Tech bubble? Analysts see warning signs / "we just do not know whether Xero is a $30 stock or a $10 stock.”

David Williams for NBR writes: Concern is rising at an apparent recklessness creeping into listed tech company investments.  Some market professionals and commentators are already calling it a bubble, with all the history and prejudices associated with such a word.  Others won’t go that far – but they’re still shocked at the money being thrown at technology companies, without basic research being undertaken.

Everyone seems to agree it’s a phenomenon brought on by Xero’s [NZX: XRO] stunning rise (justified or not), which has created a panic from investors who think they’ve missed the boat. Somehow they think they’re best-placed to pick the next success story.

Wynyard Group [NZX: WYN], SLI Systems [NZX: SLI], Snakk Media [NZX: SNK] and GeoOp [NZX: GEO] have listed this year and there seems a solid pipeline of tech prospects waiting in the wings.

But there are concerns that part-time investors, who are probably more used to pumping money into companies such as Telecom, are now warming to high-risk tech companies when they really can’t afford to lose their original investment.

Xero, which had a recent share price surge on news of a $180 million capital raising, has a market cap of $3.76 billion, making it one of the country’s biggest companies.

Yet, this is a company which is yet to turn a profit and, according to Thursday’s cashflow report, had revenue of $28.7 million for the financial year’s first half, while lifting its quarterly cash burn to $13.1 million.

Tech company potential at those multiples are clearly making some advisers uncomfortable.
Compare Xero to retirement village operator Ryman Healthcare, which has the same market value. In the 12 months to March 31 it made an underlying profit of $100.2 million.

Fresh pause
What seems to be giving market watchers fresh pause this week is tech firm GeoOp’s NZAX debut.  The baby of Leanne Graham (ex-Xero), the company finished the week at $2.50, $1.50 above the offer price, with a market valuation of $68 million.   This from a company which had revenue of $124,000 for the year ended March 31 and recorded a loss of $312,000 in that financial year. By September it had 4500 customers.  GeoOp ticks the right investment boxes, it seems.

Tech industry commentator and investor Ben Kepes says he was told by a friend, who successfully raised money recently, if you want your New Zealand tech company to resonate with investors there are three key words you need to include in your pitch: Xero, cloud and Saas (software as a service).  GeoOp can tick all three boxes, while also having the added appeal of a high-profile chairman, Mark Weldon.

(It’s worth noting Mr Weldon managed to snare 2.56 million shares, or 9.4% of the company, when NBR ONLINE has been told the experience of average investors is that they were heavily scaled back. By Friday’s market close, Mr Weldon’s stake had appreciated by $3.84 million).
Mr Kepes is seeing warning signs. He says companies should be listing that have good fundamentals behind them.

“If we’re purely listing companies and giving companies good market caps because they are part of some kind of industry trend then there’s a huge danger there.”
Canterbury-based Mr Kepes, who has invested in 15 companies in the last few years, describes tech investments as “super high risk.”

His advice? “If you don’t understand it, don’t do it.
“I probably wouldn’t go so far as to say it’s a bubble but I think that there’s some shaky fundamentals in our market right now.”

Herd mentality
JB Were’s head of advice Barry McLauchlan isn’t so reticent.
He says the money being thrown at Kiwi tech companies reminds him of the kind of behaviour leading up to the wholesale collapse of internet companies in 2001.
“It’s like herd mentality. They see these great rises in the market and so you start taking phone calls from people who haven’t done any analysis on the company at all – they just don’t want to miss out.  That’s the makings of a bubble.”

The risk profile is high and the analysis is almost impossible, he says. But he’s big enough to admit he might be wrong.

“On the plus side of Xero is that they’ve got some pretty heavy-hitting, tech-savvy funds and people who have put some money into it who understand that sector, who have taken a pretty good shot at it.”   Meanwhile, Craigs Investment Partners adviser Gretchen Williamson says small tech companies coming to market are unlikely to attract any interest from analysts, making it hard for people like herself to give clients a recommendation.

“It’s very difficult when you go and pick up the annual report to say, oh OK, they’re running at a loss but they’re valued at $20-30 million. That doesn’t fit any other logic – it puts something like 60-70 times any revenue, so you have to be future thinking.

“It’s simply not possible for me to give a recommendation on a sector that’s really still quite fledgling in terms of monetising and success and who’s going to be the best.”
Her three top tips for assessing tech companies are:

• Check the track record of management and endorsements from tech-savvy investors;
• How much cash does the company have and how quickly will they burn it;
• Recurring revenue helps predict future earnings, as opposed to one-off projects. Plus, it pays to check the margin on products.

Ms Williamson says there’s a different mindset with tech companies – it’s less about when it might turn a profit and more about how many customers it has and what value somebody else might place on it.

The money being thrown at tech companies reminds her of the mining boom. A company merely taking a passing interest in iron ore seemed to experience a share price rise, she says.
All in all, it seems a bit of a guessing game.

And JB Were’s Mr McLauchlan says uncertainty over tech stocks is making his firm more conservative.  “I would invest my clients’ money like I invest my money. I wouldn’t be putting my money there [in newly-listed tech firms].

“One of our jobs as an adviser is to understand the downside risks for clients. And we just do not know whether Xero is a $30 stock or a $10 stock.”

