses and always, always use a tax professional to be sure that you report deductions accurately. And by all means, please do not listen to your neighbor. He's an idiot.
  5. Don't make it up as you go along. Just because you "think" something "should be" deductible or excludable from income, don't make it necessarily so; or at least that is the way the song goes. The IRS and state revenue authorities have excellent resources available on the Internet. If you decide to go it alone, use all the resources that you have available to you. All IRS forms and instructions are downloadable in PDF format. All of these forms are searchable using the free version of Acrobat. There is no excuse for not being informed. Even if you decide to use a tax professional (which you should), I always enjoy working with an informed client.
  6. The devil is in the details. Trying to go cheap and quick is never good. If you try to use the old "paper and pencil" approach, there is a good chance that you will make an arithmetic error that will bring unwanted attention to your return. It also means that you return has to be processed manually by a key punch operator which means it will take longer to get your refund; hopefully you're getting at refund. Incorrect Social Security Numbers for the taxpayer, spouse or dependents are another top reason why your refund will get delayed if you choose to go the old-fashioned route. Using a tax professional that provides electronic filing will catch these errors before the return even makes it to the IRS. When using this methodology, we can warn a client about pending problems. The most common problem we see is related to divorced parents. Frequently, the divorce decree provides that the parents will divide the tax deductions for children or alternate their deduction from year to year. Inevitably, one parent, in the rush for the big refund that they so desperately need (this is a future blog topic) will file the tax return claiming the dependency deduction to which they are not entitled. This is a mess you just don't want to deal with.
  7. Color inside the lines. Please do not write little notes to the IRS in the margins of your return to explain some reason or logic that you are using to justify a deduction or explain some reason why you are doing what you are doing. All this does is attract unwanted attention to the return. Don't do it. It doesn't help. You don't want to get a letter in your mailbox where the return address is from the nearest IRS service center. Just don't do it no matter how strongly you feel is warranted. In the immortal words of Forrest Gump, "that's all I got to say about that".
  8. Update your status. The IRS has made good on their promise to audit more sole-proprietorships than they ever have. Sole proprietors reporting revenue greater than $100,000 increase their propensity to be audited more than 10 times the average. Now is the time to extol the virtues of being incorporated. Statistical probability of audit of a corporate return is substantially less than any other type of return. It may also be a good time to look at the Social Security savings from electing S-Corp status. You'll be able to offer your client a multitude of retirement investment vehicles to deposit the money they won't be sending to the Social Security Administration. It is not my intent to open up the debate as to whether or not Social Security is bankrupt (and it is bankrupt, most people just do not know it) or whether or not so Social Security will be around when we retire. That'll be a topic for another article all of its own. Be careful before you recommend this approach. Always consult a tax professional before making choices like this one.
  9. Beware of gossip. The IRS and state revenue authorities share information electronically. If the IRS picks you up on an error or unreported income, it won't take long before they share this information with your state revenue agency. You can usually expect a letter from the state requesting additional tax, penalties and interest within six months of the bad news from IRS. The same process works in reverse; so, do not think you can get away with it from that from that angle either. The best defense is a good offense; so it has been said. Anytime we assist a client with this type of issue, we proactively prepare an amended return for the state or federal government as the situation requires. The moral of the story is: get to them before they get to you.
  10. Be a Boy Scout. "Always Prepared" is their motto. Always, always keep your documentation. More importantly, always keep GOOD documentation. If you are unfortunate enough to be the lucky recipient of an audit, deductions that lack documentation or are poorly documented will be disallowed. The documentation is always your best defense in an audit. Have you ever been stopped by law enforcement officer because you were speeding? You probably didn't think you were going that fast or that driving a few miles over the posted speed limit was not enough to warrant a citation. Like me, you have probably always thought they just had to "make their quota". As much as law enforcement officials will deny that quotas exist, they do. I have it on good authority from a high-ranking official (that happens to be my client), now retired, from the State Police that officers are given a specific number of citations they are expected to write especially at certain times of the year like holidays. IRS auditors are no different. Whether they are evaluated, formally or informally, by the amount of taxes they collect is irrelevant. It's impossible for any supervisor or manager to overlook the productivity of a person in this position. So, human nature being what it is, whether you like it or not, they get evaluated by what they produce.

