Friday, September 27, 2013

Fun is not deductible, and other tax rules

Bonnie Lee for Sonoma Valley Sun writes: Dear Bonnie, I have my own business and a lot of marketing and promotion revolves around entertaining clients. I write it all off. Well, a friend of mine, also a business owner, was just audited and told me that the IRS didn’t let him take all of his entertainment deductions. What’s the deal on this? If it’s all about business, then can’t you write it off? I even heard that you don’t need receipts. Ken, Sonoma

Hi Ken, So many business owners believe that just because there is a line item on the tax return for meals and entertainment deductions that just about any dinner or theatre ticket or sporting event involving a client or potential client qualifies as a valid deduction. I’ve gone to lunch with clients who discuss their child’s soccer career, movies they’ve seen, and other non-business related matters. When the check arrives, they snatch it up, saying, “You’re my accountant so I can write this off, right?” Wrong! Sorry.
It’s not that straightforward or easy. Smug IRS agents love nothing better than quizzing you about the conversational content of your meals and entertainment, then joyfully proclaiming, “Disallowed!”
There are rules. And essentially, the rules say, “If you’re having way too much fun, it’s not a deductible expense.”
First of all, any entertaining you provide must be directly related to the active conduct of your business or associated with a directly related discussion that preceded or followed the meal or entertainment. So if you take me to lunch and we do not discuss tax planning strategies or sales projections or problems with your general ledger, and instead discuss only personal matters, then you will not be able to write off the lunch.
This also means that giving a party for the sake of establishing goodwill is not enough to make the party deductible. In order to deduct the cost of the party, you must conduct business before, during, or after the party. This rule applies to any form of entertainment and meals. That means you need to include a product demonstration, a reveal of a new product or service, a sales pitch or an educational talk related to your product or service. And the environment must be conducive to conducting business. So a rip roaring drunken brawl of a party would not qualify.
Atmosphere is everything. The IRS once disallowed a deduction of tickets to a baseball game because the volume levels at a ball part do not allow for a comprehensive business discussion. But if the business discussion had taken place prior to the ball game or shortly afterward, it would have been allowed.
Of course, giving a sales pitch at the end of a party where liquor has been served is much like talking politics with sugar infused five-year-olds. As a write-off, it’s not going to fly.
When it comes to parties, the guest list also determines the extent to which you can write off the party. You may deduct 100% of your cost if: 1) The party is open to the general public, or 2) The party is for employees and their spouses
If the party is for clients, potential clients, and independent contractors associated with your firm then you may deduct only 50 percent of the cost. If there is a mix of employees and spouses along with clients and potential clients, you may allocate part of the cost as a 100 percent write-off and the remainder as a 50 percent write-off based on the number of guests in each category.
Another rule invoked by the IRS is that the entertainment may not be “lavish or extravagant.” That’s another one of those subjective, gray areas that can be argued to death with an auditor, his manager, all the way up to tax court. But why go there? Keep it simple. Make sure the entertainment or meal is aligned to your company’s budget. If your bottom line is zero, you will likely not be allowed a write-off for flying in potential clients in first class accommodations to attend a soiree at the fanciest country club in town. Be prepared to defend the deductions you take.
Meals provided to employees during business hours for your convenience (usually to keep them there working during a crisis or busy time) are 100 percent deductible. Track these costs separately, under a category called “crew meals” on your books so that at tax time your tax pro doesn’t inadvertently apply the 50 percent rule.
You cannot deduct repeated lunches with business associates where one time it’s your turn to pay and the next time it’s his or her turn to pay.
You cannot write off the cost of entertainment facilities including mortgage interest, property taxes, depreciation, and rent for swimming pools, bowling alleys, tennis courts, cars, homes in a vacation resort, boats, etc. You can write off the cost of a hotel hospitality suite during a trade show, but you cannot write off the cost of a yearlong contract for a hotel suite that you use for entertainment purposes. See the difference?
You cannot deduct dues paid to golf and athletic clubs, country clubs, hotel clubs and clubs that provide meals even while participating in business discussions.
Always keep documentation to prove your case in the event of audit. Here are some tips:
1. If you are having a party, make sure the invitation announces a business purpose.
2. Keep a guest list. Have attendees sign a guest book or track RSVPs so you can prove an accurate allocation of the expense between employees (100 percent deductible), independent contractors, clients, and potential clients (50 pecent deductible) and family members and friends (not at all deductible).
3. Take pictures of guests looking at your new products or a video clip of your product demonstration; anything that proves the business purpose.
4. Keep all receipts for all expenses incurred. You asked about receipts, Ken, Well, you needn’t keep receipts if the meal or entertainment cost less than $75. A journal entry in your appointment book with the amount, location, and names of those you entertained is sufficient and necessary to pass the scrutiny of an auditor.
5. Maintain all of the above documentation in your tax file.
So go ahead and take your accountant to lunch – just make sure to go over the books before, during or after the meal.
Posted on 7:22 AM | Categories:

Xero Kills Sage (Peachtree) in UK, QuickBooks

Mike Block for Quickbooks Xero Blog writes:  Xero is killing Sage in Sage's UK home.  Sage bought Peachtree years ago. It soon dropped a Peachtree multi-user add-on version, which many thought was the best hope for its future. It also raised the price of Sage add-on listings to $1,000 a year. That quickly cost it ALL add-on listings.


A Sage U.S. Securities and Exchange Commission filing for Peachtree said Sage would cover the Peachtree cost by upgrading users to more expensive software. Few users know that Peachtree (now Sage) only wants them in expensive products.
Here are new developments. Morgan Stanley issued an underweight rating on Sage after the Xerocon London conference, though Sage is the dominant UK accounting software player by a wide margin. Morgan said:
(Xero has) 200,000 customers and expects 80% revenue growth in 2014 (Sage's expects 4%). 60% of new Xero customers used incumbent accounting platforms (Sage, Intuit, etc.). This shows risks incumbents face as cloud understanding and adoption increase in small businesses.
1,256 UK accounting pratices adopted Xero (including 40 of the UK top 100). This compares to 82 practices that adopted Sage One. This drove UK customers above 22,000 (now 30,000) for Xero (up 100% a year), vs 12,000 for Sage One.
Credit Suisse also issued an underperform note, so Sage lost more than 3% in value. The 2013 Xero London conference was two days, vs a day in 2012. There were 500 attendees, vs 230 in 2012. Xero said the British market was "approaching a tipping point." as more accounting firms consider cloud-based software to cut costs. Customers and practitioners love Xero, but have many complaints about Sage 50, such as bank reconciliation.
Intuit surveys showed that QuickBooks add-on users were far more loyal and likely to upgrade, Despite this, Intuit changed its free QuickBooks add-ons interface to a paid proprietary one. It soon charged 20% of add-on revenue, with a minimum of $1,000 a MONTH. It also made developers keep rewriting add-on interfaces. A top developer recently wrote Demise of the Third Party QuickBooks Add-ons Developer. His reasons made QuickBooks lose 70% of add-ons links in 21 months.
Xero committed to a free industry-standard RESTful interface that keeps getting better. It now has 274 add-ons, up 100% this year. QuickBooks desktop already lost 17% of users.
Xero will have many more add-ons than QuickBooks in a year and more users than QuickBooks Online in two years.
Posted on 7:21 AM | Categories:

Xero and Sage – a tale of two centuries

Den Howlett for diginomica writes: I was unable to attend this year’s Xerocon but you can catch all the upbeat stuff over on the Xero blog. If it was anything like last year, then I can imagine it was a high energy event. Some of the numbers are staggering compared to last year.


  • Two day event in 2013, one of which dedicated to partner training, one day only in 2012
  • 500 attendees in 2013, 230 in 2012
  • 30,000 UK paying customers, again doubling up
The company is still struggling to get the spaghetti soup of UK bankjng to play ball with automated bank feeds but that doesn’t stop Xero from trying. They need to crack that nut because those feeds represent the backbone from which customers can be (reasonably) assured their accounts are up to date. That in turn allows Xero to promote the idea of morphing accounting practices away from number crunching towards that of the trusted business advisor.
Now contrast that with Sage. The Guardian reported that
Morgan Stanley issued an underweight rating on Sage after hearing what Xero had to say
Ouch – that’s got to hurt given that Sage remains the dominant accounting software player in the UK market by a considerable margin. Here’s what Morgan’s say:
…with 200,000 customers and expecting 80% revenue growth in 2014 (versus Sage’s expectation for 4%). It highlighted that 60% of customer wins come from incumbent accounting platforms (Sage, Intuit, etc.). This figure illustrates the risks incumbent vendors face, in our view, as cloud understanding and adoption increases in the small business customer base.
The company highlighted that a total of 1,256 accounting practices have adopted Xero in the UK. This compares to 82 practices that have adopted Sage One. This has driven customers of above 22,000 in the UK for Xero, versus the 12,000 customers Sage has reported on Sage One.
Clearly there is some clarification needed around the numbers but what interests me here is that despite Sage’s bulk, it can’t seem to build significant momentum around its own solution. Is this another case of‘Can’t change, won’t change?’
From everything I hear, both customers and practitioners love Xero. I know our team like it (we’re customers) although I personally find that crucial missing pieces of functionality – like accruals and prepayments – leave me head scratching at times. Crucially, the person doing our books has no training in accounting yet seems to get on fine most of the time. That relative ease of use goes along way towards managing a function that traditionally has been the purview of trained book-keepers and accountants.
Contrast that with the litany of ongoing complaints about Sage 50. How about this one on bank reconciliation?