Online Revolution Killing QuickBooks Desktop, Xero Dominating

Mike Block of QuickBooks Xero Blog writes: In answering this Linkedin question, I concluded that the online revolution was killing the QuickBooks desktop program and that Xero was already dominating where it mattered most (online).

    On 08/08/13 2:35 AM, Peter Stannard wrote:
    ——————–

Hey Mike.

What do you think of Xero’s prospects in the US over the next 5-10 years?

Personally I feel they’ll squash Intuit as they have MYOB and others in NZ/AU and will eventually do with Sage here in the UK. I get the feeling you think the same way reading your blog?

    Peter
    ——————–

I told Peter I very much agreed and my answer would be my next blog post. Here is that delayed post:

Xero is getting new users about 50% faster than QB Online. It is the fastest, easiest, most beautiful (QuickBooks is now very unattractive) and least expensive way to do accounting, for most users. This is especially true if you use some of its many inexpensive add-ons. The number of Xero add-ons is growing very fast, while QB add-on ranks drop quickly. This relates to the free Xero industry-standard RESTful interface, compared to the expensive, proprietary, limited and repeatedly changed QB add-on interfaces.

You also should consider how fast Xero is adding employees (133% – 178% this year). Finally, we have a long history of fighting monopolies personally, besides fighting them with our laws. Despite this, we have had about 40 years of a virtual Intuit accounting software monopoly (QuickBooks and Quicken recently had 90 – 95% of the small business and home checking desktop software market). As a one-time QuickBooks insider, I know many cases where the lack of competition made QuickBooks delay or not implement many important changes. Therefore, we all have a very personal interest in seeing that QuickBooks and Quicken get much more competition.

You then must consider how long it takes accountants to test Xero, use it with a few accounts and learn it as completely as we know QuickBooks. This is partly due to the time it takes us to create many Xero account classification rules for each client. It is only after this that we will quickly switch many clients to Xero.Fortunately, my new 0CPAs program will soon virtually end the need to create new rules.

All this makes me feel we are now reaching a tipping point. Many marketing and scholarly articles say that, once 5% to 10% of a group make a change, it has roots (which you cannot kill). They also say that a 20% to 25% penetration makes a change unstoppable. The adoption of change rate actually resembles a bell curve, which starts slowly and then increases rapidly. After 50% adopt a change it gradually slows, as you begen to run out of people not adopting the change.

Online accounting software already has far more than 25% of the accounting software market. Therefore, the unstoppable online  revolution is now killing QuickBooks desktop quickly. It will soon get far worse. Xero now has about 40% of the Xero – QuickBooks Online area and is growing about 50% faster than Quickbooks Online. Most other online accounting competitors are not really competing with these two programs, either because they are much less powerful or much more expensive. Most QBO users also are former QuickBooks desktop users. The number of such potential converts is quickly shrinking. Even if QBO keep getting 40% of those abandoning QuickBooks desktop, it would top out at about 2 million users.

When you compare this to Xero, you realize some amazing things are very likely. As Xero gets better known, it is likely to get many more users from those abandon QuickBooks desktop. This alone should soon give Xero a million more users.  

Xero also already has the best foreign currency capability, while QBO lacks this entirely. Xero is already dominating online, where it matters most. It should soon have a massive increase in the number of users.

By the way, the stock market seems to know this. Two investment firms paid me to compare QuickBooks and Xero. I also see that Xero stock went up more than 200% this year, 600% in two years and 2,100% in 6 years, as U.S. investors now own 32% of the company.

Look Out Xero, Here I Come ! / Xero Roadshow - Follow-up

William "Bill" Murphy for Intuitive Accountant writes:  Well I am here in the ‘Big-D’, Dallas, Texas on the 29th floor of the Renaissance Hotel.  Tomorrow (which will be today by the time you read this) I will be attending the Xero Roadshow which is being held in what Dallas refers to as their ‘west end’, it is an area once noted for being primarily warehouse district that got converted into a cultural and entertainment district, along with some noted headline businesses.  Located just north of the JFK Assassination museum, the west end hosts a lot of events.  Alrighty that is enough logistics, except to say that from my room all of the west end and most of downtown Dallas proper is a bustle of light.

I must admit I have paid little attention to Xero, which they advertise as “Beautiful accounting software”.  

A few months back I wrote an article about the “New QBO” (QuickBooks online) which I referred to as ‘slick’. 

So I really will be interested in comparing ‘the beauty of Xero’ with 'the slick of QBO’ during the 

roadshow presentation.  Obviously this will be a case for further study as I ponder each product over 

a great cigar.  (Gary if you are reading this I expect my ‘great cigar’ to be a business expense; 

for those of you who don’t know, Gary is my Publisher.) 

Even though Xero offers free trials, I have not enrolled in a one (yet) because I wanted to see Xero

 in its entire unveiled splendor at this roadshow, but I find myself wondering 'what makes it beautiful’

 is it the color scheme, the simplicity, the essence of the interface? I mean let’s not forget this is ‘accounting software’.