This information is a free service of:

J.T. Hicks & Co., PA
Certified Public Accountants
470 S. Main St
Brewer, ME 04412
(207) 990-3127
Notice: always consult a tax professional before implementing any tax reduction strategy.

IRS CIRCULAR 230 DISCLOSURE: Tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed in this communication.

© 2011 J.T. Hicks & Co., P.A.

All Rights Reserved


Monday, February 7, 2011

10 Documents You’ll Forget To Give To Us

  1. W-2s - Many times clients work multiple jobs or change jobs during the year. Because clients are anxious for refunds they forget one or more W-2s.
  2. 1099-INT - Does your client have multiple bank accounts? Did you compare the current year 1099-INTs to the previous years Schedule B?
  3. 1099-DIV – Clients buy and sell investments all year-long. Did you compare the current year 1009-DIVs to the previous years Schedule B?
  4. Capital Gains/Losses – 1 in 10 returns submitted to us is missing basis information.
  5. 1099-SSA – older clients often mistake these documents for other correspondence they received form the Social Security Administration. Clients will often say “I get $600 per month so just multiple that by 12”. Unfortunately, these amounts are net of Medicare premiums.
  6. Tuition Deduction – Form 1099-T is often mistaken as a college financial aid document. For families with college students, we can’t calculate the deduction without the form.
  7. Real Estate Taxes – clients that don’t have their real estate taxes escrowed by the mortgage lender often forget to bring the municipal tax bills with them. A quick review of the previous years Schedule A would reveal the omission.
  8. Sales Tax – sales tax on autos, campers, motor homes and other large purchase are often forgotten.
  9. Mortgage Interest – interest on family-financed mortgages are often overlooked because clients think they are doing the family member a favor by not reporting the interest. Also, clients that re-finance during the year sometimes forget about the previous lender.
  10. Non-Cash Charitable Contributions – Clients often do not keep or lose detailed records of these types of contributions. Dates, description, name and address of the charitable organization are all necessary for proper deduction.

Thursday, February 3, 2011

ObamaCare Makes a House Call to My House

The health care crisis in this country made an unannounced, uninvited visit to my house. I had no idea that it was coming. It never called ahead; never wrote. The least it could have done was "drop a dime" and called from the rest area at Kennebunk. I didn't have any groceries. The house was a wreck. The sink was full of dishes. It was definitely an unwelcome visit. What are you gonna do? It was there at the door. No matter how much I wanted to be rude and send it on its way, I couldn't. I wanted to but, I couldn't. It was here to stay; for how long I have no idea.

We hear about the crisis from Brian Williams of NBC News every week. You never think that it will affect you until it knocks on your front door. I got the shock of my life when I opened the door. I wished that I hadn't opened the door. It's not like it's going away. It's just going to sit on the front porch. So, we'll all probably face the beast at one time or another. The beast is health care insurance and the issue is whether or not you can afford the premiums.

My small company employs 6 people at the busiest time of our business cycle. I offer health insurance to my staff. The company pays 50% and the employee pays the balance. For $250 per month, (the company pays $125 and the employee pays $125) we get a $5,000 deductible, with $30 co-pays for office visits and prescriptions. As long as you don't have a chronic illness or an accident, you have enough comfort that you can sleep at night. It's not great insurance but, it's better than going without. I was clear about what it was when I agreed to buy the policy. I'm paraphrasing Shakespeare when I say that "it doesn't matter what you call it, it doesn't change what it is." The what "is" catastrophic insurance. You really have to be terminally ill or hit by a bus before you'll meet the deductible. If you were in an accident or had a heart attack, the ambulance ride to the hospital will cost $5,000. That's a good thing, right? The deductible would be met and the insurance would kick-in and all is well as long as you survive and recover from the incident, right? Not so fast, the insurance only pays 80% of covered costs after the deducible. The $5,000 ride to the hospital and the 20% balance is yours to pay. Assuming that you survive and recover, the next challenge you'll have is the financially devastating hospital bills and the almost certain realization that you'll spend the rest of your life paying a nominal amount to the multiple health care providers that saw to your care while you were laid up. I can understand why some people would want to end their lives facing that mess. I guess it's better than no insurance at all.