Looking broader

While the per month cost of Xero is modest at £24/month in our case, start adding in additional functionality and business admin costs start to rocket.
For example, ReceiptBank multi-user will set us back £20/month. Weigh that against the cost of individually managing expenses and it is excellent value.
But then if I want (say) integrated Salesforce.com CRM then I’m looking at £19.99 a month for the integration on top of what looks like a minimum of $125/user/month in order to get access to the Salesforce.com API for integration purposes. In our case, that adds up to around £5,000 pa.
You might argue that Salesforce.com is not the only game in town and there are far more economical solutions on the market. That’s true but from the evaluations I’ve conducted, Salesforce.com really is the only game in town that can help us keep up with sales admin and grow at the same time. We could start with something else and then migrate when the time is right but I see that as a dead end which only causes headaches further down the line.
We may be an edge case but cloud solution alternatives are forcing us to think very carefully about how best to manage the business. Net-net, this is a good thing.
Perhaps more interesting, Phil Wainewright has said that cloud provides the basis for creating business models that cannot function in the on premises world. He calls them ‘frictionless enterprises.’ We see that in practice on a daily basis. What we haven’t yet seen is an explosion of those types of business.
My only remaining question then is whether the huge bulk of small business that currently use either spreadsheets or something like Sage will see things the same way and be prepared to make the cost trade offs against functional need. The answer to that may well form the basis upon which vendors like Xero can accurately forecast their true market potential.
Posted on 7:20 AM | Categories:

Long-Term Care Insurance and Your Taxes / Qualified policies deliver tax breaks; here are the basics

\Bill Bischoff for MarketWatch writes: If you or a loved one turns out to need long-term care, you don’t want to see a big chunk of hard-earned savings go down the drain to pay for it. Long-term care (LTC) insurance can help. As a bonus, qualified LTC policies deliver some tax breaks. Before getting to the tax angles, let’s first cover the basics on LTC insurance.
Long-Term Care Insurance Basics
Benefits paid under a long-term care insurance policy are usually stated as daily maximums ranging from $50 to $300. While lower benefits translate into lower premiums, don’t get carried away. According to a recent MetLife survey, the national average cost for a semi-private nursing home room in 2012 was $222 a day, which translates to about $81,000 over a full year. The average base rate for a year in an assisted living facility was about $44,000, and additional services cost extra. Most LTC policies also cover at least a portion of home health-care costs, which came to about $21 per hour last year. While these national numbers are interesting, the costs where you live are what really matter, and they can be significantly higher or lower.