By all accounts we are supposed to get an ‘early bird view’ of some of the great new features Xero is 

working on; they will also be introducing “their vision” for a new payroll feature including a firsthand 

demonstration of this functionality.  The Roadshow is also presenting what I think of as ‘marketing 

opportunities’, in other words how to take clients from shoebox to Xero (or QuickBooks to Xero, for

 that matter, I suspect.)  Among the virtual trinkets will be Xero’s training opportunities, practice 

management tools, and their partner program.  I wonder where those things will rank on a scale 

of Xero to Five, oops, I mean zero to five (me bad). 

Xero advertises that they are the global leader in online accounting with over 200,000 paying customers in over 100 countries.  While that sounds like a ‘big number’, if you consider it solely on a ‘math basis’, it is an average of only 2,000 customers for each of the 100 countries. I am sure that isn’t really their statistics, but I really wish they would give us some more specifics on those kinds of numbers. I mean we are accountants and to us, ‘numbers’ are our lives, “right gang”? Perhaps that can be a question I ask during their presentation, it will probably go over like a ‘Sooner’ in ‘Texas’.

I have done a bit of study on Xero, and one of the things I really want to see is their ‘bank feeds’ functionality. I admit, with hundreds of thousands of banks around the world, if they have bank feeds functioning for each of those 100 countries that is a really big deal. And they apparently also offer ‘real time’ exchange rates, that can be a real advantage if say someone in Texas is working on the same data with someone from Sydney, a case of virtual exchange where ‘yonder meets down under’.

I find the list of Xero ‘add-on’ products amazing; they have point-of-sale offerings that integrate, and CRM products, inventory enhancements, time tracking, and A/P and A/R interfaces. Just a lot of products for something 'so young'. Some of these are familiar names (I won’t hint as to which ones) that work with ‘the other guys too’, and some are as new as Xero itself, presently dedicated to that relationship alone.

I am looking forward to seeing something new and different, I have used the ‘same old thing’ for longer than dirt has been alive, or so it seems; and while I am not fond of change, it is all around me….heck, my iPhone is telling me that if I don’t upgrade the OS, it is going to boot me back to ‘windows mobile’.

I think everyone who regularly reads this publication knows that I am somewhat difficult to impress; something really has to be above par to garner my endorsement; and if you want Murph’s real enthusiasm it better be as ‘great’ as this H. Upmann cigar I am savoring.  So tomorrow is your chance Xero, here I come, ready or not. 

 Xero Roadshow - Follow-up

While they are fresh on my mind here are a few points for my readers from the Xero Roadshow. You will be hearing more about Xero from me in the days and weeks to come. I was pleasantly surprised with Xero. It was pretty well functional in most areas you would expect for accounting software, and it seemed fairly easy to use. - See more at: http://www.intuitiveaccountant.com/general-ledger/xero-roadshow---follow-up/#sthash.CecI3Qrj.dpuf

In my article leading up to the roadshow, I commented about their advertising slogan “Beautiful Accounting Software”, and quipped about their use of the word “Beautiful”.  Ian Vacin, Xero VP for Marketing & Product, quickly set those attending straight on this subject. Xero uses the term beautiful to imply a magical experience that puts “a smile on the face” of their users.  Many of their future promotional efforts will be centered upon conveying this experience.

Another of my preliminary witticisms dealt with the number of Xero users.  I learned that the vast majority of their customer base still lies within New Zealand and Australia, but a growing number of US and Canadian users are transferring their shoe boxes of receipts or migrating from other software, to Xero every day. Could Xero possibly be New Zealand’s next great success story, following the tremendous popularity of their wines?  Only time will tell!

The Xero approach to accounting seems slightly less rigorous than the step-by-step “QuickBooks way” which QB users must follow. The Bank Feeds, and preferred daily bank reconciliation, that Xero emphasizes is an entirely different way of approaching the day-to-day accounting chores, and differs greatly from QuickBooks, but seems to be consistent with the way that many small businesses actually deal with their finances.

Xero seems to be changing, adding and improving functionality almost every six weeks. One of the most recent changes is their new Files feature which allows users to attach documents to specific Xero transactions.

The Xero Roadshow is also premiering their new payroll functionality which seems to be on par with the kind of do-it-yourself payroll one would expect from a small business accounting package. Xero plans to roll out payroll on a state by state schedule based upon the number of Xero users in each state.  In order to promote their payroll function Xero is establishing an entirely new pricing structure that will make payroll affordable for many small businesses.  

I will be focusing my one good eye on the progress Xero is making to keep you abreast of Xero’s improvements as we go through the software’s features in future articles.

The Dollars And Sense Of Giving IRA Assets To Charity

Deborah L Jacobs for Forbes writes: Harvey Kimmel has marked his calendar for Nov. 2. That’s the day on which he turns 70½. More importantly, he says, it’s when he becomes eligible to contribute part of his IRA to charity. He plans to donate $100,000 of it to the Philadelphia Zoo this year.

In the process, he will take advantage of the so-called IRA charitable rollover – an on again, off-again rule, first introduced in 2006. The provision last expired at the end of 2011. As part of the fiscal cliff deal enacted late last year, Congress extended it through 2013.

Were it not for the charitable rollover, this would be the first year for which Kimmel, a retired turnaround specialist who has rolled over various 401(k) accounts into an IRA now worth about $1 million, would need to start taking yearly required minimum distributions.