Here's how the ugly beast revealed itself: I got the policy renewal for the next policy period starting March 1st. The monthly premium doubled. That's right, double. The single employee will now have to pay $250 per month and the company will pay the other half. I was carrying the premium for myself and my domestic partner, Mary Lou. I thought I could manage the $455 per month but, now the $989 is completely out of the question. That amount is greater than the monthly mortgage payment on my house which includes principle, interest, taxes and insurance. Imagine that, more than my mortgage payment. What if I was supporting a family? What would be the premium cost?. I can't even think about it.

Why did the premium double? What happened? How could this happen? The health care crisis is a very , very complicated beast with many, many faces and tentacles. I don't understand the everything about the issue but, I understand more than most. I have a first-hand connection to the issue. My "domestic partner", Mary Lou is a Registered Nurse working in the Emergency Departments at two major hospitals in this area. I hear the stories about parents bringing their children to the ER for rashes and other non-emergency maladies. Why do they come? Shouldn't they call their family doctor? They cant because they don't have a doctor, insurance or money. There's enough there for a totally separate article. I'll save that part for another day.

With this issue at my front door, I wondered what we, as consumers, can do to help reduce the cost of health care. For that, I turned to Maureen Hedges, CEO and Founder of Health Benefits Insurance & Consulting, LLC and asked for five ways to reduce health care costs. Here's what she had to say:

The first thing that most people need to recognize is the Health Care Reform legislation is really only addressing some insurance issues … and totally ignoring the actual COST of health care.

  • One of the biggest problems is the inappropriate use of Emergency Rooms – especially by those without commercial health insurance. More than 60% of ER visits are non-emergency situations – frequently for upper respiratory distress [colds]. Free standing out-patient clinics such as Concentra and offices in many WalMart stores need to be expanded – and public programs such as Medicaid need to penalize patients for non-emergency visits to hospital emergency rooms [just like the insurance companies do].

  • The federal and state governments pay providers of Medicare and Medicaid services significantly less than their cost to provide those services … forcing cost shifting to private patients and insurers. As baby boomers start to increase the Medicare rolls this is only going to increase exponentially. Public programs need to pay equitable sums to providers. This is, in my opinion, the greatest short coming of all current and proposed government health care programs, and one that almost no one is addressing realistically.

  • We need to change the way health care services are delivered. More video/telephonic visits with a provider. Greater use of physician assistants and nurse practitioners and off site testing locations [example: get the EKG at WalMart in Houlton transmitted directly to your cardiologist in Bangor and then discuss results on the phone]. We should encourage creativity in this area … rather than imposing more and more regulations to “protect” the consumer, resulting in higher costs not commensurate with any risk these innovations might bring.

  • Many people have no idea what medical services cost … a $20 or even a $30 office visit isn’t enough to make people really think about whether or not a visit is really necessary or appropriate. This is where phone/video conferencing with a provider could significantly reduce medical cost … especially where there are long term relationships with a primary care provider.

  • Physicians often tend to be overly cautious and order more tests than might be immediately necessary - to ensure not missing even remote diagnoses [malpractice]. Patients should be more involved, inquire about the reasons for tests, and be part of the decision making process as a consumer as well as a patient.

Maureen Hedges is a Certified Employee Benefits Specialist and consults with individuals and businesses regarding health insurance and other employee benefits. She can be contacted at:

P.O. Box 1172
Bangor, ME 04402-1172
Voice: (207)v223-1233
Fax: (866) 363-0876
http://www.healthbenefitsmaine.com/

Thursday, January 20, 2011

Death & Taxes

We've all heard the old adage that there is nothing more certain than death and taxes. Truer words have never been spoken, in my opinion.

Back in 2001 when "Dub-Yah" was in office, Congress decided to gradually reduce the effect of the estate tax until 2009 when it would expire leaving 2010 with no estate tax at all. I am certain that many of our older and wealthier Americans would have, if they could have, planned their own "final exit from earthly bonds" to take advantage of zero estate tax. The plan was to bring the estate tax back to life in 2011 with a $1 million dollar exemption and a 55% tax rate.

In December 2010, Congress performed it's own "Miracle on 34th Street" by extending the estate tax retroactively to all estates in 2010. So much for planning to die conveniently in 2010.

The new law (for 2010 and 2011) allows $5 million to go to your heirs tax free and a 35% tax on the value of your estate that exceeds the $5 million.

One question entered my mind: What's likely to happen for 2012?

President Obama and the Congress will have to pay for the stimulus package(s) some how. The government has very few options. It's simple arithmetic really: increase revenue, decrease spending. Increasing revenue can only happen two ways: raise tax rates and or create new taxes. Neither one are particularly attractive especially when you're a Democratic President that wants a second term in office. Talk about the "kiss of death"!

To answer the question of what's likely to happen for 2012 and some salient advice on the need for all of us to do some estate planning, I turned to estate planning attorney Roberta Kuriloff of Ellsworth, Maine. Here's what she had to say:

7 Reasons Everyone Needs Estate Planning
  • Do you have concerns should you become disabled?
  • Do you have concerns about passing on core values to your beneficiaries?
  • Do you have concerns that some of your beneficiaries could lose their inheritance because of creditor problems or divorce?
  • Do you have concerns that some of your beneficiaries don’t have the ability to handle money, or are receiving government benefits that could be affected by an inheritance?
  • Would you like to give your beneficiaries the same asset protection that is available to wealthy families?

If the answer to any of these questions is YES, please continue reading.

Congress has now passed estate tax reform. Each individual has a $5 million federal exemption from estate taxes. Maine has a $1 million exemption. But even if your estate is not taxable, the need for estate planning won’t be eliminated.

That’s because good estate planning is first and foremost a means to insure your goals and objectives for yourself and your family. Whether or not you have a taxable estate, you still need to plan for the possibility of your disability and to ensure that your property, however much you have, goes to the people and organizations YOU CHOOSE, in the most meaningful and cost-effective way. Let’s look at some planning techniques.

  1. Do you have a Financial Power of Attorney? If so, does the Power allow your agent to make gifts of your assets for continued estate and asset protection planning? If not, then if you become disabled your family will have to go to court to be appointed conservator over your estate. This is expensive, time consuming and not private.
  2. Do you have a Medical Power of Attorney? Having this document in place allows you to make the decisions about your care should you become disabled. Without it, your family will have to go to court to be appointed your guardian.
  3. Do you have a will? If you do not have a Will, even a simple one, the laws of intestacy will apply to your estate. This means that if you die leaving a spouse and children, the spouse gets the first $50,000 of your estate, and the balance is divided one-half to your spouse and one-half between your children! I’m sure this is not what you would want.
  4. Do you have children? Are you concerned that after you die your spouse will remarry and the new spouse will get your share of the joint estate, not your children? You can protect against this by setting up a trust in your Will that requires that your spouse sign a prenuptial agreement should he/she remarry.
  5. Do you have a child with special needs? If you do and you leave assets outright to the child, the child will lose his government benefits. If you leave the assets in a “special needs trust,” then the assets can be used to give your child a better quality of life without losing benefits.
  6. Do you have a home or vacation cottage that you want to remain in the family and not lose should you need care in a nursing home? If so, you can protect the property if you plan ahead before disability hits.
  7. Are you afraid that your child’s inheritance could be lost if she got divorced, or was sued? Well, if you plan like the parents of Ted Kennedy, that won’t happen. Ted had a trust set up by his parents. When he was sued by the estate of Mary Jo Kopechne, the estate could not invade his trust. When his previous wife sued for divorce, she didn’t get any of the trust assets. That’s because the assets were not his, but his parents, and they said the assets should be used for the beneficiaries’ health, education and maintenance, not to pay their creditors or non-beneficiaries!

As you can see, there’s a lot to think about, and a lot of meaningful planning you can do. Learn more and make informed decisions.

© Attorney Roberta S. Kuriloff

Roberta Kuriloff is an estate planning attorney located at:

20 Oak Street, Ellsworth, ME 04605, (207) 667-3107

www.kurilofflaw.com