January 29, 2013

The Fiscal Cliff and Your Business

Although Congress averted many of the consequences of a possible tumble over the fiscal cliff with last-minute action, you should be aware of the potential impact on your business of the American Taxpayer Relief Act of 2012. I encourage you to review the highlights of the new law below and call me at 954-591-8290 if you have any concerns about how your tax situation will change as I prepare your tax returns.

A number of popular business tax provisions were set to expire at the end of 2012. For example, small business expensing under Internal Revenue Code Section 179 was increased retroactive to Jan. 1, 2012, and extended through 2013. The dollar limit that can be expensed in 2012 and 2013 is $500,000 and there is a $2 million investment limit. You also can make use of the 15-year recovery period for qualified leasehold improvements, retail improvements and restaurant property until the end of 2013.

Many other business tax benefits that had expired or were set to expire were extended through 2013, including:

The 50% bonus depreciation
The Section 41 research tax credit
The Work Opportunity Tax Credit for hiring veterans and other individuals who meet specific criteria
The 100% exclusion for gains on a sale of small business stock
Special tax incentives for businesses located in empowerment zones
Rules on S corporations making charitable donations of property

These are just a few of the most important provisions of the new law. I can help you understand the effect that these and other changes will have on your tax situation.

In addition to preparing your return in a way that maximizes tax advantages for your business, I am available all year, not only during tax season like a lot of other firms; to counsel you on proactive strategies and planning decisions that will minimize taxes and meet your financial goals. Planning is particularly important because the law preserved several popular provisions that are set to expire at the end of this year.

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January 23, 2013

The Best Investment in Today's Economy

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Investing isn't easy these days. Bank savings accounts and money market funds earn next to nothing. Bond yields are at historic lows. The stock market is at a recent high, but full of volatility. And alternative investments like real estate and private equity can be illiquid or bring with them other drawbacks.

If you're a corporate treasurer, you might consider investing in a Washington lobbyist. Back in 2009, three professors conducted a study revealing that companies who helped lobby for one particular tax break earned a staggering 22,000% return on every dollar they invested in lobbying! (For those of you who didn't major in accounting, that's $220 dollars coming back on every dollar going in.)

Back in 2004, when Congress was considering the American Jobs Creation Act, an ad-hoc group calling itself the Homeland Investment Coalition lobbied for it to include a "tax repatriation holiday." Multinational corporations often structure their operations to earn profits overseas, then leave those profits overseas to avoid U.S. tax. The repatriation holiday cut the regular tax rate on those profits from 35% to just 5.25%, which encouraged them to bring those profits back home. The stated goal, naturally, was for those companies to reinvest those profits and create new jobs.

More than 800 companies ended up celebrating the "holiday." Together, they saved an estimated $100 billion in tax, which certainly sounds worth celebrating! Winners included pharmaceutical and technology companies (Pfizer, Johnson & Johnson, and Merck), technology companies (Hewlett Packard and IBM), and financial services (Citigroup, J.P. Morgan Chase, Morgan Stanley, and Merrill Lynch). Not all of those companies "invested" in lobbying for the law, but even those that did, won big. For example drugmaker Eli Lilly reported spending $8.5 million to lobby for the tax break in 2003 and 2004 -- and saving more than $2 billion in tax. Not a bad "ROI"! (The jury is still out on whether the law actually created any jobs -- many of its beneficiaries actually cut jobs after the tax break, and most of the money went to stock buybacks or dividends.)

Of course, not every lobbying "investment" pays off. Sometimes lobbyists strike out. And successful lobbying is harder in today's hyper-partisan gridlocked Congress. But shrewd lobbying still pays off. The New York Times reported earlier this week that lobbyists representing Amgen, the world's largest biotechnology firm, completed a "Hail Mary" pass by tucking language into the recent "fiscal cliff" bill. The provision delays a set of Medicare price restraints on a category of drugs that that includes Amgen's own Sensipar. This legislative goodie is estimated to benefit drugmakers by $500 million over the next two years. And it comes just two weeks after Amgen pled guilty to marketing another one of its drugs illegally, agreeing to pay a record $762 million in fines and penalties! And while the new law isn't a tax provision, per se, it still illustrates the power of lobbying.

Individual taxpayers like you and me can't lobby for millions in tax breaks. But we can take advantage of the hundreds of tax breaks that somebody else has already created. The key, of course, is research to find those breaks and planning to take advantage of them. That's why we focus so much effort on proactive planning.

Consider this as the 2013 tax season approaches. Any competent tax preparer can put the "right" numbers in the "right" boxes on the "right" forms. But then, most of them pretty much call it a day. They really just help you record history. Our job is much broader and much more valuable. So call us when you're ready to start writing your own history! And remember, we're here for your family, friends, and colleagues, too.