Unless an IRA is a Roth, the account owner must take these distributions starting at age 70½ and pay tax on the withdrawals. (See “Four IRA Deadlines Every Smart Investor (Or Advisor) Should Know.”) With the charitable IRA rollover, the donation, of up to $100,000, can count towards the minimum required distribution an owner would otherwise be required to take.

Donating IRA assets to charity has a number of tax advantages. Charities, unlike individual beneficiaries, do not need to pay income tax on withdrawals from these accounts. And while there is no income tax deduction for a donor’s contributions, the sum going to charity is not included in his or her adjusted gross income or AGI. Unlike other donations, these are not subject to percentage limitations on charitable deductions. Plus, donating these assets, rather than taking minimum required distributions, may also enable older donors to avoid certain penalties that come with a higher AGI, such as higher Medicare premiums.

Sophisticated donors appreciate the tax efficiency of this giving tool. “I’m the kind of person who looks for the simplest, easiest and least aggravating solution,” says Kimmel, a patron of the arts in Philadelphia who gives money to about 30 different organizations. For example, through the Cultural Alliance of Greater Philadelphia, he and his wife, Virginia, 69, recently set up a program to providehigh school children free access to 12 of the city’s best museums.

For this gift and many others, he has donated appreciated stock – a strategy that enables him to take a charitable deduction for the fair market of the stock and avoid the capital gains tax that he would pay if, for example, if he had sold the shares and donated the proceeds to charity.

With the IRA, he will ask his broker to sell the stock to raise cash for his donation. Since this will occur inside the IRA wrapper, he won’t have to pay capital gains tax. If Congress extends the charitable IRA rollover, Kimmel plans to make another similar gift early next year, and count it towards his 2014 minimum required distribution.

It’s also possible to make gifts of up to $100,000 from an IRA without using it to satisfy the mandatory annual payout. So if you’ve already taken your required payout for 2013, you can still give IRA assets to charity — you just can’t count it towards the mandatory withdrawal.

The University of Michigan, which actively promotes this giving tool to its donors, has raised $19.8 million through IRA charitable rollovers since they were first permitted in 2006, says Shari M. Fox, assistant vice president for development at the University. A total of 790 donors have contributed this way, with gifts ranging from a few hundred dollars to the $100,000 maximum. The best year for this type of gift was 2007 – the year before the financial crisis began – which was also towards the end of a multiyear University of Michigan fundraising campaign. In that year alone, 521 donors made lifetime gifts of IRA assets, totaling $6.4 million.

One hurdle for charities is convincing donors to use these assets, rather than others, to make gifts. The IRA charitable rollover is clearly a giving tool appropriate only for those who don’t need the money during retirement. And for people who have socked away funds in what they consider to be a nest egg for themselves or their heirs, suddenly giving those assets to charity requires a new mindset. Some donors also have trouble understanding the benefit of a giving tool that does not result in a charitable income tax deduction, as this one doesn’t, Fox says.

Limited opportunity?

As in past years when the law allowing charitable IRA rollovers was scheduled to expire, charities are sending urgent messages to their donors.

“Hurry! Existing legislation expires on December 31, 2013,” reads an Oct. 15 newsflash that the Free Library of Philadelphia Foundation sent to its database of 85,000 library users. So far they’ve received one $10,000 gift, and have another in the works for an unspecified amount, says Amanda Goldstein, director of the library’s Major Gifts & Planned Giving program, started two years ago.

“I don’t know if this is the last chance ever or for a long time,” says Conrad Teitell, a lawyer with Cummings & Lockwood in Stamford, CT, and a key proponent of the rollover. Though the provision has been extended retroactively since 2006 each time it expired, Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, said recently that this year there will be no extenders and that each tax break will be considered on a case-by-case basis as part of overall tax reform (whatever that means).

Regardless of what happens with the IRA charitable rollover, it will still be possible to save taxes and benefit charity by donating an IRA through an estate plan. The way to do that is to name a charity on the beneficiary designation form given to the IRA administrator. Since money in a retirement account passes outside of a person’s will, it’s necessary to spell out your wishes on this form. The options include making the charity a 100% beneficiary of the IRA, or indicating that the charity is a beneficiary of a certain percentage of the IRA and that the rest should go to individual beneficiaries.

Pitfalls and protocols

Since charitable IRA rollovers are lifetime transfers, different protocols apply. Instead of taking money out of an IRA, the owner must ask the custodian of the account to send a certain sum directly to charity. The donor must not have the funds in his or her possession “even for a nano second,” Teitell says. And the money must arrive by midnight on Dec. 31. So it’s important to get this in motion soon, rather than waiting until the very end of the year.

IRA funds donated this way can go to any organization to which you can make a gift that would qualify as a charitable deduction on your tax return. One thing you cannot do is use the funds for contributions to donor-advised funds, supporting organizations or private non-operating foundations. But this rule doesn’t prevent donors from giving IRA assets during life to a community foundation’s designated field of interest fund or its endowment, Teitell notes. For example, Kimmel, who supports the Philadelphia Foundation, could not donate his IRA to his donor advised fund there, but could make a lifetime gift of IRA assets to the organization’s endowment.