You can buy a LTC policy with or without automatic annual inflation adjustments to your benefit maximums. Usually, the annual inflation adjustment rate is 3% to 5%, and that rate can be compounded annually or not. Choosing a 5% compounded inflation adjustment feature is more expensive, but it could be money well spent.
Benefit payments commence after the policy waiting period has been satisfied. Policies with waiting periods of 90-100 days are the most popular.
Finally, you can usually choose benefit periods ranging from two years to lifetime coverage. Most policies have benefit periods of three, four, or five years. The average length of a nursing home stay is about two and a half years, but this statistic doesn’t account for periods of home health care.
When you sign up for LTC insurance, the hope is that you’ll pay fixed monthly premiums. The premiums are based on your age and health factors at the time you enroll. Enrolling at age 65 could cost twice as much or more than enrolling at age 55. Your overall health status needs to be good when you apply for coverage or you won’t be accepted at any age. After you obtain coverage, it will remain in force—regardless of changes in health and advancing age—as long as you pay the premiums. Beware: while the insurance company can’t raise your LTC premiums due to changes in your personal age or health, it can raise premiums for broad classes of policyholders when financial results go south. This has turned out to be an all-too-often occurrence. So be sure to check the overall reputation and premium-raising history of any insurance company you’re considering for LTC coverage.
Tax Breaks for Qualified Policies
Qualified LTC policies are eligible for federal income tax breaks (and maybe state income tax breaks too depending on where you live). Qualified policies must be guaranteed renewable, and they cannot have any cash value. Most policies sold these days are qualified policies, but make certain before signing up if you want to collect the tax breaks I’m about to explain.
Tax-Free Benefits: Benefits received under a qualified LTC policy are generally federal-income-tax-free (and usually state-income-tax-free too) because they are considered insurance reimbursements for medical expenses. For 2013, this tax-free treatment automatically applies to benefits of up to $320 per day. (The tax-free cap is adjusted annually for inflation.) Even if you receive benefits above the cap, they are still tax-free as long as they don’t exceed your actual LTC costs. If you collect LTC insurance benefits during the year, the total amount will be reported to you on Form 1099-LTC, which you should receive early in the following year. You then calculate the taxable amount of benefits (probably zero) on Form 8853, which is attached to your Form 1040.
Tax Deductions for Premiums: Because a qualified LTC policy is considered health insurance for federal income tax purposes, the premiums are treated as medical expenses for itemized medical expense deduction purposes. However, if your premiums exceed the age-based caps listed below, you can only count the capped amount as a medical expense. Don’t forget to count premiums paid for coverage on your spouse as well as premiums paid for any other dependent relative (for this purpose, a dependent relative is someone for whom you pay over half the cost of support during the year).
Age on Dec. 31, 2013Amount you can treat as medical expense
40 or under$360
41 to 50$680
51 to 60$1,360
61 to 70                        $3,640
Over 70$4,550
Take your qualified LTC insurance premium amount (limited to the age-based cap if applicable) and combine that figure with your other medical expenses (health and dental insurance premiums, insurance co-payments, out-of-pocket prescription costs, and all your other unreimbursed medical outlays). If the resulting total exceeds 10% of your adjusted gross income (AGI), you can write off the excess as an itemized medical expense deduction. If you or your spouse will be age 65 or older as of Dec. 31, 2013, you can write off medical expenses to the extent they exceed 7.5% of AGI. (AGI is the number at the bottom of Page 1 of your Form 1040; it includes all taxable income items and is reduced by certain write-offs such as deductible IRA contributions and alimony payments to an ex-spouse.)
If you’re self employed, you can generally deduct premiums for qualified LTC insurance on page 1 of Form 1040 whether you itemize or not. However, the age-based deduction cap applies to you too. 
Posted on 7:20 AM | Categories:

Which Tax-Deductible Pension Plan is Right for Me?

William H Black Jr writes: Your business is successful and the days of plowing back profits for growth are in the past. The building and equipment is either paid for or being amortized. The biggest concern now is taxes. What solution is there and how can the tax bite be minimized?
For most closely-held businesses the answer is a tax-deductible “qualified plan” (called “qualified” because the contribution qualifies for an income tax deduction). In other words, some form of a retirement plan.

However, a well designed plan is not about retirement, as much as it is about paying yourself rather than the Internal Revenue Service. Keep in mind the contributions are income tax deductible, the invested assets grow on a tax-deferred basis, the plan assets are protected from the claim of judgment creditors under ERISA, and the plan assets qualify for an income tax-free Individual Retirement Account (IRA) rollover.1

The only question is: Which plan is best for your particular situation? For the same reason the local car dealership has many different models and colors, plans come in many varieties as well. The reason — one size does not fit all. It’s necessary to choose the right plan for your situation.
Plans come in two general styles, Defined Contribution (DC) and Defined Benefit (DB). Defined Contribution plans are just that, they define the contribution one can make to the plan. The limits are 25 percent of covered payroll not to exceed $51,000 for any one individual. Defined Benefit plans define the pension income one will receive at a future date. Adequate funds have to be contributed to provide for that future income.

Frankly, these plans are all budget driven. While we all would like to retire on $1 million a month (wouldn’t that be nice!), the question is, do we have the resources to get there? The answer? We all have a budget with which to work. That budget will determine which plan is best for one’s particular circumstances.

Here are some examples:
SIMPLE plan: For 2013, the maximum pretax employee contribution to a SIMPLE plan is $12,000. Catch-up contributions for those 50 and older are limited to $2,500. Designed for small business owners who don’t want to deal with retirement plan administration or non-discrimination tests, the SIMPLE is available for businesses with less than 100 employees. The business owner must make fully vested contributions (a dollar-for-dollar match of up to 3 percent of an employee’s income, or a nonelective contribution of 2 percent of pay for each eligible employee). You cannot sponsor a SIMPLE plan and another retirement plan.

SEP plan: This employer-funded plan gives businesses a simplified vehicle for making tax deductible contributions. Employer contributions are 100 percent vested from the start. In 2013, an employer’s annual contribution limit to a SEP-IRA can’t exceed the lower of $51,000 or 25 percent of an employee’s salary. The same annual contribution limits apply for the self-employed.