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January 16, 2013

Her Majesty, the Snoop

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Getting audited by the IRS is rarely anyone's spot of tea -- unless, of course, you're the auditor. But at least our IRS "plays fair" and uses your actual return to decide whether to audit you. Not so for the folks at Her Majesty's Revenue and Customs Service across the pond!

Here in the former colonies, the IRS uses statistical analysis to find most of their audit targets. Every return gets a super-secret score called a Discriminant Information Function, or "DIF." The higher your DIF, the more potential the IRS sees for bringing in additional taxes in an audit. So, with limited resources available for auditing returns, the IRS naturally strives to audit the higher-scoring returns first. (It's like why Willie Sutton robbed banks -- because that's where the money was!) Generally, small businesses organized as sole proprietorships face the greatest chance of audit -- as high as 4% or more -- because they have the greatest opportunity to underreport income and overstate deductions.

But back in the old country, HMRC is getting a little more aggressive. They're not just looking at tax returns. They've just announced a new program to use credit checks to find suspected tax cheats. The plan is to cross-check details of the income people report on their return against their actual spending, to identify those at risk of both legal and illegal tax avoidance. Officials have just finished a pilot program involving 20,000 people -- but they expect to expand it to as many as two million. Blimey!

The program sounds straightforward enough. Let's say you operate Ye Olde Cock & Bull Pub in a small town somewhere outside London. You report £20,000 in income. But your credit file shows you spending closer to £30,000. Now ye olde tax authorities have reason to believe you're not reporting all those pints of Boddingtons you've served -- and they have actual evidence to make their case.

The problem, of course, comes when the program finds stashes of suspicious but legitimate assets. Let's say you're Robert Crawley, the 6th Earl of Grantham. Your own family money, which dated back to the Wars of the Roses, is long since gone. So you marry an American heiress. You make a genteel living managing Downton Abbey and occasionally sitting in Parliament. But if HMRC reviews your credit file, they're likely to find spending way out of line with your stated income! You can explain it, of course, as part of your wife Cora's inheritance. But who wants to have to explain that sort of thing to the tax man, even if you are paying your fair share?

Of course, the program also raises enormous privacy concerns. It's fashionable to say that in today's internet age, privacy is a relic of the past. But it's also hard to see a program like that flying here in the United States -- at least not without howls of protest.

We all know that proactive planning is the key to paying the least amount of tax allowed by law. But did you know that planning can also cut your chance of getting audited? Reorganizing your sole proprietorship as a partnership or subchapter-S corporation, for example, can cut your risk of audit by as much as 90%. So call us when you're ready for a plan that lets you pay less tax and attract less attention!

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January 9, 2013

Tax Season Delayed

by Kenneth Hoffman in Business Counsel, Tax Due Dates, Tax Preparation, Tax Planning

Following the January tax law changes made by the United States Congress within the American Taxpayer Relief Act (ATRA), the Internal Revenue Service (IRS) has announced that it plans to open the 2013 filing season and begin processing individual income tax returns on January 30.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on January 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it could begin accepting tax returns.

The IRS will therefore begin accepting tax returns on January 30, after updating forms and completing programming and testing of its processing systems, to reflect the bulk of the late tax law changes. The announcement means that the vast majority of tax filers - more than 120m households - should be able to start filing tax returns on that date.

The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax patch as well as the three major "tax extender" provisions for taxpayers claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

It is estimated that the remaining households will be able to start filing in late February or early March, because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline, or obtain an extension.

"We have worked hard to open tax season as soon as possible," said IRS Acting Commissioner Steven Miller. "This date ensures we have the time we need to update and test our processing systems."

The IRS has also emphasized that taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The IRS had originally planned to open electronic filing this year on January 22; more than 80% of taxpayers filed electronically last year.

Although tax season has been delayed, there is no automatic extension to file or pay any taxes that may be due by March 15th for corporate filers and April 15th for every one else. If an extension is needed, call us ASAP at 954.591.8290.

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January 9, 2013

More Than Meets the Eye

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

We usually try and keep these dispatches light and entertaining. We know you'd rather read about "Tax Strategies for Somali Pirates" than, say, the latest regulations governing domestic international sales corporations. But every so often it's time to put on our serious face, and this is one of those times.

By now, of course, we all know that Congress spent their New Year's crafting a last-minute deal to avoid a "fiscal cliff" disaster. The "American Taxpayer Relief Act of 2012" extended the Bush tax cuts, permanently, for incomes up to $400,000 for single filers and $450,000 for joint filers. Ordinary income above those thresholds will be taxed at 39.6%; corporate dividends and long-term capital gains will be taxed at 20%. The Alternative Minimum Tax is "patched" for good, and the estate tax is eliminated for estates under $5 million.

If your income isn't quite that high, you may think you've just dodged a bullet. But the sad reality is, you're probably already paying more tax, even if your income is nowhere near $400,000:

The fiscal cliff legislation includes provisions phasing out personalized exemptions and itemized deductions for singles earning over $250,000 and joint filers earning over $300,000. You'll lose 2% of your personal exemptions for every $2,500 over the threshold. And you'll lose $3 of your itemized deductions, up to 80% of the total, for every $100 of income above the thresholds.
The 2% payroll tax "holiday" that we enjoyed in 2011 and 2012 is over, and won't be coming back.
Finally, the new Medicare tax provisions of the Affordable Care Act take effect. Medicare taxes on earned income go from 2.9% to 3.8% on incomes above $200,000 ($250,000 for joint filers). And there's a new "unearned income Medicare contribution" on "Investment income" (interest, dividends, capital gains, rents, royalties, and annuities) above those same thresholds.

Here's the bottom line. If you woke up on January 2, read the headlines, saw "$400,000," and thought you were safe, think again.

On the bright side, fiscal cliff legislation extends all sorts of tax breaks that were in danger of expiring. These include expanded first-year expensing and bonus depreciation deductions for business equipment, tax-free charitable gifts from IRA accounts, expanded student loan interest, and even the above-the-line deduction for educator expenses. The bill even extends a critical break for NASCAR track owners, letting them write off land improvements and support facilities over just seven years instead of fifteen! (If you happen to own a "motorsports entertainment complex," you really need to call us for planning!)

The tax provisions of the fiscal cliff legislation run over 80 pages. Even the Senate explanation takes up 15 pages. So we're still doing our homework and sorting out all the opportunities. But we can promise you that we're here to help make the best of the new law. And remember, we're here for your family, friends, and colleagues, too!

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

January 3, 2013

Dying to Save Taxes?

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

2013 is here, and after months of post-election sound and fury, we took a quick "test leap" off the dreaded "fiscal cliff." Look out below!

By this point, we're all familiar with the income tax consequences of the cliff. The Bush tax cuts expired, as scheduled, on December 31, sending everyone's taxes up. The 2% payroll tax holiday expired at the same time, with no hope of resuscitation. The Alternative Minimum Tax (AMT), which up until this week had never been indexed for inflation, still hadn't been "patched" for 2012, meaning it would catch 27 million more Americans in its claws. There are even new Medicare taxes and a 3.8% "unearned income Medicare contribution" on earned income and investment income for individuals earning over $200,000 and joint filers earning over $250,000. (Okay, those new Medicare taxes aren't technically part of the "fiscal cliff" -- but they don't give upper-income earners much reason to cheer 2013, either!)

But the fiscal cliff also threatened some dramatic estate tax changes as well. Taxpayers dying on December 31 could leave a tax-free $5.12 million "unified credit" to their heirs, and pay a 35% rate on any balance above that amount. On January 1, however, that unified credit shrank to just $1 million -- and the tax itself jumped to 55%. Die on December 31 with a $3 million estate and owe Uncle Sam nothing. Die just one day later, and pay a $1.1 million tax. That's one awfully expensive day!

Of course, Washington spent New Year's Day scrambling its way back from the cliff. As we now know, we'll keep the Bush tax rates on incomes up to $400,000 ($450,000 for joint filers) and get a permanent AMT fix. As for estate taxes, the unified credit stays the same and the rate climbs to 40%.

So, here's an awkward question, moot as it now may be. With such large estate taxes at stake, would millionaires choose to die early to spare their heirs the risk of higher taxes?

You probably won't be shocked to learn that determined patients can literally will themselves to delay death past important dates like birthdays, holidays, and anniversaries. Hospitals saw death rates drop significantly in the last week of 1999, only to increase by similar amounts in the first week of 2000. That suggests that patients were determined to catch at least a peek at the new millenium.

A similiar but happier phenomenon can occur when it comes to giving birth. In 2004, the Australian government gave taxpayers a $3,000 new baby bonus, starting on July 1. A 2009 study found that as many as 1,000 births were delayed to take advantage of that windfall.

But dying early to save estate taxes? Really . . . ?