For their tax records, donors need a receipt from the charity acknowledging the gift and indicating that no goods or services were received in exchange for it – not even a celebratory rubber chicken dinner, Teitell warns. If your tax return is audited, you will be glad to have this documentation.

Though you can’t take a tax deduction for this gift, it’s important to report it properly to the Internal Revenue Service so you don’t get taxed on the withdrawal. By Jan. 31 the financial institution must send you IRS Form 1099R, reporting the distribution. It appears on this form with the code number 7, just like any other IRA distribution, says Barry C. Picker, a CPA with Picker & Auerbach in Brooklyn, NY.

It’s up to you to tell the IRS how much of the distribution went to charity — what tax geeks call a “qualified charitable distribution.” Here’s how Picker recommends you do that: On Form 1040, the tax return that is due April 15, report the total amount withdrawn from the IRA (the amount that appears on on Form 1099R) on line 15a (labeled “IRA distributions”). Then indicate on line 15b how much of that is taxable, and put the letters “QCD” in the left margin. If it all went to charity, the taxable amount will be zero; otherwise you subtract the amount donated, from the amount on line on 15a, and enter the difference on line 15b.

Unless you are audited, there is no way for the IRS to check your math or your moral compass. Nor is there anything for the IRA custodian to do besides issue the 1099-R. That’s good news, Picker notes, since it also means “the custodian can’t mess it up.”

Making Your Gifts Count:10 Smart Tips For Charitable Giving

Kelly Phillips Erb for Forbes writes:  Americans gave $316.23 billion to charity in 2012, equivalent to 2% of the U.S. gross domestic product (GDP). The majority of that giving, $223 billion, came from individuals – not surprising since 88% of households give to charity.

Making a charitable donation is not only a chance to make a difference: it’s also an excellent way to reduce your tax burden for the year. The tax benefit is considered a compelling reason for making charitable deductions: more than two-thirds of high-net-worth donors saidthey would decrease their giving if they did not receive a corresponding tax deduction.

A tax deduction for charitable giving isn’t guaranteed just because you’re feeling generous. As with everything in tax law, it’s important to follow the rules. With that in mind, here are 10 tips for making your donation count:

1. Itemize. In order to claim a charitable deduction on your tax return, you must itemize your deductions. You report itemized deductions on Schedule A on your federal form 1040 using lines 16-19: 
2. Choose carefully. Only donations to qualified charitable organizations are deductible. If you’re not sure whether an organization is qualified, ask to see their letter from the IRS (many organizations will actually post their letters on their web site). If that isn’t possible, you can search online using IRS Exempt Organizations Select Check. Keep in mind that churches, synagogues, temples and mosques are considered de facto charitable organizations and are eligible to receive deductible donations even if they’re not on the list (some exceptions apply so be sure and ask if you’re not sure). You can also find out more about a charitable organization’s tax exempt status – as well as review financials, mission statements and more – by check out a third party evaluator site like Charity Navigator.
3. Get a receipt – even for cash. Cash deductions, regardless of the amount, must be substantiated by a bank record (such as a canceled check or credit card receipt, clearly annotated with the name of the charity) or in writing from the organization. The writing must include the date, the amount and the organization that received the donation. You don’t have to submit the writing along with your return but you need to be prepared to show it at audit. This is a relatively new requirement: the rules changed in 2007 to require written evidence for all monetary donations, including cash.
4. Don’t overlook payroll deductions. Increasingly, employees rely on charitable giving opportunities available through their employer. If you make a contribution by payroll deduction, record keeping requirements under the Pension Protection Act of 2006 require you to retain a pay stub, form W-2 or other document furnished by your employer that shows the total amount withheld as a charitable donation along with the pledge card that shows the name of the charity. For federal workers, a pledge card with the name of aCombined Federal Campaign will meet these requirements.
5. Pay attention to the value of any incentives. A charitable donation is deductible only to the extent that the donation exceeds the value of any goods or services received in exchange. If you make a donation and receive something in exchange – anything from a coffee mug to a dinner – you can deduct the cost of your donation less the value of the item received. If you’re not sure of the value of an item or service received after a donation, just ask. Most charitable organizations will do the math for you and document the value of your donation on their thank you letter or receipt.
6. Consider donating appreciated assets. Donating property that has appreciated in value, like stocks, can result in a double benefit. Not only can you deduct the fair market value of the property (so long as you’ve owned it for at least one year), you avoid paying capital gains tax. Normally, appreciated property is subject to capital gains tax at disposition. There is an exception for donations to charitable organizations: you escape paying capital gains tax altogether.
7. You can’t deduct the value of your time. The IRS does not allow a charitable deduction for volunteering your services. The good news is that out of pocket expenses relating to volunteering so long as they are unreimbursed; directly connected with the services; expenses you had only because of the services you gave; and not personal, living, or family expenses. Out of pocket charitable expense which might be deductible include the cost of transportation (including parking fees and tolls); travel expenses while you are away from home performing services for a charitable organization; unreimbursed uniforms or other related clothing worn as part of your charitable service; and supplies used in the performance of your services. As with other donations, keep good records since documentation is key.
8. Document the value of your gift. Good records are always important when it comes to charitable giving but even moreso for donations of non-cash items. You must be able to substantiate the value of your donation. You can generally take a deduction for the fair market value of the items, or what the item would sell for in its current condition, but you’ll want to be able to establish an appropriate value. If self-documenting the donation because it’s less than $500, be specific, noting the description and condition of the items. If you contribute property worth more than $5,000, you must obtain a written appraisal of the property’s fair market value.
9. Limits may apply. Many taxpayers aren’t even aware that there are limits on charitable contributions but they do exist. If you contribute more than 20% of your adjusted gross income (AGI, found on line 37 of your form 1040), pay attention to limits. The specific limitations can be fairly complicated – with numerous exceptions – but here are some quick rules of thumb: you can deduct appreciated capital gains assets up to 20% of AGI; you can deduct non-cash assets worth up to 30% of AGI; and you can deduct cash contributions up to 50% of AGI. If you exceed those limits, you can carry the deduction forward for five years.
10. Pay attention to the calendar. Contributions are deductible in the year made. To make it count during the tax year, gifts must be made by December 31. That doesn’t necessarily mean cash out of your account. Credit card charges – even if they’re not paid off before the end of the year – are deductible so long as the charge is captured by year end. Similarly, checks which are written and mailed by the end of the year will be deductible for this year even if they aren’t cashed until 2014.

