Making Life Less Taxing

Moving to WordPress

2010-06-10T00:35:00.005-04:00

I have officially moved my blog to WordPress. Please visit MichaelTHanley.com where Tax Saving Tips, Marketing Tips, and General Business Advice are posted at least once a day to pickup where my Blogger blog left off:

michaelthanley.com

Small Business Credit Cards Excluded From New Consumer Protection Laws

2010-05-12T18:48:00.004-04:00

Many of you are aware of the new Consumer Protection Laws in place for credit cards. If you haven't already noticed, take a look at your latest credit card statements...you will notice a simpler layout, more detailed information about payoffs, etc. You also should have received updated Terms from your credit card issuer outlining some of the new benefits such as limits on penalties and limits on interest rate changes.

However, small business owners need to be aware that these changes have not been incorporated into the realm of small business credit cards. Unless the credit card issuers are voluntarily putting these limits in place, your business credit card is subject to the same terms (aka no protection under the new Consumer Protection Laws) that it has always been subject to.

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School Budgets - How to Avoid Cutting so Many Teachers

2010-05-11T15:55:00.005-04:00

Over the past few years, one of the hottest topics on Long Island has been school district budgets. Between increased property taxes, budgets being voted down, and teachers being cut left-and-right, no wonder why there is so much controversy.

However, I'm not sure if anyone has taken a true step back to analyze the root problem here:

Too many teachers are being hired.

Now, before I go any further, I want to preface this post by stating that I am 100% pro-teacher. My wife is a teacher, my parents are both retired teachers, my sister-in-law is a teacher, my aunt is a teacher, many of my friends are teachers, and many of my clients are teachers. I know how hard-working teachers are and I wish there were more teaching positions out there so that there wouldn't be so many amazing teachers who find themselves unemployed or underemployed.

That being said, the root economic problem that these school districts are creating is that they are hiring too many teachers to begin with.

When you are able to cut 6, 8, 10, 18 teaching positions from a district (which usually amounts to .5 - 2 positions per school when you really analyze the numbers) and still operate business-as-usual without any noticeable changes, the question remains, "why did we need these extra 6, 8, 10, 18 teachers in the first place?"

Obviously, the answer is, "the taxpayers were willing to give us a bigger budget to play with, so we spent every penny and then hired additional teachers with the surplus funds." A more prudent solution would have been to only hire those teachers that were needed and to place those surplus funds into a reserve account that could be used in future years when the budget is tight.

Obviously, the districts like having as much manpower at their disposal as possible. However, when you hire 10 teachers in year one and then cut 8 of those teachers in year two, you just damaged the lives of 8 teachers. Had you not hired them in the first place, they would have been motivated to send out resumes and potentially gotten hired by a district that needed them and that planned to offer them a long-term position. Instead, they spent the year happily employed and felt secure in their new position, only to have the rug pulled out from under them just 10 short months later. I would estimate that 2-3 out of those 8 teachers also bought their first house during their first year of employment, locking themselves into a 30-year mortgage with $3k-$4k monthly mortgage payments only to now find themselves at the end of the school year with no job and no foreseeable way of making those monthly mortgage payments.

Teachers don't want to lose their jobs.
Taxpayers don't want to be responsible for teachers losing their jobs.
Taxpayers don't want to pay unnecessary taxes.

School districts need to stop this revolving door policy of 1-year and 2-year teaching careers, stop cutting 6, 8, 10, 18 teaching positions during tight-budget years, and start running their districts more like a business.

Solution - In years when money is flowing freely, hire only those teachers that you need and put any excess funds into a reserve account. In years when money is tight, use those reserve funds to save the jobs of the teachers that you need.

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How to hide Farmville and other annoying updates from your facebook News Feed

2010-05-09T11:13:00.006-04:00

Sorry moms, but this is going to steal your Mother's Day thunder:

To hide Farmville updates and other facebook game updates from appearing in your news feed, follow these simple steps:

1) Open your News Feed and look at the upper right corner of the update that you want to get rid of and you will see a button that says "Hide."

2) Click the Hide button and two more buttons will appear that will give you the option to either hide all updates from that particular friend or all updates from that particular application

In addition to helping you block these game updates, this also helps to hide updates from your friends who constantly post annoying status updates (like the updates that contain the word "muah," updates about The Bachelor, or some type of countdown to some special event coming up in their life).

Everyone can now enjoy their Mother's Day and stop hating their friends who play Farmville!

Now, if we can just figure out how to block people from posting gifts to your wall....

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You can learn a lot about someone from their iPhone Home Screen

2010-04-30T21:24:00.008-04:00

You can learn a lot about someone from checking out what Apps they have on their iPhone Home Screen...

To the left, you can see what my current iPhone Home Screen looks like. Across the top row...the Google, Facebook, and LinkedIn Apps are pretty self-explanatory...the Dragon Dictation App is the best speech-to-text or voice-to-text App available for the iPhone. In row two, Echofon is my favorite of all the Twitter account managers, WordPress to manage my blog, and Logmein to access my computer remotely. In row three, I deviate a bit from the business world with the IMDb App. I think this is the best App available for the iPhone and I like the IMDb App better than I like the actual IMDb website.

If you want to take a screenshot of your iPhone Home Screen to share it with your friends and colleagues, browse to your iPhone's Home Screen and press the Home button and the Sleep/Wake button at the same time. The screen will flash and the camera click will play. You can then view the screenshot in your Camera Roll.

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The Spam Industry - Really?!?!

2010-04-30T18:32:00.004-04:00

So, this entire industry exists that revolves around people, companies, and automated bots sending out spam every minute of every day. Common sense says that an industry will only exist if there is money to be made.

My question is...who are these consumers who are shopping by clicking on links within spam e-mails, spam tweets, etc??

Next time someone tries to sell you Viagra, Cialis, $99 vacations to Disney, a $199 iPad, or a KFC Double Down through a text message, a tweet, or an e-mail, please ignore it so that we can try to put an end to this spam industry.

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When to DIY and When Not to DIY

2009-11-05T15:21:00.000-05:00

Case Study: When to DIY and When Not to DIY

I have a client who has worked as a Full-Charge Bookkeeper for various companies for over 20 years. A couple of years ago, she started up a side business and hired me to prepare her 2007 corporate tax returns (her first year in business). Then in 2008, she decided to save some money by doing them herself.

Last week, she came to my office and showed me a notice from the IRS for approximately $675 worth of penalties & interest and another notice from NYS for $500 worth of penalties & interest. While reviewing the corporate tax returns that she self-prepared and filed, I also discovered that she had overpaid her taxes by $1,600.

So, by trying to save my $500 year-end corporate tax return preparation fee, she cost herself $2,775 ($1,600 of unnecessary tax + $1,175 of penalties & interest) that she shouldn't have had to pay.

I’m fixing all of the mistakes she made by filing amended tax returns. I will be able to get her back $1,600 and some of the penalties, but the majority of the penalties & interest will stick and during the amendment process, her audit risk will be extremely high due to the fact that we’re asking for almost all of her 2008 tax bill back in the form of a refund.

And this is a woman who has been a professional bookkeeper for over 20 years! Imagine what happens when small business owners with even less bookkeeping/tax experience attempt to do the same!

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Why I can't stand the "my 401(k) became a 101(k)" quote

2009-11-03T21:06:00.003-05:00

Over the past year or so, a popular new phrase has emerged that has people jokingly say that "my 401(k) became a 101(k)."

While it was clever at first, like all funny quotes, it became overused quickly. However, that is not what bothers me about it...