Well, believe it or not, yes. A 2003 study published in the The Review of Economics and Statistics by two economics professors asked if changes in estate tax rates affected mortality rates -- and found that for individuals dying within two weeks of a tax reform, a $10,000 change in estate taxes increased the chance of dying in the low-tax period by 1.6%. This is hardly surprising when living longer let people claim the savings. But the authors even found evidence of people dying sooner to avoid the increases. (That's especially ironic considering that, by definition, nobody gets to enjoy saving tax on their own estate!)

We've said all along that proactive planning is the real key to paying less tax. And smart tax planning lets you pay less and even live to enjoy it! So, we're glad that you're reading these words, and we promise we're here to answer all your questions on the "American Taxpayer Relief Act of 2012"!

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January 1, 2013

Happy New Year and Welcome to 2013

by Kenneth Hoffman in Business Counsel, Tax Preparation, Tax Planning, Church Taxes, Tax Counsel

Welcome to 2013. There is still an air of uncertainty about the nations fiscal health. If you have any questions, please do not hesitate to contact me.

Now is a good time of the year to change the oil in your car. Your mechanic will provide you with a receipt with your cars' current mileage. This can be used as evidence to establish the ending mileage for 2012 and the beginning mileage for 2013.

There is no need to keep track of those pesky, fading receipts. Take a picture with your phone's camera and upload it to your "2013 Business Receipt" folder on your FREE Box.com account.

The IRS requires you to track your mileage and expenses. As our New Year's gift to you, you can download our 2013 Tax Diary. Use it to track your mileage, appointments, and meal expenses.

While you are here, please check out our Tax Preparation services.

If you decide to prepare your own tax return and want a second opinion, then have a look at my Tax Return Review Service. Have a question about preparing your own tax return, I'd be more than happy to answer them. Sign-up for my Tax Question and Answer service.

Lastly, if you receive a Notice from the IRS about your tax return, then take advantage of my IRS Notice Service.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

December 31, 2012

Update on the Fiscal Cliff

by Kenneth Hoffman in Business Counsel, Tax Counsel

I am receiving a lot of calls about the fiscal cliff. First, I am sure they will pass something, possibly by even today December 31st extending the Bush-era tax rates for most people (those earning less than $400,000 or $450,000).

There's lots of finger pointing going on over all this, but I don't think either party wants to have to deal with the consequences of letting this thing go 'over the falls'. This is just too big a political risk.

Even if nothing gets done by 12/31, that doesn't mean we 'go over'. When the bill is passed it will most likely be retroactive to January 1, 2013. So, if a deal is cut on January 10th it would still be as if it was passed on January 1st.

I will keep you apprised on what is happening as we get it. Don't let it spoil the New Year's fun.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

December 28, 2012

Final Thoughts for 2012

by Kenneth Hoffman in Business Counsel, Tax Counsel

2013 is almost here, and it looks like that old Grinch is leaving a "fiscal cliff" under everyone's tree. Here are a few final thoughts to help usher in the New Year:

"There's no line on the tax return that asks 'what are you not telling us?'"
Robert Goulder (tax attorney)
"The rich, indeed, are different from the rest of us; they have shiftier tax lawyers."
Jim McTeague (columnist, Barron's)
"Dear Tax Commissioner: Three years ago I cheated on my taxes. Since then I have been unable to sleep at night. Enclosed is $5,000. If I still can't sleep, I'll send you the rest."
Anonymous
"If you are truly serious about preparing your child for the future, don't teach him to subtract -- teach him to deduct."
Fran Lebowitz
"The ancient Egyptians built elaborate fortresses and tunnels and even posted guards at tombs to stop grave robbers. In today's America, we call that estate planning."
Rep. William R. Archer (former Chair, House Ways and Means Committee)
"[A] tax lawyer is a person who is good with numbers but does not have enough personality to be an accountant."
James D. Gordon III (BYU Law School)
"Make sure you pay your taxes; otherwise you can get in a lot of trouble."
Richard M. Nixon
"Just because you have a briefcase full of cash doesn't mean you're out to cheat the government."
Pete Rose
"From a tax point of view, you're better off raising horses or cattle than children."
Former U.S. Rep. Patricia Schroeder

We wish we could tell you exactly what's going to happen with the fiscal cliff and taxes. But we can promise we'll be here to help you make the best of it, in 2013 and beyond. And remember, we're here for your family, friends, and colleagues too!

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges.

To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

December 20, 2012

Set Minister Housing Allowance Before Year End

by Kenneth Hoffman in Church Counsel

Churches must designate a portion of each minister's compensation as a housing allowance by December 31 in order for ministers who own or rent their homes to receive the full benefit of a housing allowance exclusion for calendar year 2013. The designation should be adopted during a regular or special meeting of the church board, and should be contained in the written minutes of the meeting.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.