Tax Deductions for Professional Gamblers

OptimaTax writes: What could be better than winning $8.3 million at the World Series of Poker next week?   Not paying taxes on all $8.3 million.   Since a federal court ruling two years ago, there are tax deductions for professional gamblers similar to those for self employed contractors and small businesses. Expenses like travel, meals, and lodging can be cut from their total income.

This means that if a professional player won $1 million and showed business expenses of $100,000 million during the year – he would only pay taxes on $900,000.

Are You a Professional Gambler?

So how do you prove to the IRS that you’re a professional gambler? Show that you treat the game like a business all year long; that you play to make a profit, not to have fun with your friends.

The federal tax code uses nine guidelines to determine what qualifies as professional gambling, and what doesn’t. Here are a few of those guidelines adapted from an article last year in the Journal of Accountancy.

Gambling Guidelines 

• Make a profit. Everyone loses money sometimes. But if you never win and or profits, it’s hard to suggest that you make a living by gambling. This is the same way the IRS distinguishes between a small business and a hobby.

• Keep records of the time you spend practicing and competing. By maintaining books and records show that you’re not just a casual gambler, you can prove that you’re a professional.

• Study hard. Prepare for each tournament with a poker expert. This will show you consider gambling your job, and that improving your game is part of professional development.

• Don’t have an entourage. Since gambling is usually for fun, you have to show that you are not playing for pleasure, but for a living. It is better to go by yourself. If you want family and friends to keep you company, don’t include them in your business expenses.

“Like most tax issues, accurate and proper tax planning is key. With a sensitive issue, such as professional gambling, having your tax strategy be IRS ready will be vital in keeping your winnings in your pocket.  Winning against the Internal Revenue Service is possible, as long as you hold the right cards in your hand.” –Andrew Park, Enrolled Agent at Optima Tax Relief.

What Expenses Can Be Deducted?

Like most small businesses, professional gamblers can deduct expenses that the IRS considers “ordinary and necessary” to “carrying on any trade or business.” The website ProfessionalGamblerStatus.com provides a long list of  tax deductions for professional gamblers you can deduct, ranging from internet connections (if you play online), to flights, car trips, and meals when you travel to tournaments.

List of Possible Deductions

• Internet Costs, if you regularly play online
• Home office expenses
• Tax advice
• Subscriptions to gambling magazines and newspapers
• Gaming fees, chat room fees
• Club membership fees and dues
• Clerical and record keeping expenses
• Travel and meal costs during tournaments
• Wages paid to relatives or employees for their assistance

You can also deduct money used to hire a poker coach or someone to keep track of your results. The payment just needs to be “a reasonable allowance for salaries or other compensation for personal services actually rendered,” according to the IRS.

To comply with the laws, make sure you don’t look like you’re trying to take advantage of the system. For instance, taking a taxi and flying coach would arouse less suspicion than renting a private jet and a stretched limo. That also applies for high rollers, who are often offered complimentary hotel rooms, buffets and rides by casinos. Don’t try to pass those off freebies as expenses.

So what if you’re not a professional but you drive 60 miles, eat lunch, and have a great day at the track? Since you’re not a professional gambler, you can’t deduct any expenses. But you still have to pay taxes on your winnings.

When Planning Never Forget The Alternative Minimum Tax

Peter J Reilly for Forbes writes: You can do a lot more to affect your tax liability for the year in November and December than you can in April of the following year.  Often you will have enough information to do a pretty good mock-up of your return, which will then allow you to do some what-ifs.   It might be tempting to do planning based on the theory that your marginal tax rate is x percent, so that paying y dollars on a deductible item will save you xy dollars.  Don’t do it.  Unless your life is very simple you really need to set up your pro-forma tax return and run through the complete computations.  (Or have somebody do it for you.) There are just too many thresholds and phase-outs and odd interactions in the tax code. Probably the biggest thing that will cause simplistic tax planning to crash and burn is the alternative minimum tax (AMT).