401(k): There are many varieties of the 401(k). Many believe they are all the same but it’s just not that way. For example:
• Salary Deferral-Only Structures: This type of plan has no employer contribution. The participating employee may defer 100 percent of W-2 income not to exceed $17,500 (2013 limits). For those age 50 and older one is allowed an additional $5,500 catch-up contribution for a maximum deferral of $23,000
• Safe Harbor: Maximum addition to one’s account is $27,700. A byproduct of the Small Business Job Protection Act of 1996, the Safe Harbor plan makes it very attractive to a business owner. With a Safe Harbor plan, an owner-operator can enjoy higher contribution limits. Safe Harbor allows the owners to defer the full salary deferral limits even if employees contribute little or nothing.
• Safe Harbor with Discretionary Profit Sharing: Maximum addition to one’s account is $51,000. While the Safe Harbor feature allows the owners to make their full salary deferrals of $17,500 ($23,000 for those 50 and over) the maximum allowable contribution to one’s account is $51,000 ($56,500 for those age 50 and over). Where does the difference come from? The employer’s discretionary profit sharing contribution. The operative word is discretionary as the additional contribution is completely discretionary and there is no obligation to fund from one year to the next. Take advantage of the deduction in profitable years and disregard the contribution when cash is needed for other purposes, such as expansion, etc.
In addition to the above, a 401(k) plan may have a Roth feature. In other words, the employee’s salary deferral can be made with after-tax monies. The advantage is all the future qualified withdrawals can come out income tax free. Yes the account’s earnings too.

Defined Benefit plan: When you’ve already done the 401(k) and you need a larger annual income tax deduction, the Defined Benefit plan may be the answer. Consider that these plans allow for annual income tax deductions in some cases of as much as $250,000. But that is the most one can do; you can design the plan for a lesser contribution. As stated earlier in this article, these plans are budget driven, so determine the desired annual contribution and have the plan structured to absorb that amount. One thing about defined benefit plans, the contribution is mandatory. In other words, design with the thought that this contribution must be made for several years.

Planning Myths

Many falsely believe plans do not fit their situation. Only after analysis of the facts and circumstances are the advantages apparent. For whatever reason there is a good deal of misinformation circularizing on plans. Don’t assume anything. Have a responsible pension consulting firm, in conjunction with your CPA or other competent professional advisor, analyze your circumstances so you can make an informed business decision on what plan is best for you. You may be surprised.
1RMD’s, or required minimum distributions, must commence no later than April 1 of the year following the year one attains age 70½. RMD’s are taxable as ordinary income.
Posted on 7:20 AM | Categories:

Don't Want to Deal With the IRS? You Don't Have to

Bonnie Lee for Fox Business writes: Many people are afraid of the Internal Revenue Service. Some haven’t paid tax returns for several years and owe Uncle Sam a large sum in taxes, others are intimidated by their lack of tax knowledge, and some are just scared by the agency’s reputation.
But if you have a tax problem, it won’t go away simply by ignoring it. If you don’t feel like you have the time or resources to handle the matter yourself, you can have someone step in and get the information necessary to help resolve the issue and represent you with the IRS.
There are many levels of professionals that can assist in solving a tax problem, including an attorney, a certified public accountant or an enrolled agent. You could also ask a colleague or even assign the job to Aunt Martha.
To have someone else handle a tax problem, simply complete and submit IRS Form 2848 Power of Attorney to the IRS. Part II, items a-r of the Power of Attorney details who is qualified to represent you. Do not make up your own agreement or use a legal boiler-plate form, the IRS will only recognize its own special form. Once you complete the Power of Attorney, fax it to the IRS (Click on the link below to find out the fax number for your area:  Power of Attorney Transmittal Fax Numbers)
If you and your spouse file a joint tax return and the matters to be discussed involve those tax returns, you will have to complete a separate Power of Attorney for each taxpayer.
If you want someone to only obtain your confidential tax information but not speak on your behalf, you can complete and submit IRS Form 8821 Tax Information Authorization. This is used usually to speak to the IRS collections division to discover pending action on your account.
If all you want is to obtain copies of previously filed income tax returns, you needn’t have a representative obtain the information for you. Instead submit IRS Form 4506. The instructions that accompany the form will indicate where to mail it. It will cost $57 per tax return to obtain a copy. And it will take approximately 60 days for them to complete the request.
IRS Form 4506-T is a request for a transcript of your tax return information or a statement of your account. It’s free of charge, and if you have not filed your tax returns, you may want to submit this form.  You can also call the agency at 1-800-908-9946 to order one. There is also a self-help tool under “Tools” on the IRS Home Page which you can use to order a transcript.
The IRS will provide you with all of the documentation it has received regarding the tax year(s) in question - W-2 information, 1099 information, verification of non-filing, and record of account. If it was submitted to the IRS, they have copies and will provide them to you so you can prepare your tax return.
IRS Form 56 Notice Concerning Fiduciary Relationship is used to notify the IRS if you are handling the affairs of a deceased family member or if you find yourself the administrator of a trust. In the case of the deceased family member, file this form with the final tax return.
Posted on 7:19 AM | Categories:

Tax Planning Tips for Retirement (Winning the Guessing Game)

Kent Thune for About.com writes: The question over which type of retirement savings account to use for the best tax benefit is somewhat of a guessing game. I recently responded to a reader email asking that question. Here is an extended version of my answer to the reader:
In general, if you expect to be in a higher federal tax bracket in retirement, the Roth IRA is best. If you expect to be in a lower tax bracket, which is most common, the traditional IRA is best. If you will be in the same tax bracket, it doesn't matter which one you use. You may also consider using a regular brokerage account as an alternative. You may also use a combination of all three and don't forget about your 401(k)! Above all, knowing what federal tax bracket you will be in at the beginning of retirement will be your biggest challenge.
Should You Use a Regular Brokerage Account for Retirement Savings?
A regular brokerage account is not tax-advantaged. However you only pay taxes on dividends (interest earned) each calendar year and you only pay taxes on the gains (capital gains tax) upon withdrawal. Typically, capital gains taxes are lower than federal income taxes. For example, the capital gains tax rate is currently 15%. By comparison you will pay federal income tax on 100% of the withdrawals from a traditional IRA. So if you withdraw $40,000 from your traditional IRA in the first year of retirement and your federal tax rate is 25%, you will pay $10,000 in federal taxes. Whereas if you withdraw that same amount from a regular brokerage account, and assume that $20,000 of your $40,000 represents gains, you will pay $3,000 in capital gains (20,000 x .15).
Trying to Win the Taxation Guessing Game
The guessing game is that no one knows with certainty what tax rates will do over the next 10, 20 or 30 years. From a historical perspective, the US federal tax rates are relatively low now. This may lead one to the reasonable expectation that rates will likely go higher in the coming decades. Furthermore the federal government has dramatically increased its debt over the past 10 years or so and this debt is a taxpayers' burden. Logically speaking, higher debt expenses in the future must be paid by higher revenues (tax). The best guess is for higher income tax rates in retirement for those who have 10 years or more until they begin withdrawing from retirement accounts.
Tax Diversification and Asset Location
However, assuming federal tax rates will increase and your income needs will decrease, it is possible that you may be in the same income tax bracket in retirement as you are now. It's a kind of "one step up and one step down" effect. You may move to a higher tax bracket between now and retirement but then step back down upon entering retirement (presumably due to lower income needs).
I believe the conventional wisdom put forth by most financial planners with regard to retirement savings is generally wise: If your employer offers a 401(k) with a match, contribute enough to receive the match. Any additional savings should go to a Roth IRA. If you are able to save beyond the max for your Roth IRA, which is $5,500 in 2013 ($6,500 for age 50 and over), you can put additional savings in an individual brokerage account.
The final step in tax planning for retirement is to know which account should hold certain investments. Read my article on asset location for more tips on tax planning with regard to knowing which investments work best (or worst) in certain accounts based upon tax efficiency. I also recommend reading the Top 10 Things to Know About Mutual Fund Taxation.
Posted on 7:19 AM | Categories:

New Year-End, New Headaches / Ideas for tax planning as 2013 begins to wind up

Roger Russell for AccountingToday writes: Despite all the recent tax law changes, most taxpayers aren't aware of the steps they should take between now and the end of the year to improve their position.

By taking appropriate measures, it is possible to minimize the effects of new taxes and higher rates. The problem isn't the same as last year at this time when no one knew what the tax landscape would be after the first of the year. The problem now is that much is new, and more complex.


"The end of last year was a disaster for tax planning," said Grafton "Cap" Willey, managing director of Top 100 Firm CBIZ. "There was a lot of year-end planning last year, but it was done without any certainty as to what would happen. Some of the planning was needed, while some was not. For example, we did a lot of accelerating of capital gains. With the increase in capital gains rates from 15 percent to 20 percent for people making more than $250,000, plus the new Medicare tax of 3.8 percent, this year we're taking a hard look at net investment income. With the potential increase from 15 percent to 23.8 percent, it's an effective increase of 57 percent."
"It's become a complicated calculation," he said. "If someone is in the threshold area, we try to keep their net investment income down to get below the threshold. If not, we try to minimize the impact of the increased rates. We might use municipal bonds, or take a look at tax-deferred annuities, which could take income out of the current year. For example, if someone is near retirement but still has a high income, they might put some of their income in tax-deferred annuities until their income rates decrease when they stop earning wages."
There are a number of new thresholds coming into play, Willey indicated. The new Medicare 3.8 percent tax applies to net investment income of taxpayers with AGI above $200,000 for single taxpayers or $250,000 for joint return filers. The 3 percent phase-out of itemized deductions and the 2 percent phase-out of exemptions have been re-instated. "In the area between $200,000 and $400,000, managing AGI is helpful because you can save tax on phase-outs and net investment income surcharges," said Willey. "Look at things that can affect those; for example, the opportunity to max out retirement contributions, and anything that's tax-deferred. Also, you have to be concerned about taking distributions from retirement plans because they can increase AGI."
Another tool to use is an installment sales agreement, Willey observed. "It spreads out gains over future years, and lowers AGI in a particular year. And if there is any state estate tax due, it might be better to pay it before the end of the year so you get the deduction for it in the current year."

