March 14, 2007 by Ray Perez.

The tax law allows you to deduct two types of travel expenses related to your business.

1. Firstly you can deduct local transportation expenses incurred for business purposes—the expense of getting from one location to another, but not meals or incidentals.
2. Second, you can deduct away from home travel expenses—including meals and incidentals. Deduction limits can be eased if your employer reimburses your travel expenses.

Local Transportation Costs

You can deduct the cost of local business transportation. This includes airfare, rail fare, and bus fare, as well as the costs of using and maintaining a business automobile. For those whose main place of business is their personal residence, business trips from that residence, and return trips, are deductible transportation and not non-deductible commuting.

You generally cannot deduct lodging and meals unless you stay away overnight. Meals may be partially deductible as an entertainment expense, as discussed below.

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March 13, 2007 by Ray Perez.

This is for you if you are self-employed and involved in multiple businesses, even with partners.

A new tax act has made a change allowing you to contribute to a self-employed retirement plan, on your own behalf, without requiring you to make contributions on behalf of your employees. The new act has repealed the so-called aggregation rules that previously applied to the self-employed retirement plans.

Under the old rules, if a self-employed person owned, or was a part owner of more than one business, and a retirement plan was provided for the employees in one business, law required that a retirement plan be provided for the employees of the other business(es). Beginning in 1997, this law removed this requirement!

If you own two businesses, the law allows you the option of establishing a retirement plan for only one business (with the fewest employees), even if you work by yourself in that business! The only limitation for this new law is that the amount of money you can contribute to a retirement plan is based on the self-employment earnings generated by the business with the retirement plan.

In other words, if the business you own with (no employees) has smaller net earnings than the other business (with employees), the amount you can contribute to a retirement plan will be based on the smaller net earnings.

While the rule change allows you to avoid contributing to a plan for your employees, it also means that you would be limited to making the smallest (rather than the largest) potential contributions to your personal retirement plan.

I want to make sure you are getting the most out of your financial future, so contact us or your accountant to determine your eligibility and to optimize the plan for you.

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March 13, 2007 by Ray Perez.

Well, you can. If you don’t have enough cash to make a deductible contribution to your IRA by April 15th, here is how you can still take the tax deduction. And have until June 12th to make the full 4,000 contribution! To get started, all you need is a previously started IRA.

You begin by having $4,800 distributed to you from your IRA on April 15th. Your bank is required to hold 20% (income tax withholding), so you’ll actually receive $4,000. Once you have the $4,000, immediately deposit it back into your IRA. If you do this before April 15th, this counts as your deductible contribution for the year. The best part of this is that you have 59 days to “make up” the withdrawal-or to be taxed. Simply deposit $4,800 “rollback” into the same IRA account by June 12th to avoid taxes on the original $4,000 distribution made to you.

This is a type of short-term loan from your IRA to make this year’s deductible contribution before the April 15th due date.

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March 9, 2007 by Ray Perez.

Starting a family business is a difficult adventure, especially when day-to-day tasks can overshadow your goals. We know your business is something you want to last, and planning ahead will help you achieve that success.

Old wisdom is clear: The critical issue concerning succession was to identify, develop, and install the successor to the business’s top executive. That seems simple, but most people don’t consider all the other elements like non-family executives and advisors.

The predominant family business statistic has been that only 30 percent of family businesses survive the second generation. The need for succession planning to avoid becoming a victim of that dismal statistic was the reason for developing the family-business field.

But family business experts have come to realize that a 30 percent “survival” rate rather than being a symbol of failure is actually a phenomenal success achieved by the advantages that family strength brings to business enterprises.

We now know that the analogy of “passing the baton” is terribly inadequate. We now understand that succession rarely involves an incumbent and a successor. Instead, the process involves all of the key players, including family members, executives and advisors.

Not just a matter of successor development and the incumbent’s preparedness to let go, the process is a complex stew of social, cultural, financial, legal, strategic, moral, and other dimensions that resist logical, “businesslike” thinking.

Success, we came to recognize, depends on being able to combine and balance businesslike thinking with family-like thinking. Clearly, “succession” is inadequate to describe the process. Among the many categories of planning - besides succession - too often neglected in family business were strategic, estate, operational, and governance.

Failure to plan in any of these areas can be fatal. In many instances, the issue was not “how to” but “why not?” What would keep a family business from doing what it should and could to achieve its goal of self-preservation?

The need to develop processes dealing with the massive complexity of changes relating to personal, family, and corporate finances (including the effort to deal with the estate-tax issue) is key. This includes issues of strategy and structure in the business, family values in relationships and structure, governance and accountability, and each of the key players’ personal journeys.

If you run a family business it’s extremely important to start the planning process now.

Please call us and we’d be happy to talk to you about how to get started.

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March 9, 2007 by Ray Perez.

There are few books of basic wisdom that endure for generations. One of these books is The Richest Man In Babylon, first published in 1926.

We have heard, again and again, the critical importance of putting aside a share of our income for investment.

There are a lot of ways to build wealth, but there is a simple, sure way that can always work. It is simply to develop the habit from a young age of saving a share of your income, say 10%. Paying this amount to your investment account must become the same as paying your monthly rent or mortgage payment.

Developing the habit of saving money should be developed the same as the habits of bathing, washing hands before a meal, or shaving.

If you can’t have certain luxuries now and maintain your savings ritual, postpone the luxuries now so you can enjoy them and financial security later.

I said this method is simple, I didn’t say it was easy.

These are the lessons that George S. Clason drives home again and again in the parables of The Richest Man In Babylon.

Here is an excellent graduation gift for your child or grandchild.

If you haven’t heard of or read The Richest Man In Babylon yet, maybe this is a good time to get a copy for yourself and read it.

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March 8, 2007 by Ray Perez.

According to The Pension & Welfare Benefits Administration, small businesses employ nearly 40% of the private-sector workforce in the United States. However, a majority of small businesses do not offer their workers retirement savings benefits.

If you’re like many other small business owners in the United States, you may be considering the various retirement plan options available for your company. Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees you need to compete in today’s competitive environment.

Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business’s assets. Such benefits include:

• Tax-deferred growth on earnings within the plan
• Current tax savings on individual contributions to the plan
• Immediate tax deductions for employer contributions
• Easy to establish and maintain
• Low-cost benefit with a highly-perceived value by your employees

Types of Plans

Most private sector retirement plans are either defined benefit plans or defined contribution plans. Defined benefit plans are designed to provide a desired retirement benefit for each participant. This type of plan can allow for a rapid accumulation of assets over a short period of time. The required contribution is actuarially determined each year, based on factors such as age, years of employment, the desired retirement benefit, and the value of plan assets. Contributions are generally required each year and can vary widely.

A defined contribution plan, on the other hand, does not promise a specific amount of benefit at retirement. In these plans, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). A 401(k) plan is one type of defined contribution plan. Other types of defined contribution plans include profit-sharing plans, money purchase plans, and employee stock ownership plans.

Small businesses may choose to offer a defined benefit plan or any of these defined contribution plans. Many financial institutions and pension practitioners make available both defined benefit and defined contribution “prototype” plans that have been pre approved by the IRS. When such a plan meets the requirements of the tax code it is said to be qualified and will receive four significant tax benefits.

1. The income generated by the plan assets is not subject to income tax, because the income is earned and managed within the framework of a tax-exempt trust.
2. An employer is entitled to a current tax deduction for contributions to the plan.
3. The plan participants (the employees or their beneficiaries) do not have to pay income tax on the amounts contributed on their behalf until the year the funds are distributed to them by the employer.
4. Under the right circumstances, beneficiaries of qualified plan distributors are afforded special tax treatment.

It is necessary to note that all retirement plans have important tax, business and other implications for employers and employees. Therefore, you should discuss any retirement savings plan that you consider implementing with your accountant or other financial advisor.

Here’s a brief look at some plans that can help you and your employees save.

SIMPLE: Savings Incentive Match Plans for Employees of Small Employers

A SIMPLE plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE plans, employees can set aside up to $10,000 in 2006 (increasing to $10,500 in 2007) by payroll deduction. If the employee is 50 or older then they may contribute an additional $2,500. Employers can either match employee contributions dollar for dollar – up to 3 percent of an employees wage – or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.

SIMPLE plans are easy to set up – you fill out a short form, administrative costs are low, and much of the paperwork is done by the financial institution that handles the SIMPLE plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent, or to send contributions for all employees to one financial institution. Employees are 100% vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

SEPs: Simplified Employee Pensions

A SEP allows employers to set up a type of individual retirement account – known as a SEP-IRA – for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to the lesser of 25 percent of an employee’s annual salary or $44,000 in 2006 (increasing to $45,000 in 2007. This amount is indexed for inflation and will vary each year). SEPs can be started by most employers, including those that are self-employed.

SEPs have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.

401(k)Plans

401(k) plans have become a widely accepted savings vehicle for small businesses. Today, an estimated 25 million American workers are enrolled in 401(k) plans that hold total assets of about $1 trillion.

A 401(k) Plan allows employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $15,000 in 2006 (increasing to $15,500 in 2007), reduce a participant’s pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $5,000. Employers may offer to match a certain percentage of the employees’ contribution, increasing participation in the plan.

While more complex, 401(k)plans offer higher contribution limits than SIMPLE plans and IRAs, allowing employees to accumulate greater savings.

Profit-Sharing Plans

Employers also may make profit-sharing contributions to a plan that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEPs.

Contributions may range from 0% to 25% of eligible employees’ compensation, to a maximum of $44,000 in 2006 ($45,000 in 2007) per employee. The contribution in any one year cannot exceed 25% of the total compensation of the employees participating in the plan. Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25%, while others may get as little as 3%. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).

Your Goals for a Retirement Plan

Business owners setup retirement plans for different reasons. Why are you considering one? Do you want to:

• Take advantage of the tax breaks, to save more money than you’d otherwise be able to?
• Provide competitive benefits in addition to – or in lieu of – high pay to employees?
• Primarily save for your own retirement?

You might say “all of the above.” Small employers who want to set up retirement plans generally fall into one of two groups. The first group includes those who want to set up a retirement plan primarily because they want to create a tax-advantage savings vehicle for themselves and thus want to allocate the greatest possible part of the contribution to the owners. The second group includes those who just want a low-cost, simple retirement plan for employees.

If there were one plan that was most efficient in doing all these things, there wouldn’t be so many choices. That’s why it’s so important to know what your goal is. Each type of plan has different advantages and disadvantages, and you can’t really pick the best ones unless you know what your real purpose is in offering a plan. Once you have an idea of what your motives are, you’re in a better position to weigh the alternatives and make the right pension choice.

If you do decide that you want to offer a retirement plan, you are definitely going to need some professional advice and guidance. Pension rules are complex, and the tax aspects of retirement plans can also be confusing. Make sure you confer with your accountant before deciding which plan is right for you and your employees.

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March 7, 2007 by Ray Perez.

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March 7, 2007 by Ray Perez.

Regardless of how life changes, one of the biggest hurdles you’ll face in running your own business is to stay on top of your numerous obligations to federal, state, and local tax agencies. A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records.

You can safely assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings. On the other hand, it is surprising how many small businesses actually overpay their taxes. They often neglect to take deductions they’re legally entitled to, or just don’t know about certain breaks that can help them lower their tax bill.

Adding to the mayhem, we have tax codes that seem to be in a constant state of flux. Creating exceptions for special groups has resulted in a steady stream of new and revised tax laws, which have lengthened the Internal Revenue Code to over 4,500 pages and rendered it barely understandable to even the most experienced tax professionals. Often one section can run up to several hundred pages. A special tax service used by tax professionals explains the meaning and application of each part of the code. It is contained in another 12 volumes! The harder Congress tries to simplify the code, the more complex it becomes.

Preparing your taxes and strategizing how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, MONEY, and (God forbid) an auditor knocking on your door, is to have a professional accountant handle your taxes. Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code and gain the advantage over the IRS.

Nevertheless, many accountants don’t understand the mammoth tax code and end up being too conservative with your tax deductions. The more conservative they are, the more taxes you end up paying.

Unfortunately, the cryptic and mystifying nature of the tax code generates a lot of folklore and misinformation that also leads to costly mistakes. Here is a list of some common small business tax misperceptions:

1. All Start-Up Costs Are Immediately Deductible

The only catch is that in order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years \(180 months\).

So the immediate deduction is a good option for businesses with less than $14,000 of start-up expenses. If you’re startup expenses are greater than $14,000, then you’ll do better by not taking an immediate deduction but spreading your start-up costs over 5 years \(60 months\).

2. Overpaying The IRS Makes You “Audit Proof”

The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. Being incorporated enables you to take more deductions.

Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are pretty much equivalent to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend $1,000 in legal and accounting fees to set up a corporation, only to determine shortly after that they want to change their name or company direction. Plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. The home office deduction is a red flag for an audit.

This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.

5. If you don’t take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

6. Taking an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date.

7. Part-time business owners cannot set up self-employed pensions.

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial. After all, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If your accountant messes up, you pay the penalty, not him.

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March 7, 2007 by Ray Perez.

Storing tax records: How long is long enough?

April 15 has come and gone and another year of tax forms and shoeboxes full of receipts is behind us. But what should be done with those documents after your check or refund request is in the mail?

Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the “three-year law” and leads many people to believe they’re safe provided they retain their documents for this period of time.

However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.

Caution: Identity theft is a serious threat in today’s world, and it is important to take every precaution to avoid it. After it is no longer necessary to retain your tax records, financial statements, or any other documents with your personal information, you must dispose of these records by shredding them and not disposing of them by merely throwing them away in the trash.

Business Document To Keep For One Year

• Correspondence with Customers and Vendors
• Duplicate Deposit Slips
• Purchase Orders (other than Purchasing Department copy)
• Receiving Sheets
• Requisitions
• Stenographer’s Notebooks
• Stockroom Withdrawal Forms

Business Documents To Keep For Three Years

• Bank Statements and Reconciliation’s
• Employee Personnel Records (after termination)
• Employment Applications
• Expired Insurance Policies
• General Correspondence
• Internal Audit Reports
• Internal Reports
• Petty Cash Vouchers
• Physical Inventory Tags
• Savings Bond Registration Records of Employees
• Time Cards For Hourly Employees

Business Documents To Keep For Six Years

• Accident Reports, Claims
• Accounts Payable Ledgers and Schedules
• Accounts Receivable Ledgers and Schedules
• Cancelled Checks
• Cancelled Stock and Bond Certificates
• Employment Tax Records
• Expense Analysis and Expense Distribution Schedules
• Expired Contracts, Leases
• Expired Option Records
• Inventories of Products, Materials, Supplies
• Invoices to Customers
• Notes Receivable Ledgers, Schedules
• Payroll Records and Summaries, including payment to pensioners
• Plant Cost Ledgers
• Purchasing Department Copies of Purchase Orders
• Sales Records
• Subsidiary Ledgers
• Time Books
• Travel and Entertainment Records
• Vouchers for Payments to Vendors, Employees, etc.
• Voucher Register, Schedules

Business Records To Keep Forever

While federal guidelines do not require you to keep tax records “forever,” in many cases there will be other reasons you’ll want to retain these documents indefinitely.

• Audit Reports from CPAs/Accountants
• Cancelled Checks for Important Payments (especially tax payments)
• Cash Books, Charts of Accounts
• Contracts, Leases Currently in Effect
• Corporate Documents (incorporation, charter, by-laws, etc.)
• Documents substantiating fixed asset additions
• Deeds
• Depreciation Schedules
• Financial Statements (Year End)
• General and Private Ledgers, Year End Trial Balances
• Insurance Records, Current Accident Reports, Claims, Policies
• Investment Trade Confirmations
• IRS Revenue Agents’ Reports
• Journals
• Legal Records, Correspondence and Other Important Matters
• Minutes Books of Directors and Stockholders
• Mortgages, Bills of Sale
• Property Appraisals by Outside Appraisers
• Property Records
• Retirement and Pension Records
• Tax Returns and Worksheets
• Trademark and Patent Registrations

Personal Document To Keep For One Year

• While it’s important to keep year-end mutual fund and IRA contribution statements forever, you don’t have to save monthly and quarterly statements once the year-end statement has arrived.

Personal Documents To Keep For Three Years

• Credit Card Statements
• Medical Bills (in case of insurance disputes) 
• Utility Records
• Expired Insurance Policies 

Personal Documents To Keep For Six Years

• Supporting Documents For Tax Returns
• Accident Reports and Claims
• Medical Bills (if tax-related)
• Property Records / Improvement Receipts
• Sales Receipts
• Wage Garnishments
• Other Tax-Related Bills

Personal Records To Keep Forever

• CPA Audit Reports
• Legal Records
• Important Correspondence
• Income Tax Returns
• Income Tax Payment Checks
• Investment Trade Confirmations
• Retirement and Pension Records

Special Circumstances

• Car Records (keep until the car is sold)
• Credit Card Receipts (keep until verified on your statement)
• Insurance Policies (keep for the life of the policy)
• Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
• Pay Stubs (keep until reconciled with your W-2)
• Property Records / improvement receipts (keep until property sold)
• Sales Receipts (keep for life of the warranty)
• Stock and Bond Records (keep for 6 years beyond selling)
• Warranties and Instructions (keep for the life of the product)
• Other Bills (keep until payment is verified on the next bill)
• Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)

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March 4, 2007 by Ray Perez.

College Planning
If you have young children, review their college planning. Determine the amount you will need to accumulate by the time they enter college. Based on this estimate, establish or review your savings plan. Consider one or more of the tax-favored higher education programs.

Mortgage Review
Review your home mortgage. Are you paying too much interest? Consider the savings you could obtain by refinancing. Also look into the possibility of making mortgage payments twice a month or adding some principal to each payment to save on the interest cost. If you have other debt at higher interest rates, and the interest is non-deductible, consider paying off these debts with a home equity loan.

Required Minimum Distribution
If you were age 70-1/2 last year, and did not take the required minimum distribution from your retirement plans, prepare to take a withdrawal before April 1. Professional guidance will be helpful here.

Review Budget vs. Actuals
Compare February income and expenditures with your budget. Make adjustments as appropriate to your March expenditures. Make sure you have invested your planned savings amount for February.

Estimated Tax Payments
Total up your taxable income, capital gains and deductions for the first quarter. This information can be used to plan your estimated tax payments and perhaps avoid or minimize any underpayment penalties.

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