AMT For The Uninitiated

To help you understand what is going on with AMT, take a look at the forms.  If you hire somebody to do your return, that might be a daunting prospect, since you have a package that might resemble a small book.  Also it may be that you did not happen to be in AMT last year.  There are only two forms I am going to refer to and only a couple of lines on each, so it will not hurt too much.  The forms are1040 and 6251.  It might help to open them up.  That is why I gave you links.

On Form 1040 if you go to Line 44 you will see “Tax” which is followed by Line 45 “Alternative Minimum Tax”.  Line 46 is the sum of the two previous lines. That makes it look like AMT is an “extra tax” that is added to your regular tax.  Although that may be true in a formal sense, it is misleading.  Take a look at Form 6251 which feeds into Line 45 of the 1040.  Line 33 is your “Tentative Minimum Tax”.  On Line 34 you subtract an adjusted version of the ”Tax” from Line 44 of the 1040 to arrive at the AMT.  I’m sorry that I can’t make it simpler, but it is important to recognize this.  That AMT on Line 35 of Form 6251 that is carried to Line 45 of Form 1040 is actually what accountants call a plug.  The number that is going on Line 46 of the 1040 as the income tax before credits is either the regular tax or the tentative minimum tax, whichever is higher.  More on the credits later.  Here is the key insight.

Which Country Do You Live In – AMT Or Regular?

Look at those two numbers the “Tax” from Line 44 of 1040 and the “Tentative minimum tax” from Line 33 of 6251, the difference between those two numbers represents how far you are from the border of two countries.  In the country of Regular Tax rates are higher but there are more deductions and exclusions and faster depreciation schedules.  In AMT Land rates are lower, but there are fewer deductions and exclusions and slower depreciation schedules.  If the regular tax is much higher than the “Tentative minimum tax”, then simplistic tax planning might work OK.  You should still run through the full computation, because all the thresholds and phase-outs and the passive activity loss rules can create odd situations that you might find counter-intuitive.

Now The Hard Part

If you are deep into AMT country, is there much you can do ?  Well, the first thing you can do is to avoid wasting deductions. Take a look at that Form 6251 again.  In computing your Alternative Minimum Taxable Income (AMTI), it starts with Line 41 of your 1040, which is unlabeled.  Essentially it is your regular Taxable Income, with exemptions added back.  So if you are divorced or separated or coparenting by some other means, let the coparent have the exemptions for the kids.  Remember that a non-custodial parent needs Form 8332 in order to claim the exemption.  So if you are the custodial parent you will fill it out and if you are the non-custodial parent you will tell your coparent not to bother.  It is possible that this move might cost you a bit in state income taxes, so you should probably ask them for a couple of hundred bucks to make you whole, unless they are really dumb, in which case you should ask for a couple of thousand.

Next focus on lines 2, 3 and 5, mostly line 3 – Taxes.  We are not talking about federal taxes here we are talking about the state income taxes (or sales tax), real estate tax and personal property tax.  Taxes are deductible against regular taxable income but are added back for AMTI.  You control the timing of those payments.

So if you are deep into AMT country, wait until January to pay your fourth quarter state income estimate and your real estate taxes even if it costs you a small penalty.  Those deduction will not help you in 2013, but maybe they will do you some good in 2014.  On the other hand, if AMT land is far, far away accelerate those deductions into 2013.  Make a very big fourth quater estimate on your state income taxes and pay it in December.  In Massachusetts, for example, towns are on a June year end, so you will be able to make the real estate tax payments due in the first half of 2014 in December of 2013.  If you are in a low or no income tax state, you might want to accelerate or slow down a purchase that will create a big sales or use tax payment.

Miscellaneous deductions follow a similar principle except that you have to keep in mind that they are subject to a 2% of AGI floor for regular taxes.  If you have a big legal bill that is related to the production or preservation of income, you can decide whether to pay in 2013, if you are firmly in regular tax country, or 2014 if you are in AMT land.

What About Those Other Twenty Or So Lines ?

Here is the thing.  AMTI is not just a couple of tweaks to the regular tax.  It is a complete parallel system.  The numbers near the top of the form are items that are never deductible for AMTI, but most of the rest of the numbers are about timing.  Generally you get to deduct things faster in Regular Tax Land.  That means that many of the numbers on Form 6251 can be negative.  You have different carryovers of passive activity losses for AMT, different net operating loss carryovers.  You might have a different capital loss carryover.  And of course you have different basis in assets.

If you are in Regular Tax Land, nobody is going to care about those negative numbers, unless they are really anal.  Comes the year when you are all of a sudden deep into AMT country, it would really be great if you could post some big negative numbers on that Form 6251.  There is a problem, though.

An Ugly Truth About Tax Preparation

Suppose that you were a shareholder in an S corporation. Every year you received a K-1 which showed you how much income was flowing through to you.  There were also numbers representing AMT adjustments depreciation almost for sure, but possibly odd things like research and development expenses.  In all those years you never paid AMT so nobody ever worried much about those numbers.  In 2013 you sold your stock in the S corporation.  When you do your pro-forma return you find that you are deep into AMT Land.