WALK THE LINE
"This year's tax planning is going to be heavily focused on reducing above-the-line amounts," said Monic Ramirez, senior tax manager at Sensiba San Filippo LLP. "There are several thresholds for adjusted gross income that taxpayers should manage in order to avoid the Medicare tax hike of 3.8 percent on investment income, the Medicare high-earner tax of .9 percent, and the Pease limitation on itemized deductions. And in California, managing taxable income will have an added benefit of avoiding the higher tax brackets enacted by Proposition 30."
Ramirez suggests maximizing contributions to tax savings and retirement vehicles such as 401(k), 403(b), 457 and 529 plans, as well as HSA, SEP and Keogh plans. "If self-employed, set up a self-employed retirement plan, and revisit decisions to contribute to a traditional versus a Roth retirement plan. Since distributions from Roth IRAs and 401(k)s are not subject to regular tax or the Medicare investment tax, they are a more attractive retirement savings vehicle for high-net-worth individuals."
"On the contrary, if a taxpayer is hovering around the threshold for the new Medicare tax, the taxpayer should consider moving Roth contributions to a traditional retirement plan," she said. "Maximizing contributions to a traditional plan could reduce taxable income below the threshold and, therefore, avoid an additional 3.8 percent tax on investment income."
"Long-term capital gains still maintain their preferential rates," Ramirez observed. "However, long-term capital gains received a 5 percent increase and are subject to the additional 3.8 percent Medicare investment tax. Even worse, short-term capital gains are subject to ordinary income rates and the 3.8 percent Medicare investment tax. Therefore, tax-deferral mechanisms for significant tax gains should be considered, such as a Section 1031 exchange for real property sales or structuring the sale as an installment sale."
"An installment sale spreads the gain over several tax periods in order to minimize or entirely avoid the Medicare tax on investment income," she said. "Taxpayers should also consider realizing losses on existing stock holdings while maintaining the investment position by selling at a loss and repurchasing at least 31 days later, or swapping it out for a similar, but not identical, investment."
Taxpayers might also consider reducing income by taking advantage of other tax-exempt investment vehicles, such as municipal bonds, which are still tax-free, she noted. "And in most states, home-state bonds are also state tax-exempt."
If a loss in a flow-through has been incurred, make sure that it's deductible, suggested Ramirez. "Taxpayers can increase their basis in a partnership or S corporation if doing so will enable them to deduct a loss from it this year."
If a taxpayer has self-employment income, they should consider any capital expenditures that will be needed in the coming year, Ramirez suggested. "Favorable Section 179 deductions and bonus depreciation have been extended through the end of 2013. Purchasing qualified property and placing it in service before the year end will accelerate the depreciation deduction allowed on the assets into 2013 and reduce the earnings potentially subject to the .9 percent Medicare surtax."