Although a more accurate statement would be "My 401(k) became a 201(k)," what really bothers me the most is that people are still saying it. That leads me to believe that people are not aware of their current financial situation and I blame two things for it:

1) After opening depressing brokerage account statement after depressing brokerage account statement last year, many people became programmed to stop opening their statements. Therefore, they have no idea where they stand these days

2) The media has been VERY diligent at telling us how miserable our lives have become over the past couple of years, but they have not yet started to tell us how things have turned around and that the economy is heading in the right direction

So, for those of you who have not been following the stock market, here is what the quote should be at the moment:

"My 401(k) became a 201(k) and now it's back up to a 301(k)."

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Buy Real Estate Now

2009-11-01T12:12:00.001-05:00

Buy Real Estate Now

With real estate values approaching all-time lows and interest rates near their all-time lows, now is the perfect time to look at acquiring real estate. Here are some groups of people who can benefit:

Business owners who want to stop paying rent and own their own building/office/store/shop/etc.
First-Time Homebuyers
People looking to purchase residential rental properties (especially multi-family units)
People looking to purchase commerical rental properties

If you fit into any of the above categories and would like to explore your options, respond to this e-mail and we can discuss how you can make the most out of this historic real estate market!

Why business owners should own their own building:

In most cases right now, your monthly mortgage payment may be lower lower, similar, or only slightly higher than your current monthly rental payment
When you rent, you are subject to rent increases. When you own the building and you have a fixed-rate mortgage, you will lock in your monthly payment. The only item that will increase over time will be your property taxes. For example, if you are paying $1,000/month rent right now, you will most likely end up paying $2,650/month for the same space 20 years from now. However, if you lock in a $1,000/month mortgage payment, you will be paying $1,000/month 20 years from now.
Once your mortgage is paid off, you won't have to worry about monthly mortgage payments or rental payments. All you have to do is pay your property taxes.
When all is said-and-done and you are ready to retire or sell your business, instead of simply walking away from your lease, you can either sell your building (most likely for a lot more than you paid for it) or hold it and generate a monthly income stream by renting it out.

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New Law Takes Effect 10/26/09

2009-11-01T12:08:00.001-05:00

New Law Takes Effect 10/26/09

Effective 10/26/09, ALL employers in New York must provide the following information IN WRITING to any new hire:

Pay Rate
Changes in Payday
Earnings Statement (Paystub)
Time Off Policies
Termination

Additionally, all employers must obtain WRITTEN acknowledgement from each new hire that they have been provided with each of the above items AND employers must meet a minimum recordkeeping requirement by keeping detailed payroll records for at least three years.

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How to Fix the iPhone Autocorrect

2009-10-30T09:07:00.003-04:00

What is the most frustrating thing about the iPhone?? By far, it's the Autocorrect feature where the iPhone decides to step in and say "I'm smarter than you, this must be what you were trying to type."

Everytime I type "me" the iPhone Autocorrects to "mr."
Everytime I type "so" the iPhone Autocorrects to "SP."
One time I typed "check" and the iPhone Autocorrected to "Checkov."

So I did a little research and here is how you "program" the iPhone Autocorrect feature:

1) Open up a New Window from within Safari
2) In the Google search box, start typing the words that the iPhone Autocorrect has a tendency to mistakenly autocorrect.
3) When the iPhone attempts to Autocorrect you, tap the little "x" in their suggestion box

For some reason, this is the only way to currently overwrite the iPhone’s Autocorrect dictionary. Hopefully, Apple will recognize this problem and create a simpler solution (a way to access the dictionary, a way to overwrite the dictionary from other programs/apps/etc, or an App to overwrite the dictionary).

It frustrates mr SP much that there is no other way to Checkov the dictionary. So, until then...this will have to do.

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Senator Flanagan Calls for Repeal of MTA Tax

2009-10-29T20:59:00.005-04:00

The newest in a long line of taxes nagging small business owners is the New York State MTA Commuter Tax. With the intention of having small businesses supplement the always-running-at-a-deficit MTA (Metropolitan Transportation Authority...the organization in charge of running the LIRR, NYC Mass Transit, NYC Subways, Metro-North, Bridges & Tunnels, etc.), this tax has proven to be nothing short of a mess since it was first introduced...

It started off as a huge battles as various state politicians weighed (aka argued) the benefits of supplementing the MTA system with the downside of adding yet another tax on small businesses in an already weakened economy.

It ended up being one of the most poorly administered taxes in the history of NYS (and possibly the country). Had the tax been formally imposed back when it was introduced, the first filing would have been due on April 30th, 2009 and it would have only covered the month of March. It would have been a nice, simple one-month introduction to the tax that would have had the average small business with $100,000 of annual payroll paying approximately $28. Instead, the April 30th filing deadline came and went without the state making a decision of how they would implement the tax (as a separate line item on the NYS-45 quarterly payroll tax return or via a separate filing)...then the second filing deadline of July 31st also came and went with still no decision on how to implement the tax.

What we ended up with was a November 2nd filing deadline that now covers 7 months worth of payroll and that same company that would have only had to pay $28 the first time around is now stuck paying $198. Talk about bad first impressions...

This tax has been a mess from concept to implementation and it is the last thing that a small business owner needs at a time when every last dollar counts.

In a press release on October 15th, NYS Senator John Flanagan (R-2nd Second Senate District), who represents Smithtown, Huntington, Northport, E. Northport, Stony Brook, Centereach, Commack, and Hauppauge, among others, called for a repeal of the MTA Tax.

You can read a copy of the press release by clicking on this link: http://www.nysenate.gov/press-release/senator-flanagan-joins-small-businesses-and-non-profits-call-repeal-mta-payroll-tax

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Don't Be Greedy

2009-09-10T23:49:00.002-04:00

Last year, when I was looking for an office building to purchase, I had a verbal agreement with the owners of a building here in Smithtown to purchase their building for $950,000. The best part of the deal for them was that I had found them before they had hired a realtor, which meant that they were going to save approx $45,000 in broker fees.

They were selling the building because they had gone out of business...tying up some loose ends due to their business closing lead to a two week delay from the time we reached a verbal agreement to the time we were putting everything in writing.

Using the strong-arm tactic of "we have someone else bidding higher, if you still want the building, you're going to have to pay more," they now told me that the purchase price was $1,050,000 ($100,000 higher than we agreed upon), plus they were now throwing in several other clauses/stipulations that were never discussed prior and were all obviously detrimental to me.

Frustrated with their desperate attempt at negotiating, I decided to take the weekend to look at some other buildings. Luckily I did and I found a building just a few blocks away that was a much better fit for my offices (more office space, better parking, great location, etc.) for a lower purchase price.

When I informed the owners that I would be walking away from their deal, they started to bring their purchase price back down to the $950,000, but it was too late.

It is now 17 months later and I drive past their building at least twice a day (on the way to my office and on the way home from my office)...the "For Sale" signs have been up ever since...they are now on their second realtor and there are "Price Reduced" signs now up on the lawn as well. As of today, the asking price is $925,000.

So, to take a step back and analyze this scenario, by being greedy, these owners have so far lost $142,000 between 17 months worth of mortgage interest, real estate taxes, maintenance, utilities, and the fact that they will now have to pay a broker fee if & when they do sell their building. This $142,000 loss assumes that they sell their building tomorrow for full asking price, which in this economy, I don't think will happen. I forsee this building selling for somewhere in the low to mid $800,000s sometime at the beginning of 2010.

Moral of the story: Don't be greedy, especially in an economy like this. Know when a good deal is staring you in the face and make it easy for your customer/client/buyer to do business with you.

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BlogTalkRadio Share Show Widget

2009-08-26T16:37:00.001-04:00

MicroBusinesses are Growing - Don't Ignore Them!!

2009-08-05T16:53:00.002-04:00

Microbusinesses are one of the largest and fastest growing segments of the US Economy, yet far to many service providers ignore them.

For example, I recently wrote a book, Effective Tax Planning for the MicroBusiness. It was not until after I finished the book and started to market it that I discovered that I had written the first (and so far, only) tax planning book that talks to the specific needs of the MicroBusiness. Why are so many people ignoring this market??

Some facts about MicroBusinesses & Small Businesses:

The Small Business Association's Office of Advocacy reports that firms with 500 or fewer employees have generated between 60 and 80% of new jobs each year over the past decade.
90% of all businesses in the US employ 5 or fewer employees
63% of all businesses in the US have $50,000 or less in annual revenue
New York, California, and Texas have the largest percentage of MicroBusinesses in the US
There are 22.5 Million MicroBusinesses in the US
94.7% of all businesses in the US have 10 or fewer employees
.07% of all businesses in the US have 500 or more employees
75% of all small businesses have no employees other than the owner(s)

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The #1 Thing Your Tax Preparer Won't Tell You

2009-07-19T22:56:00.003-04:00

The #1 "Thing Your Tax Preparer Won't Tell You" From Smart Money's Top 10 Things Your Tax Preparer Won't Tell You

"A big name doesn't always mean better service."Roughly 135 million Americans file tax returns, and of those, two-thirds pay for help. While solo acts like CPAs and so-called enrolled agents have plenty of clients, almost 20% of taxpayers go through a big franchise like H&R Block, Jackson Hewitt or Liberty Tax Service to get their refund — last year an average $2,255 per return. Problem is, tax preparation and advice depend on the preparer, and in a system of franchises, that means thousands of seasonal employees and limited quality control.

The results can be dangerous. When staffers from the Government Accountability Office went undercover to get returns done by the big chains, they found "nearly all of the returns prepared for us were incorrect to some degree," according to the report. Worse yet, recently filed lawsuits allege that the owners of 125 Jackson Hewitt franchises cost the government $70 million in tax fraud and created an environment "in which fraudulent tax-return preparation is encouraged and flourishes," according to the Department of Justice. Jackson Hewitt says it stands behind its compliance procedures as well as its nationally standardized educational curriculum.

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Accrual Basis vs. Cash Basis

2009-07-19T22:37:00.003-04:00

Q: I own a small business. How do I know if the Accrual Basis or the Cash Basis is right for me?

A: The simplest rule of thumb in determining which accounting method is better for your business (assuming minimizing taxes is your primary goal), is:

If at the end of the year, your A/R (Accounts Receivable) is typically higher than your A/P (Accounts Payable), the Cash-Basis method would be your best bet in order to minimize taxes.
If at the end of the year, your A/P is typically higher than your A/R, the Accrual-Basis method would be your best bet in order to minimize taxes.

Of course, this is just a generalization. Other factors such as Inventory may play a role in the final decision. Consult with your CPA before making a final decision, but just keep the above facts in mind as your general guideline.

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Worried that your employees are stealing time playing around on Facebook or Twitter?

2009-07-15T17:55:00.000-04:00

Worried that your employees are stealing time playing around on Facebook or Twitter?

With so much new web-based technology out there, it becomes easier-and-easier to "play" at work. While larger companies combat this by blocking certain websites or by monitoring employee keystrokes, it is difficult for the smaller businesses to avoid this lost time. Here's an interesting approach...

...certain things are bound to happen. Employees taking some "me time" during work is one of those things. If you have the right employee, I would empower them to create social networking profiles & groups for you and your business and encourage them to spend 30-45 minutes each day updating these sites. This may satisfy their social networking cravings while giving your small business a boost as well.

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Tax Returns vs. Tax Refunds

2009-07-07T22:42:00.004-04:00

Two of the most commonly mixed-up terms I come across when speaking with clients are the terms "tax return" and "tax refund." The most common mistake people make is using the term "tax return" when speaking about their "tax refund."

To clarify the difference between the two, here is an exerpt from the glossary of my upcoming book, Choosing the Right Structure for Your Business, due out in the fall of 2009. You can receive 40% off plus free shipping if you preorder this book at http://www.30minutebooks.com/choosing-structure.html:

Tax Refund: The amount of money that a business or individual receives as a result of overpaying their taxes throughout the year.

Tax Return: The actual document that is filed to report income/expenses of a business or individual.

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Tax Liens vs. Tax Levies

2009-07-07T21:44:00.006-04:00

Hopefully, you will never have firsthand experience with either tax liens or tax levies. However, if you do, here is a quick explanation so that you know the main differences between the two:

Tax Lien
A tax lien is a claim that is filed against your property. Typically, a tax lien is filed against your bank account. This instructs your bank to "freeze" your money so that you do not have access to it until the lien is cleared.

Tax Levy
A tax levy occurs when your property is actually taken from you. Again, this is typically done through your bank account whereby your funds are removed from your bank account to pay the taxing authority.

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Quick Tips: Small Biz Tax Prep and Keeping Your Fees Low!

2009-07-06T11:30:00.004-04:00

Reading Diana Ransom's article, Quick Tips: Small Biz Tax Prep on the SmartMoney Small Business site inspired me to take a few of her thoughts and expand upon them.

As a CPA, here are a few tips to help keep your accounting fees as low as possible:

1) Opt for QuickBooks over Quicken, Peachtree, any industry-specific accounting programs, or any lesser-known accounting programs. Today, just about every CPA out there is at least familiar, if not well-versed, with QuickBooks and we can simply import your data into our system. This eliminates the data-entry portion of our services and allows you to only pay us for our expertise...tax planning and tax preparation.

2) When filing your expense receipts, keep them in two separate envelopes:
Envelope #1 - Everything you paid for with cash, a personal check, a personal debit card, or a personal credit card

Envelope #2 - Everything you paid for with a business check, business debit card, or business credit card

This way, all you need to do is take Envelope #1 to your accountant at the end of the year (he will already see all expenses in Envelope #2 when reviewing your business credit card & bank statements.

3) If your business is inventory-intensive, do not rely on the QuickBooks inventory module. It is by far the weakest component of the QuickBooks program. Your best bet is to track inventory through separate software or use a program that interfaces with QuickBooks, such as Fishbowl.

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Top 10 Bookkeeping Mistakes

2009-07-06T11:15:00.004-04:00

I came across this article about the Top 10 Bookkeeping Mistakes on SmartMoney's Small Business Site and wanted to comment since it was such a good article.

As a CPA who specializes in helping small business owners, I love this article. #2, #4, and #5 really stand out in my mind as the three most critical and most common mistakes on the list.

#2-Doing it yourself. Many business owners have the ability to generate a set of books...they will provide it to a tax preparer (or worse, prepare their tax return themselves). As long as they are happy with the amount of their refund and they do not get audited, they will feel that they did a good job. However, "happy with your refund" and "didn't get audited" do not necessarily translate to "the best possible tax return." The two biggest problems with the DIY approach include a higher than usual audit risk and the loss of certain credits/deductions that you would have received if you had a pro do it for you.

#4-Not properly classifying employees. Too many small business owners classify their employees as "independent contractors" in an effort to avoid paying payroll taxes. However, if the IRS or your state decides to challange your classification (which is fairly common when your ratio of 1099s to W-2s issued for the year is too high), you will pay back all the taxes you saved plus steep penalties, fines, and interest charges.

#5-Lack of communication (especially the part about paying someone a bonus and not reporting it). This is very common at the end of the year with Christmas bonuses...business owners pay their employees every week through a payroll service and then all of a sudden at the end of the year, they think it's okay to just write their employee a check with no taxes taken out and without notifying their payroll service. A mistake that could be costly to both the employer and the employee!

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Scary News About Your Spending Habits and How They Affect Your Credit Score

2009-06-30T15:25:00.001-04:00

Credit card companies have always tracked their cardholders' spending for three main reasons:

1) To be able to market goods/services to you that your profile indicates you may like

2) To detect fraud

3) To assist law enforcement agencies

However, credit card companies have now found a fourth, and very scary thing to do with this information...determine your creditworthiness...Here are some trends in your spending that could result in a lower credit score and the reduction/elimination of your credit card limits:

1) Shopping at discount stores/thrift stores and purchasing generic brands

2) Shopping at the same stores that other people who have defaulted on their credit card debt shop at

3) Using your credit cards for the vices...cigarettes, alcohol, massages, casino gambling, online gambling, bail bond services

Congress is now investigating credit card companies for utilizing these practices in determing to lower credit limits, cancel credit lines, and deny applicants for credit. During 2010 and 2011, we can expect to see some public hearings about this issue. In the meantime, it seems like "what's done is done" but that credit card companies will be more careful in using this sensitive information (at least until we hear the results of the congressional hearings).

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Effective Tax Planning for the MicroBusiness

2009-06-22T21:39:00.009-04:00

On Monday, 6/1 my book about effective tax planning for the small business owner & self-employed individual was released (see below for more info). While the book is focused mostly on offering tax planning tips and tax savings strategies to those who currently participate in active tax planning, I started thinking more and more about how to educate people of the benefits of implementing a tax plan.

In my opinion, everyone who owns a business or who is self-employed (gets paid via a 1099, has a "DBA," etc.) should be consulting with a CPA in order to put together a tax plan around the middle of each year. The simple action of deciding to start implementing a tax plan is the most important part of the process...as great as my strategies are, they mean nothing to the businness owner who does not actually implement them through a tax plan.

Effective Tax Planning for the MicroBusiness is available in bookstores nationwide for $24.95 plus shipping & handling. However, if you click on the link below, you can purchase your copy for $19.95 plus FREE shipping & handling:

http://www.30minutebooks.com/effective-tax-planning.html

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New Thought About How Artificial Sweeteners Actually Make You Fat

2009-03-19T10:46:00.006-04:00

Yes, I know this is a "tax & accounting" driven blog...so, why am I writing about artificial sweeteners?

1) I have a unique and interesting viewpoint on them that I would like to share with my readers

2) The best investment that anyone can make is an investment in their health. With the powers of compounding interest, adding just one year to your life could result in putting hundreds of thousands of additional dollars in your pockets before you die that you can pass on to your heirs.

With that being said, here is my take on artificial sweeteners...

Everyone I know who opts for an artificial sweetener over sugar does so for weight loss or weight control reasons...because unlike sugar, artifical sweeteners contain no calories and negligible amounts of carbohydrates. However, it is my non-medical opinion that artificial sweeteners such as those found in "diet" soda, other "diet" drinks, chewing gum, "low-fat" and "fat-free" items, etc. actually prevent weight loss and weight control.

Health experts have argued this citing two main reasons to avoid artificial sweeteners and I would like to bring forth a third reason, one that makes more sense to me and one that hit home about a year ago causing me to swear off artificial sweeteners for good.

The two main reasons why health experts say we should avoid artificial sweeteners:

1) They contain chemical compounds that "are not good for us." Between causing cancer and other damage to the kidney and liver, they are toxic and should not be ingested

2) They cause us to crave actual sugar. By tasting sweet, our brain is triggered to send signals to our body to "get ready to digest sugar." When that sugar never comes, our body is left with insulin and other hormones that did not get to do their job, so we begin to crave actual sugar, causing some of us to give in to those cravings and eat sugary foods.

While both of these arguments are valid, I don't think either one is strong enough to actually prevent people from giving up artificial sweeteners in favor of sugar.

However, here is the third argument, the one that resulted in me giving up Sweet'N Low and other artificial sweeteners:

Artifical sweeteners are not natural products and they have not been around long enough for humans to develop the ability to efficiently digest them. Therefore, when you ingest artificial sweeteners, your digestive system has to spend so much time and energy focusing on trying to break down these chemicals, that it does not get to spend enough time digesting fats and simple carbohydrates. The more fats and simple carbohydrates that go undigested, the fatter you will get.

Whether you eat artificial sweeteners or not and whether or not you choose to make any changes to your artifical sweeteners because of this argument, I do hope that you take the time to change at least one thing about your health. A step towards good health is certainly a terrific investment. And in an economy like this, we're all looking for the next great investment!

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Lessons Taught By Madoff's "Victims"

2009-01-12T10:30:00.006-05:00

The Bernard Madoff scandal has clearly had a widespread impact across the globe. While the courts decide how to handle this particular situation and the government works on a solution for preventing similar situations in the future, it is important for us to analyze the simplest lesson to be learned from this scandal...

The #2 rule of investing is "Diversification" (the #1 rule as many of you have guessed is "Buy Low, Sell High)...anyone who invests money needs to be sure to spread that money across several different investment vehicles...the old, "don't put all your eggs in one basket" philosophy.

As an investor and an advisor (and hoping not to sound too cold-hearted) I feel two different levels of sympathy for those who I categorize into two different groups of investors in this situation:

1) Those investors who lost everything
2) Those investors who lost something

While most people sypathize more with those who lost everything, I find myself feeling the exact opposite emotions when thinking about these investors...

Those who lost some of their money clearly followed the rule of diversification and therefore I feel that they deserve more of my sympathy. They followed the rules of investing and got burned by a dishonest man...something that is hard to fault them for.

Those who "lost their life savings" or "lost everything" clearly deserve some sympathy since I feel that nobody should be cheated out of even $1, let alone millions. However, these people failed to follow the #2 rule of investing...diversification. While Madoff is clearly to blame for the losses they incurred in his investment scheme, he is not responsible for the fact that they lost everything. The only person they can blame for losing everything is themselves, for the simple fact that they chose to put their life savings into one investment vehicle. Had they taken a step back from greed or trust or whatever emotion it was that lead them to make this horrible decision and instead chose to invest 10, 20, 50, even 75% of their money with Madoff, they would still have some of their money left.

I write this in no way to show sympathy or support for Bernard Madoff, I write this in the hopes that my readers will take a valuable lesson from this scandal and NEVER put all of their eggs in one basket. If your primary investment vehicle is a 401(k) or other retirement plan that invests primarily in your company's stock, now is a time to diversify. If you have all of your money invested primarily in one stock, one sector of the market, or one mutual fund, now is the time to diversify. No matter how safe you feel in your current investments, take the time to look at them closely or take the time to meet with an experienced financial advisor to have them review your portfolio.

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Stop Complaining About the Price of Gas

2008-10-23T16:57:00.003-04:00

One of the worst things a businessperson can do is complain about the price of gas. I have lost track of the amount of businesspeople who have complained to me about "wasted gas" when they should have been complaining about wasted time. Just the other day, I had a financial advisor complain to me that he drove 30 minutes each way to meet with a potential client only to find out that the potential client was gone for the day. Rather than complaining about his wasted time, he chose to complain about the money spent on wasted gas.

When complaining about wasting 60 minutes worth of gas, you are reducing the value your time, both perceived and real. By placing the emphasis on the $14-16 worth of gas ($9-12 after taxes), you are essentially saying "my time is worth less than $14-16 per hour." If that is truly the case, then you should not be in business...you should go get a job where you can earn more than $14-16 per hour.

As a businessperson, your time is worth AT LEAST $50 per hour...depending on your profession, your time could be worth as much as $500 per hour. Stop complaining about gas and focus your energy on conserving your time...figure out how to become more efficient in day-to-day tasks, determine what items you can delegate to a staff member, or cut loose some of your unprofitable clients.

But whatever you do, do not devalue your worth by complaining about wasted gas when you should be complaining about wasted time!

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The Upcoming Presidential Election and Taxes

2008-08-19T17:36:00.002-04:00

As a business owner, I rarely discuss politics in most business situations.

However, the upcoming election and how it will impact the future of our tax code is one topic that requires a political discussion...

In the current state of the IRS Tax Code, there exists a unique situation that will provide a great deal of power to the sitting President in 2010. Currently, many areas of the code have built-in "Sunset Provisions" which mean that they are set to expire in 2010. Some areas that will be affected include:

Estate Tax
The "Marriage Penalty"
Retirement Plan Contributions
Tax Credits Relating to Children
College Tuition Credits/Deductions
Capital Gains Tax Rates
Various Other Items

With a democratic president in office come 2010, it is assumed that any current benefits set to expire in 2010 will either remain expired or be brought back on a smaller scale, providing less of a benefit. Similarly, any current taxes that are set to expire or reduce in 2010 will be reinstated and possibly even raised.

With a republican president in office come 2010, the opposite assumption holds true.

Whoever holds office in 2010 will have the unique opportunity to shape the future of the tax code. This is a very strong power that should be weighed heavily by voters when they decide who to pull the lever for in November.

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Gross Profit vs. Net Profit: A Common Mistake

2008-08-19T17:35:00.003-04:00

One of the most common mistakes that I see small business owners make when discussing profit is failing to accurately differentiate "gross profit" from "net profit."

Gross profit is equal to your revenue minus your cost of goods sold (or cost of sales).

Net profit is equal to your revenue minus ALL expenses.

Turn to Virgin founder and Chairman Richard Branson for a simple mnemonic to help you remember the difference, "Pretend you're fishing. Net is all the fish in your net at the end of the year. Gross is that plus everything that got away." This is the advice that was given to him by one of his Virgin boardmembers after he consistently made this mistake early on in his career...he considers it the best financial advice he ever received.

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Don’t Let Your “On the Side” Accountant Get You Audited

2008-08-17T16:53:00.001-04:00

Accounting is a field filled with many accountants who prepare tax returns “on the side” or have a “side business” in addition to their full-time job. While this presents many problems with communication, audit representation, availability, etc., perhaps the biggest problem is the additional audit risk that the clients who use these types of tax preparers face.

Since many of these accountants are looking to make some extra money without any overhead, they have a tendency to share software with other accountants or steal software from the company they work for. When this happens, you can pretty much count on the fact that the “Paid Preparer’s Information” section of your tax return will either be left blank altogether, have “Unpaid Preparer” checked off, or have “Self-Prepared” checked off.

When any of the above items appear in the Paid Preparer Information section of a tax return, the audit risk of that tax return skyrockets. This is looked at the same as if a CPA prepared a return and does not stand by it enough to feel comfortable signing it.

Although it could be a perfectly innocent case of your tax preparer trying to save a few bucks on tax preparation software, the IRS will not know this until you tell them during your audit!

Additionally, the IRS is currently working on a piece of detection software that will identify quarterly payroll tax returns that are not signed by the preparer. Once in place, this system will be used to identify preparers who have a tendency not to sign their clients’ payroll tax returns and subject these clients to higher-than-normal audit risks.

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When Your Partner Should Also Be Your Business Partner

2008-08-15T15:24:00.002-04:00

There has been a lot of hype over the past couple of years surrounding a new piece of legislation that allows a husband and wife who operate a business together to forego filing a Partnership return in favor of filing a Schedule C on their joint tax return.

The argument for this is that the accounting fees will typically be $200-300 less each year and the couple wouldn’t have to go through the hassle of signing & mailing in their tax return.

However, the downside is that audit risk will jump from .3% to 2.7%, leaving your business nine times more likely to be pulled for a random IRS audit!

The best options for any husband and wife business partners would be to establish an S-Corporation or an LLC. The second best option would be to remain a Partnership and continue to file a separate Partnership tax return. The worst option would be to "take advantage" of this legislation and file a Schedule C.

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Tax Relief for Heroes

2008-08-15T15:19:00.002-04:00

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act into law. This law provides various tax breaks for military personnel and their families. Here is a summary of the key benefits:

Penalty-Free Withdrawals
Reservists who get called into active duty will be allowed to withdraw funds from their retirement plans such as IRAs, 401(k)s, and 403(b)s without having to pay the standard 10% penalty. Note, these withdrawals will still be taxed as income, it is only the actual 10% penalty that is being waived.

Tax-Free Rollovers
Military death benefits and military insurance proceeds may be rolled over into ROTH IRAs or Coverdell Education Savings Accounts (ESAs) tax-free without regard to the standard limits/restrictions.

Economic Stimulus Payments
As long as one spouse is a member of the military, the couple will qualify to receive an economic stimulus rebate check.

Earned Income Credit
Non-taxable combat pay will be treated as earned income when calculating the Earned Income Credit.

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Selling Your Small Business

2008-07-27T19:15:00.002-04:00

If you are like many business owners out there, you dream of one day selling your business, cashing that one last big check, and riding off into the sunset.

However, gearing up a business to sell is something that should be established and worked at from day one.

Many small business owners approach their business in a way that allows them to avoid paying taxes (not reporting all of your income, inflating your expenses, etc.). Aside from the legal and ethical implications here, you are setting yourself up for great disappointment when it comes time to sell your business.

Here are just some of the things you risk by taking the “I’ll do what I can to avoid taxes now and worry about the sale of my business later” approach:

1) Many years of continued profitability increase the likelihood of a quick sale and ensures that someone will be willing to pay top dollar for your business. Underreporting income and overstating expenses makes your business look less profitable

2) A good buyer will have his accountant run due diligence and look into the history of your business. A history of problems with the IRS means that your business will be less desirable due to the fact that with it may come additional future IRS scrutiny

3) A buyer who sees your tax avoidance as a sign of other possible unethical business practices, they may be less willing to negotiate with you or they may walk away from the deal all together

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Don't Claim the Home Office Deduction

2008-07-21T13:22:00.002-04:00

Looking for a quick tax deduction this year?

If so, most tax preparers and unscrupulous accountants may steer you towards the Home Office Deduction. DIY tax preparation software such as TurboTax or TaxCut will also lead you down this road.

However, if you are fortunate enough to have hired a knowledgeable CPA who is ethical and looking to establish a long-term accountant/client relationship with you, you will not be claiming that Home Office Deduction anytime soon.

Claiming this deduction will save you a few hundred dollars on your current tax return. Sounds great, right? Even if claiming this deduction will expose yourself to significantly higher audit risk, you are willing to do it in exchange for those couple hundred dollars.

However, what you haven’t been told up until now is the long-term impact of claiming the home office deduction…how it can cost you up to $15,000 in additional taxes when you eventually sell your house!

Considering that the average homeowner who claims the home office deduction saves approximately $450 in taxes each year, they would have to live in their house for over 33 years to ensure that they have saved enough taxes each year to cover the potential $15,000 tax bill.

How does claiming the home office deduction lead to a high tax bill in the year you sell your house? Well, the IRS allows a $500,000 capital gain exclusion to married couples who file a joint tax return. What this means is that, given certain requirements are met, you can sell your house for a profit of up to $500,000 without having to pay a penny in capital gains taxes. However, if you allocate 20% of your house to your “home office” for purposes of claiming the home office deduction, you run the risk of losing 20% of your capital gain exclusion. Losing 20% of this $500,000 exclusion means that $100,000 of your gain would be taxed at the capital gains rate (currently 15%) and you would be faced with a $15,000 tax bill.

One caveat – renters. If you rent your home instead of owning it, you can claim the home office deduction without having to worry about this long-term negative financial impact. Keep in mind, that your tax returns will still remain subject to additional IRS scrutiny as the home office deduction is an often-challenged deduction.

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Don’t be a Small Fish in Your Accountant's Pond

2008-07-14T21:42:00.004-04:00

Ever feel like you are one of the smallest fish in your accountant’s pond?

If so, it may be time for a change.

Being the small fish means that you are last in line to hear about changes in the tax code that could benefit you and your company…it means you receive answers to your questions weeks after you ask them…it means virtually no tax planning is done throughout the year to benefit you come tax time.

The main reason why accountants treat their smaller clients like “small fish” is simply due to the fact that they are not good business people themselves. Tip #1…if your accountant does not run his own business well, why do you have him on board as a trusted advisor for your business?

Let me explain to you why my firm, Merl & Hanley, LLP has made a conscious decision to view our smaller clients as our best clients:

1) Accounting is a service-driven business that revolves around one main thing…time. There are only so many hours in a day…a week…a year. Accountants gauge the success of their practice by their hourly rate. Taking on larger clients that provide us with 10, 15, 20+ hours of billable hours each month typically means having to offer these clients some type of “volume discount.” So, if we are able to earn $150 per hour working on the smaller (1-2 hour per month) client, we can only earn $125-140 per hour working on the larger (20+ hour per month) client. Since hourly rate is the driving force of our business, the smaller client is actually our better client since we are able to earn more per hour working on the smaller client’s file. That is why our smaller clients come first!

2) Accounting, like all other service-driven businesses succeeds due to referrals and satisfied clients are the number one source of referrals. By choosing to service 200 smaller clients for the same amount of fees that we could earn by servicing 50 larger clients, we expand our field of referral sources by 300%. Growing our business through referrals means spending less time on marketing, which means more time to service our existing clients.

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IRS Raises Standard Mileage Rates

2008-07-08T21:09:00.003-04:00

With gas prices soaring, the IRS has announced an increase in the standard mileage rates that taxpayers can use to deduct the cost of driving for business, medical services, or moving.

BUSINESS MILES
Effective for driving from July 1 through December 31, 2008, the standard mileage rate for business driving has been increased to 58.5¢ per mile. The rate for business miles driven from January 1 through June 30, 2008, remains at the previous rate of 50.5¢ a mile.

MEDICAL AND MOVING MILES
The IRS also increased the deductible rate for medical and moving mileage for the last six months of 2008 to 27¢ a mile. For the first six months of 2008, the rate remains at 19¢ a mile.

CHARITABLE MILES
Note that the IRS made no change in the mileage rate for driving in conjunction with charitable activities. That rate is set by law and remains at 14¢ a mile.

The standard mileage rates provide taxpayers with an IRS-approved recordkeeping shortcut for deducting expenses for business, medical, and moving driving. The rates are adjusted annually based on operating costs for vehicles. When costs rise dramatically during the year, the IRS considers a midyear change.

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Fixed Fee Billing

2008-07-08T10:34:00.002-04:00

When interviewing an accountant, whether this is your first time hiring one or whether you are making a change from your current accountant, one factor to strongly consider is how you will be billed. Will the accountant bill you on a per-hour basis or will you enjoy the benefits of fixed-fee billing.

Although hourly billing seems to have been the industry standard for over 50 years, as the client, it’s time that you stand up for your rights and demand a change to fixed fee billing.

Fixed fee billing is a method employed by many newer accounting firms. It involves them gathering enough information about you and your business to estimate what amount of work will be involved in servicing your company. Using this estimate, the accountant determines a set monthly, quarterly, semi-annual, annual, or per-project fee.

Major Benefits of Fixed Fee Billing:

1) You always know what the fee will be before you agree to the work

2) Rather than hesitating to call or e-mail your accountant with a question out of fear that his meter will be running, you enjoy the freedom of being able to pickup the phone or shoot him an e-mail whenever the need arises

3) No time wasted questioning or disputing bills for which your accountant and his staff spent more time on a project than you think they should have

4) Not being subject to “timesheet padding.” When your accountant’s staff is working on your file and they take a cigarette break, grab a cup of coffee, get interrupted by a phone call, have a computer problem, or chat with a co-worker, you can just about guarantee that this time will be billed to you. While all employees deserve a break, you should not be paying them for their rest.

5) Not being subject to billing program intervals. Most billing programs that accounting firms use to track billable hours run off minimum intervals such as ten minutes, twelve minutes, or fifteen minutes. This means that when you spend three minutes on the phone with your accountant, you are going to be billed for at least ten minutes. Doesn’t seem like much, but add up all the rounding for an entire year and you are looking at five-ten additional billed hours each year.

Small businesses can save an average of $500-$1,500 per year in fees simply by hiring an accounting firm that utilizes fixed-fee billing.

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QuickBooks Online versus QuickBooks Desktop Software

2008-06-29T14:16:00.003-04:00

Ahhh, the thought of being able to access your QuickBooks data from anywhere in the world…multiple offices in different locations being able to access one central file…being able to review reports from the comfort of your hotel room…just think of the possibilities.

Now, think of the price of doing this. No, not the monetary price…in fact, the QuickBooks Online Edition only costs approximately $200 more for one year of service than the actual desktop software version (such as QuickBooks Pro or QuickBooks Premier). The price I’m speaking of is in terms of speed, and functionality:

The biggest downside for me and the average business owner is speed. The Online Edition adds a tremendous amount of time to your day-to-day operations…reports that generate in just a few seconds on the desktop edition now take 10-60 seconds depending on the size of your company file and the speed of your internet connection. Limitations on keyboard shortcuts add to the amount of time you will need to spend entering data.

While all users won’t experience a decline in functionality due to their limited use of the program, any business that uses QuickBooks as more than just a “checkbook” program will notice a dropoff in features offered by the Online Edition. One of the features that I find most frustrating is the fact that you can only have one report/screen displayed at a time. On the desktop software, you can have several windows opened at one time and flip back-and-forth between them as needed.

If remote access is your main reason for leaning towards QuickBooks Online, I would suggest that you combine the QuickBooks desktop software with some type of remote access program such as GoToMyPC, WebEx, Citrix, VPN, or some other similar type of remote access software. This way, you have the full functionality of the QuickBooks desktop software and you are still able to access it from remote locations.

Already have QB Online? Don’t worry. QuickBooks has developed a wonderful conversion process where they take your Online Edition company file and convert it to a working company file that can be used with your desktop software. It takes about a 24-48 hour timeframe to complete, during which time you cannot add new data to your file. However, it is well worth that minor inconvenience in order to avoid the ongoing inconveniences of the Online Edition!

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The Problem With LLCs

2008-04-28T12:01:00.007-04:00

If it walks like an LLC and talks like an LLC, it probably stinks (like an LLC).

For the majority of small business owners, all that an LLC delivers is higher setup costs, higher annual fees due to New York State, higher audit risk, and higher taxes.

Yet, so many people are forming LLCs these days.

Why? I chalk this craze up to misinformation. The two biggest culprits of this misinformation include uninformed websites touting LLCs and attorneys/accountants steering entrepreneurs towards the LLC so that they can charge higher setup fees.

For most small business owners, the S-Corporation still reigns supreme...significantly lower setup costs, significantly lower audit risk, lower annual fees due to New York State, and potentially significantly lower taxes.

If you are at the stage of determining which type of business is best suited for you, feel free to contact me for a free analysis of exactly how much tax you can save and how much lower your audit risk will be by forming an S-Corporation instead of an LLC.

If you have already setup an LLC and are now kicking yourself for doing so, cheer up. There is a three-step procedure that we use in order to petition the IRS to tax your LLC as an S-Corporation. We have been successful with 95% of the petitions we have filed. Taking this step is much cheaper, easier, and cleaner than shutting down your current LLC and setting up a new S-Corporation.

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Incorporate For Free

2008-03-19T22:09:00.009-04:00

Any of you who have attended one of my seminars or have read some of my articles know I believe in promoting the benefits of incorporating.

In addition to reducing your audit risk and minimizing your tax liability, incorporating also provides you with personal liability protection. It is hands-down one of the smartest moves any business owner, self-employed individual, independent contractor, or entrepreneur can make.

Rather than just talk about the benefits, I have decided to "put my money where my mouth is" and offer a unique situation for 25 lucky business owners to incorporate for free each month.

For more details, visit one of the following websites:

Corp-4-U, Inc.

Merl & Hanley, LLP

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IRS Tax Rebate Checks - Not WHEN, But IF

2008-02-28T22:05:00.006-05:00

Unfortunately, the most frequently asked question surrounding the tax rebate checks is "when will I get my rebate check." However, for many, the question should be "am I getting a rebate check?"

Here are a few key bullet points to note regarding the tax rebate checks:

1) As the name implies, they are in fact rebate checks. They are not free money. You must owe tax to receive the rebate. The rebate amounts are not simply $600 or $1,200. They are "the amount of tax you owed up to a maximum of $600 or $1,200" (with a couple of other minor exceptions).

2) You must actually file a tax return in order to qualify. If you typically do not file due to low taxable income or no taxable income, this is the year you need to file a tax return. This holds true for all taxpayers, young and old...from high school and college students all the way up to retirees.

3) Phaseouts start at $75k for a single filer or $150k for a married couple filing a joint return. If you are a single taxpayer earning over $75k or a married couple earning over $150k, you will not receive the full refund. If your income level is high enough, you will not receive a refund at all.

4) Avoid filing extensions for your 2007 tax returns. If you do not file by the April 15th deadline, you will delay the processing of your rebate check since it cannot be calculated until you calculate the amount of tax that is due.

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Seven Essential Tax-Planning Tips for Individual Taxpayers

2008-02-28T00:24:00.006-05:00

Estimate your alternative minimum tax (AMT) liability. It may be possible to avoid or reduce the AMT by postponing certain “tax preference” items to the following year. Alternatively, you might accelerate income into the current-year if your AMT rate is lower than your regular tax rate.

Contribute to your favorite charities. Note, however, that tougher substantiation rules apply to monetary gifts made to charity in the current year. In general, the IRS requires written confirmation of your gift.

Bunch medical expenses in the year you may qualify for a deduction. Your unreimbursed expenses can be deducted only to the extent the total exceeds 7.5 percent of your adjusted gross income (AGI).

Avoid estimated tax penalties. No penalty is imposed if your tax payments for the current year, including withholding, equal at least 90 percent of this year’s tax liability or 100 percent of last year’s liability (110 percent if your prior year AGI was $150,000 or over).

Consolidate personal debts into a home-equity debt. Unlike nondeductible personal loans, you can deduct the interest paid on the first $100,000 of home-equity debt, regardless of how you use the proceeds. Caveat: The debt is secured by your home, so use this technique with discretion.

Use capital gains and capital losses to offset each other. Depending on your situation, you may realize gains or losses at year-end. Any excess loss can offset up to $3,000 of ordinary income in the current year.

Be mindful of the twenty most commonly overlooked deductions. Forgetting a few smaller deductions may not seem like a big loss, but those omissions add up. Comb your records for deductible business expenses, such as: advertising costs, association dues, bad debts, charity contributions, coffee and food expenses, clothing required for the job, equipment, gifts to clients, home entertainment, insurance, interest on credit cards for business expenses, Internet fees, investment expenses, legal expenses, licensing fees, office supplies, repair costs, subscriptions, theft losses and travel expenses.

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Five Essential Tax-Planning Tips for Small Businesses

2008-02-28T00:22:00.005-05:00

Keep detailed records of collection efforts to support deductions for bad debts that became worthless in 2007.

Reschedule business trips planned for early next year to December to increase travel deductions for 2007.

Increase your business driving or decrease personal driving—or both—to preserve top-dollar deductions for personally-owned vehicles.

If your company operates on the accrual basis, set bonus amounts before January 1, but pay them early next year. Generally, the bonuses aren’t taxable to employees until the year they are paid but can be deducted on your company’s current-year return so long as they’re paid by March 15 of the following year.

Nail down current deductions for repairs to business premises by scheduling them separate and apart from major renovations. As opposed to repairs, capital improvements aren’t deductible but are added to the “basis” of property.

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Top Three "Don'ts" For Small Business Owners

2008-02-28T00:19:00.004-05:00

Disguise personal expenses as business expenses

Claiming 100% deduction for a vehicle that is used for both business and personal purposes

Claiming deductions for your spouse’s automobile, cell phone, gas, etc.

Claiming deductions for your children’s automobile, cell phone, gas, etc.

Pay workers “off the books”

Cannot deduct payments to workers if you do not issue corresponding W-2s or 1099s

Workers Compensation Insurance carriers are cracking down on ATM Withdrawals, Cash Withdrawals, and checks made payable to cash as the cash is typically used to pay workers “off the books”

Claim the Home Office Deduction if you own your home

While you may save a few hundred dollars each year you claim the deduction, doing so will not only expose your tax return to a high audit risk, but you may end up paying back thousands in additional taxes when you eventually sell your home

If you rent, the deduction is much more advisable…although you will still experience a high audit risk, you will not have any long-term negative tax consequences

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Top Three "Do's" For Small Business Owners

2008-02-28T00:13:00.005-05:00

Retain copies of all receipts, especially those from any cash transactions

Your accountant or bookkeeper will have a good record of any purchase you make with a debit card, credit card, or check. However, the only way they will know about a cash purchase is if you provide them with a copy of the receipt.

Receipts justifying any ATM Withdrawals, Cash Withdrawals, and checks made payable to cash are now required by most Workers Compensation Insurance Audits. Any cash withdrawals that cannot be justified will be assumed to have been used to pay off-the-books workers and you will be charged for additional payroll.

Take advantage of Section 179 Bonus Depreciation

If you are planning to make any large purchases during the first quarter of the following year such as trucks, automobiles, or equipment, you may benefit from making that purchase before December 31 of the current year. Making the purchase in the current year may qualify you to expense the full purchase price under IRS Code Section 179 in order to quickly reduce your current-year taxable income. For 2007, the maximum deduction limit has been increased to $125,000

Talk to your accountant about the Manufacturing Credit

A business may be able to claim a manufacturing credit in 2007 equal to 6% of the taxable income from its qualified production activities. Due to new regulations issued this year, it may be easier to qualify for deductions.

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Employee Stock Option Plans

2008-02-27T23:04:00.005-05:00

Here is a question that was sent by a reader to Karen Klein, a columnist at the LA Times. Karen contacted me for a response because of some work we had done in Newsday:

I am starting up a Web-based business and I'm leaning toward incorporation rather than LLC as the legal entity because I'd like to be able to attract employees by issuing stock in the future. I understand that there must be a board of directors in a corporation, and the board must hold meetings and vote to bring about actions. At this initial stage my company is just myself. Therefore I'm wondering if a one-person board of directors can legally exist, and how it can perform functions such as voting.
KC, Elkridge, MD

KC,

Great question.

This is a common misconception that many small business owners have and it prevents a great deal of them from incorporating even though that may be their best option.

Owning a corporation is not as daunting a task as you think. The common concept of a “board of directors” is not what is required for a small corporation. As the 100% owner of the business, you can act as the corporation’s sole director. You must hold an annual shareholders meeting during which minutes must be kept, a task that proves fairly easy for you as the sole shareholder.

Back to your statement about issuing stock to employees...

Although Employee Stock Ownership Plans (ESOPs) are typically a better fit under the C-Corporation structure, as a “solopreneur,” you should gain much greater tax advantages by operating as an S-Corporation (depending on your income level, you may be able to cut your total tax in half). Additionally, as the IRS continues to tighten their reigns on the tax laws surrounding stock options, ESOPs become less attractive to potential employees making them less likely to accept stock or stock options in lieu of pay. If you use the taxes saved by operating as an S-Corporation to replace stock options with higher salaries, you should be able to attract quality employees, retain full control and ownership of your company, and still have money leftover to pay yourself or reinvest in the business.

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Year-End Tax Planning for Small Businesses

2008-02-27T22:56:00.005-05:00

What are some best practices for small business owners as the end of the year approaches?

By far, the most effective form of tax planning involves meeting with their CPA at the end of August or beginning of September. At this time, two-thirds of the year is over and the accountant will have sufficient data to run an accurate tax plan. Barring any unforeseen circumstances that transpire during the fourth quarter, there is no reason why an accountant cannot determine what the client’s tax return will look like in March or April. Having this “mock tax return” prepared in August or September will allow the small business owner four months to implement tax savings strategies, implement tax deferral strategies, or pay in any tax due before the end of the year. Additionally, if it appears that the taxpayer is on pace to receive a large tax refund, the tax planning can work in the reverse by allowing the taxpayer to reduce their estimated taxes and/or payroll withholdings in order to increase their current cash flow (no reason to float the government an interest-free loan).

What is the one thing every small business owner must do?

Take a complete, accurate inventory count. For accrual-basis taxpayers, this is required. For cash-basis taxpayers, not only does it make good business sense to keep tabs on your inventory, but your inventory count could indicate that a switch to the accrual-basis of accounting will put your business in a better position in terms of taxes and audit risk.

What is the one thing they must not do?

Lose sight of whether they are a cash-basis or accrual-basis taxpayer. An accrual-basis taxpayer who tries to prepay all their upcoming expenses or hold off on depositing current year income in an effort to reduce current year income will be unpleasantly surprised to find out that they depleted their cash balance for no reason. When reporting on the accrual basis, income is reported when earned, not when deposited and expenses are reported when incurred, not when paid. On the flip-side, a cash basis taxpayer should not assume that they can deduct their December phone bill whether or not they pay it before the year is over. Cash-basis taxpayers report expenses when paid, not when incurred and they report income when received, not when earned.

What is the most common mistake made this time of year?

Many small business owners tie their profit into the amount of money they have in the bank. If they have $100k in the bank, they think their profit is $100k…if they have $0 in the bank, they think their profit is $0 (it’s a mistake that is more common than the average person would think). This leads to irrational end-of-year moves such as taking a large draw or S-Corporation distribution in an effort to reduce the ending bank balance, and in turn reduce their “profit.” Since items like draws and S-Corporation distributions are not tax deductible, they do nothing to decrease the business profitability. In cases where the owner distributes more than is available for distribution, they run the risk of reducing their basis in the business, which could lead to a situation where any losses they incurred cannot be deducted in the current year.

Along the same lines, many small business owners rush to make large equipment purchases at the end of the year in order to reduce their profits. However, certain businesses that do not qualify to expense these equipment purchases under Section 179 bonus depreciation rules, put themselves into a trap. If during any tax year more than 40% of new assets are placed into service during the last three months of the tax year, the Midquarter Convention applies. When using the Midquarter Convention, you generally receive a lower than normal amount of depreciation for the year. If this is the scenario that the small business owner is in, they are better off using those monies to pay expenses rather than purchase equipment.

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Incorporating Out-of-State

2008-02-24T01:21:00.013-05:00

For my first few posts, I have decided to address questions that frequently come up during my initial consultations with new clients. Here are a few common questions/misconceptions about forming a corporation or LLC in a different state than you live in:

Q: I am a New York resident and business owner. I have been told that I can save a great deal of tax each year if I establish my company in a tax-free state. Is it really this easy to avoid New York State income taxes?

A: No, it is not that simple. The way New York handles multi-state tax issues is by allowing a credit against NY income taxes equal to the amount of income taxes paid to other states. If you are a full-year or part-year resident of NY and if any part of your income was taxed by another state, local government, or the District of Columbia, you may claim a credit against your NY State tax. Therefore, if your income is not taxed by the other state, your credit against NY income tax equals zero and you end up paying the full NY income tax rate.

Q: What about other benefits of establishing my business in another state such as the anonymity provided by Nevada Limited Liability Companies (LLCs)?

A: Though Nevada is heralded as a state that provides business owners anonymity, this only holds true for shareholders of a Nevada corporation, not a Nevada LLC. Members and managers of a Nevada LLC must be disclosed on annual reports that immediately become public information. Additionally, if you are involved in arms-length transactions with your clients and/or customers, they meet you face-to face and they know who you are. Therefore anonymity is only valuable in certain industries where that face-to-face contact is not prevalent. Further, by establishing your New York-based business in Nevada, you will have to undergo additional filing fees in order to do business and report your business activity in NY.

Q: With all the talk about establishing entities out-of-state, what is my best course of action?

Unless you are operating a large business, most small and mid-size companies are better off establishing their business in the state that they plan to do business in. This ensures that you do not have to shoulder the burden of additional reporting requirements, administrative provisions, state filing fees, accounting fees, and legal fees. Consult with both your attorney and your CPA before going online to setup a company in a different state.

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Home-Based Businesses and Audit Risk

2008-02-24T00:06:00.011-05:00

For my first few posts, I have decided to address questions that frequently come up during my initial consultations with new clients. Here is one about the audit risk aspects of operating a home-based business:

Q: I operate a small business out of my house. The thought of a potential IRS audit makes me lose sleep at night. Is there anything I can do to eliminate or reduce my chances of being audited?

A: There are many ways to minimize your chances of being audited. First and foremost is to ensure that you avoid some of the more highly audited forms.

As a Sole Proprietor (sometimes referred to as a DBA), you are required to report your business income and expenses on Schedule C. Filing this schedule means that you fall into the highest audit risk category and find yourself with an audit risk of approximately 2.7%. A simple remedy to this problem is to incorporate. By incorporating you reduce your risk of an audit to approximately .3%, making you about nine times less likely to be audited in a given year.

Another form that shifts your tax return into the audit field at an alarming rate is Form 8829 (Expenses for Business Use of Your Home) which is used to claim the home office deduction. This form tends to catch the eye of the IRS due to the fact that many people have abused this deduction in the past by claiming a larger home office than they actually had or by deducting expenses on an office that is not completely dedicated to business use. In addition to the huge audit risk that this form creates, the home office deduction typically costs you more taxes in the long run due to the reduction of your capital gain exclusion in the year you sell your house. So, why draw unwanted attention to your tax return if you are not even receiving a financial benefit?

Other simple tips to protect yourself from an IRS audit include not having your tax return prepared by hand, making sure your reported income supports your living expenses and other deductions, not rounding off deductions (round numbers make it appear that you are guesstimating while exact figures appear to be taken from actual records) and hiring a reputable tax preparer to prepare your return. Tax preparers whose tax returns are audited frequently will be flagged as disreputable tax preparers opening up their entire client base to IRS audits. If your tax preparer is "creating" deductions for you or generating large refunds that you know you are not entitled to, it is only a matter of time before his scam comes crashing down.

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