Wouldn’t it be great to have a nice big negative number somewhere on your Form 6251,  Well you are entitled to one.  It goes on Line 17 of Form 6251. It is the difference between the regular tax basis of your S corporation stock and the AMT basis of your S corporation stock. [See Note] Surely you have been keeping track of your AMT basis in your S corporation stock.  Oh.  You rely on your accountant for things like that.  Well, I have to tell you.  Your reliance is misplaced.  If you have had the same accounting firm for all the years that you owned the S corporation and they used a good software package like Pro fx continuously for all those years, there is a chance that the number is available.  If you switched preparers several times and they switched software, the chance that you have a good AMT basis number is pretty remote.

Personal net operating losses are not that common, but they do happen.  A common problem you will see when you enter a personal net operating loss is all of a sudden a huge AMT.  That is because you also have to enter the AMT NOL, which is likely a different number. If the return has changed hands enough, reconstructing that can be quite a challenge.

What you need to do if you are facing a big AMT liability is to closely scrutinize your returns for the last several years to see if there might be some favorable adjustments being overlooked.  If you think that there is somebody doing this as a matter of course, you are probably kidding yourself.

How To Be In AMT Without Knowing It ?

Many credits against regular tax are limited by AMT.  If that is happening to you you will not see AMT liability on your 1040.  It will show up in the detailed computations of the limitation on your credits.  I was going to give you some forms and line numbers to illustrate that point, but if you have gotten this far you probably have a headache.

I’m hoping that I get some commenters who tell me that they keep meticulous track of all AMT carryovers for their clients and do a detailed reconstruction whenever they take on a new client.  I bet they floss regularly too.

Why Bankruptcy Is Rarely If Ever An Effective Means Of Dealing With A Tax Liability

Stephan J Dunn for Forbes writes: Often I express the view that bankruptcy rarely if ever is an effective means of dealing with tax collection action.  Some readers have challenged me on it, and I have promised elaboration.  Here it is, in the form of an excerpt from my forthcoming West treatise Current Federal Tax Controversies:

“Bankruptcy is almost never an effective means of relief from a tax liability.  Once a tax lien attaches to property, it remains until the assessment is paid or becomes unenforceable by the lapse of time, notwithstanding discharge of the property’s owner in bankruptcy

There is no discharge for a tax with respect to which a return was not filed, or was filed after the due date, and within two years before the filing of the bankruptcy petition.  Nor is there discharge for a tax with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.  There is no discharge for income tax for a taxable year ended on or before the date of filing of the bankruptcy petition, for which a return, if required, was last due, including extensions, after three years before the filing of the bankruptcy petition.

There is no discharge for a tax required to be collected or withheld and for which the taxpayer is liable in whatever capacity.   These are the so-called “trust fund” taxes—income tax, Social Security tax, and Medicare tax withheld by an entity from employees’ wages, but not paid over to the taxing authorities.  These taxes are assessable against the entity’s responsible persons, and they are not dischargeable in bankruptcy.

The statute of limitations on assessment of tax against a taxpayer or collection of it is suspended during any period when the IRS is prohibited from assessing the tax or collecting it because of the pendency of a bankruptcy case concerning the taxpayer, and—

(1)   for assessment, 60 days thereafter, and

(2)   for collection, six months thereafter.

Perhaps the most harmful aspect of a bankruptcy is that it subjects the taxpayer to the scrutiny of creditors and the bankruptcy trustee.  In one case, a taxpayer’s Federal income tax accounts were reposing as currently not collectible.  Then the taxpayer filed a chapter 7 bankruptcy.  The bankruptcy was ill-advised, discharging but a few thousand dollars in credit card debts.  The bankruptcy prompted the IRS renew collection action against the taxpayers.   The Revenue Officer assigned to the taxpayer’s accounts had retired. A new Revenue Officer investigated and found a recorded deed which the taxpayer had executed before filing the bankruptcy.  The IRS asserted a nominee lien against the property conveyed by the deed.  The grantee sued the United States under 28 U.S.C. § 2410 to remove the cloud of the recorded NFTL from the property, and the U.S. District Court ultimately upheld the nominee lien.
Installment agreement, currently not collectible posting, and offer in compromise, discussed above, are all more effective than bankruptcy in dealing with tax collection action, and do not involve the risks inherent in bankruptcy.”

Footnotes with legal authorities have been omitted from the foregoing excerpt.  For a version with legal citations, check here.

Tax Rates, Standard Deduction, Exemptions Increase Due to IRS Inflation Adjustments

Terri Eyden for AccountingWeb writes:  For tax year 2014, the IRS announced October 31, 2013, annual inflation adjustments for more than forty tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2013-35 provides details about these annual adjustments.

The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts:

1. The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33, and 35 percent – and the related income tax thresholds are described in the revenue procedure.

2. The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.

3. The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).

4. The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)

5. The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).

6. The maximum Earned Income Credit amount is $6,143 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.

7. Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.

8. The annual exclusion for gifts remains at $14,000 for 2014.

9. The annual dollar limit on employee contributions to employer-sponsored health care flexible spending arrangements (FSA) remains unchanged at $2,500.

10. The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.

11. The small employer health insurance credit provides that the maximum credit is phased out based on the employer's number of full-time equivalent employees in excess of ten and the employer's average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2013-35, which will be published in Internal Revenue Bulletin 2013-47 on November 18, 2013.