WATCH THE RATES
The big difference between last year and this year is that the rates are "quite a bit higher" now for upper-income taxpayers, noted Robin Christian, a senior tax analyst at Thomson Reuters.
"For most individuals, the ordinary federal income tax rates for 2013 will be the same as last year: 10 percent, 15 percent, 25 percent, 28 percent and 35 percent," she said. "However, the fiscal cliff legislation passed in January increased the maximum rate for higher-income individuals to 39.6 percent - up from 35 percent. This change only affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads of households, and $225,000 for married individuals who file separate returns."
Where taxpayers are near the standard deduction amount, Christian recommends bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. "For example, say the taxpayer is a joint filer whose only itemized deductions are about $44,000 of annual property taxes and about $8,000 of home mortgage interest. If the taxpayer prepays their 2013 property taxes by December 31 of this year, they could claim $16,000 of itemized deductions on their 2013 return. Next year, they would only have the $8,000 of interest, but they could claim the standard deduction, which will probably be around $12,500 for 2014. Following this strategy will cut taxable income by a meaningful amount over the two-year period. The drill can be repeated all over again in future years."
Taxpayers should take advantage of the Section 179 deduction this year, since the maximum deduction is scheduled to drop from $500,000 to $25,000 for tax years beginning in 2014. Likewise, she urges, take advantage of the 50 percent first-year bonus depreciation, since it will expire at year's end unless it is extended by Congress. She also advises updating estate plans to reflect the current estate and gift tax rules, with the exemption pegged at a "historically generous" $5.25 million, and the rate at a "historically reasonable" 40 percent for 2013.
John Vento, a New York-based CPA and CFP, advises clients to check with their HR department to fully understand the extent of benefits available to them. "For employees, the bulk of write-offs they can get is through their employer," he observed. "If they can get tax-free benefits they should try to maximize them. They should take advantage of their tuition reimbursement plan, and fully fund their 401(k) plan. If they're 50 or older, they should take advantage of the catch-up provisions, which allows them to contribute an additional $1,000 to their IRA. They should also check out the provisions where benefits are paid out in pre-tax dollars, such as tax-free reimbursement of child care, and even transit passes."
The energy efficiency credit, which was slated to expire at the end of last year, has been extended for one more year, Vento indicated. "While it may be renewed, there is no guarantee, so clients should be advised to make any necessary improvements that qualify for the credit this year."
Vento noted that if you find a job for your dependent children to help fund some of their living expenses, each child can earn up to $6,100 in 2013 without having to pay any federal income tax. "Consider establishing a Roth IRA in the child's name," suggested Vento. "The child can withdraw money from it to pay for college, and the withdrawal will be taxed at the child's tax rate, which could be as low as zero if structured properly."
Posted on 7:19 AM | Categories:

Time Doctor Versus FreshBooks

Rob Rawson for Biz 3.0 writes: Time Doctor and FreshBooks both offer time tracking features, but they are really completely different tools with different purposes. FreshBooks is focused on invoicing as logging expenses, billing clients and basic accounting.

freshbooks

Time Doctor, on the other hand, is focused on improving productivity within a team or for individuals. It monitors the websites visited and application used and provides detailed reports of the time spent on which tasks.

Time Doctor is also currently working on an integration with FreshBooks!
For a clearer comparison of the features offered by Time Doctor and FreshBooks, check out this table:
FeaturesFreshBooksTime Doctor
Time trackingYesYes
Track projects and TasksYesYes
Track time on your PhoneYesYes
Expenses/Billing TrackingYesNo
Track websites visitedNoYes
Generate time usage reportsNoYes. Weekly as well as daily reports outlining time spent on tasks
Attendance trackingNoYes
Optional screenshots recordingNoYes
Generate InvoicesYesNo
Online invoicing to receive online payments from clientsYes. Can also set up recurring invoices and auto paymentNo
Track offline paymentsYesNo
Late Payment remindersYesNo
Accounting reports and taxesYes. Sales tax, profit and loss, balance sheetNo
  
Posted on 7:18 AM | Categories:

Cloud accounting firm Clear Books stages DIY IPO / Clear Books circumvents lack of bank funding with crowd sourced share offer

JANE MCCALLION for Cloud Pro writes:  Accountancy Software-as-a-Service (SaaS) firm Clear Books has developed its own cloud-based crown funding toolkit in order to carry out a ‘do it yourself’ IPO.
The organisation, which provides services to small businesses and sole traders, has issued a share offer to raise £839,913 having recently re-registered as a public limited company (PLC).
Clear Books claimed it turned to the idea of raising money from customers and ‘fanvestors’ following the reluctance of banks to invest in or lend to small businesses in the current economic climate, as well as what it claims are the short-term agendas of venture capital firms.
The company also rejected traditional crowd funding sites as they charge upward of five per cent in fees, adding that full stock market listing fees are even higher. According to the firm, the total fees associated with its own IPO will be one per cent.
The Cloud Funding toolkit, as it has been dubbed, accepts share applications online and also takes payment for shares, as well as providing access to an investor module where share certificates can be downloaded.
The toolkit also automatically accounts for the transaction in the investor’s Clear Books account, assuming they are a customer.
The company has also said it is considering making the tool available to its own customers if they wish to carry out a similar ‘DIY IPO’, although it has not made a firm decision on this yet.
Tim Fouracre, CEO of Clear Books, said: “We have always developed internal tools to run our own business more efficiently and then made this software available to our customers to benefit from too.
“We have done this with accounting, payroll, human resources and document management. So helping our small business customers raise funds is an exciting opportunity to help small businesses in the UK grow faster.”
Posted on 7:18 AM | Categories: