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IF YOU ARE . . . committed to providing exceptional service dedicated to the highest degree of knowledge determined to increase your business client base
Join the Leader in Creating a New and Higher Standard for the Tax Industry Join TAXSMART AMERICA® BUSINESS CENTERS as We Raise the Bar
For An Alternative to Franchising CONTACT OUR LICENSING DEPARTMENTTODAY ● 858 277-0775 www.TSABusinessCenters.com
TAX PROFESSIONAL TAX PRO GAME PLAN
Tax pros or any service industry, these four fundamentals are necessary for growing your business. THE INSIDIOUS NATURE OF THE AMT Managing the tedious, complexity of the alternative minimum tax. OIC–OH, I SEE Helping clients get rid of tax debt, not as easy as we would like.
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FEATURE MAKE MORE MONEY RECESSION OR NOT
Put more money in your clients’ pockets and your pockets grow too!
BUSINESS OWNER TAX PLANNING TIPS FOR THE BUSINESS OWNER
What you don’t know can hurt you. Make sure you read these valuable tax saving tips. S CORP WHY & HOW Understanding the entity that can save you thousands of dollars in taxes. SCOOPING UP ROCK-BOTTOMS The real estate investor rally is around the corner. Learn how the Cost Segregation method helps you keep even more of your money.
CONSUMER THE SUBTLE EROSION OF WEALTH
Wealth Series Part 1 of 4. Upcoming issues include Wealth Accumulation (Part 2), Wealth Preservation (Part 3), and Wealth Transfer (Part 4). DREAM BIG PLAN SMART Thinking of starting your own business? Make sure you keep these things in mind.
EDITOR’S NOTE WEBCLIPS TAX BULLETIN SPOTLIGHT On Jay Chimayan SPOTLIGHT On Diane Jara PARSE WITH THE PRO Q&A TAXSMART AMERICA BUSINESS CENTER DIRECTORY
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Editor’s Note EDITOR IN CHIEF: Susan Harnsberger CONTRIBUTING EDITOR: James Harnsberger EDITORIAL ASSISTANT: Teri Sampson
“Of all the different types of tax we have, the only one I really like would have to be thumb tacks.”
CHIEF WRITER: James Harnsberger CONTRIBUTING WRITERS: Nick Angello, Susan Harnsberger
– Susan Harnsberger Photo: Nick Angello
MARKETING AND PUBLIC RELATIONS: Gabi Barbarena EDITORIAL DIRECTOR ONLINE: Susan Harnsberger LAYOUT, DESIGN, AND ART DIRECTOR: Ric Jara ASSISTANT LAYOUT AND DESIGN: Susan Harnsberger PHOTO EDITOR: Ric Jara CONTRIBUTING PHOTOGRAPHER: Nick Angello DIRECTOR OF AD SALES: Teri Sampson THE ADVISORY BOARD James Harnsberger Founder of TaxSmart America® Business Centers and TaxSmart America® University; 23 years in the tax industry as a business owner and 10 years in the industry as an educator; holds a degree in paralegal studies.
Susan Harnsberger Founder of TaxSmart America® Business Centers and TaxSmart America® University; Bachelor of Science Degree in Physics; business owner since 2002.
Ric Jara Through custom design, Mr. Jara brands companies for growth in the market. Degree in Graphic Design & Visual Communication.
Gabi Barbarena Ms. Barbarena works with numerous business entities to strategically grow their business and broaden their market reach. Masters Degree in Executive Management, Bachelor of Science Degree in Organizational Behavior. TaxSmart America® Magazine is published quarterly by TaxSmart America® Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123. Copyright© 2008 by Universal Abundance Enterprises, LLC. All rights reserved. No part of this issue may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying without permission. Requests for permission may be sent to TaxSmart America® Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123. Subscription rates: one year $27.90. Reprints available: write Reprint Department, TaxSmart America®, Inc., 8825 Aero Drive, Suite 103, San Diego, CA, or call 858 277-0775. TaxSmart America® Magazine is published quarterly by TaxSmart America® Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123, (858) 277-0775. Opinions expressed herein are solely those of the editors and contributors. Readers are advised to take special care in relying upon opinions or recommendations. The reader is responsible for verification of any information provided herein.
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RAISING THE BAR One day about a year ago my husband and I were at the bookstore browsing for a couple of magazines to take over to the coffee place a few stores over. We enjoy having coffee and reading outside, so it’s something we do as often as we can. I don’t know what it was about that particular day, but wandering through the magazine aisles, I had an epiphany that would alter and add to my role in our companies in a very rewarding way. Looking through a plethora of business and finance magazines, I noticed that although several boasted an article or two on taxation, there was not a single magazine dedicated to taxes. Now you might think, well, yeah, who wants to read about taxes? When I first met my husband, I wondered the same thing. I love him dearly, so I just assumed that on the other side of his exceptional brilliance was maybe a mild mental disorder that makes him enjoy reading tax code and tax law. But after seeing the passion he has for this industry, after watching him pour over his research, after listening to him provide in-depth, continued education lectures and workshops to thousands of tax professionals in Southern California, I realized quite sometime ago that taxes and our tax system are anything but boring. Between the pages of this Magazine, we intend to inspire and educate the tax professional, bring awareness and knowledge to the business owner, and encourage and empower the consumer. Ultimately our desire is to help all taxpayers keep as much of their money as the tax code allows. We do this both through the Magazine and through our Business Centers. TaxSmart America®Business Centers interviews and screens tax professionals (most have been in the business at least 5 years), throughout Southern California who are interested in licensing with us. Those we license we feel are the crème de la crème already, but they then go through a rigorous 18-month professional development program along with 12 months of CTEC and IRS approved advanced education on taxes and business services. In October we licensed our first 22 offices in Southern California with another 30 scheduled for October 2009. We hope you’ll take a look at our directory on page 22. This is a talented group of very special people. Through the Magazine, our goal is to become an exceptional resource for you. We hope the articles in this first issue are of great interest and benefit to you. We always welcome your comments and any suggestions you have for upcoming issues. When my husband and I got over to the coffee place that life-changing day, I casually mentioned that there are no tax magazines and maybe we should start one. The idea immediately resonated with him. I am eternally grateful for all his hard work, his support, and his belief in me in bringing our Magazine to life.
Susan Harnsberger Editor in Chief
THE ART OF DEDUCTION
Tax preparation: Art or Skill? Actually, it’s both. The skill comes from understanding the tax code and keeping up with a plethora of weekly changes; the art is in being able to utilize the knowledge to the greatest advantage of the taxpayer. Missing deductions and credits could cost the taxpayer thousands of dollars in overpaid taxes. This is a lot more common than most people realize. Here are a few you might be missing: primary and secondary home mortgage (with some caveats), points, discount fees, prorated property tax, investment management and advisory fees, keeping meals and entertainment separate, hobby expense if you earned hobby income, mileage for commuting between two jobs, professional publication subscriptions (like this one), professional association dues, FMV deduction on donating art owned for more than a year, possibly foregoing claiming your college students as dependents (high income taxpayers), AMT credits frequently left on the table, AMT rules approved in the Emergency Economic Stabilization Act of 2008 which may be retroactive. This is a small sampling. To gain a better understanding of each of these and to see the full article for a lot more deductions and credits for personal and business returns, please visit TaxSmartMag.com.
AMEND AND SEND
In a series of government studies published by the Government Accounting Office (GAO), it was found that many taxpayers don’t realize the extent by which they may have overpaid their taxes. Overpayment of taxes can be a result of errors, (deductions calculated incorrectly), or omissions (information not included on the return). Choosing to use the simplicity of the standard deduction rather than itemizing can also lead to significant overpayment. It is worth noting that many taxpayers, including small business owners, do not know that the IRS will allow for the filing of an amended tax return to correct these mistakes. An amended return also serves as a claim for refund of taxes that may have been overpaid, and in most cases the IRS will also pay interest to the taxpayer on refunds from overpaid taxes. Refund recovery can go back three years and sometimes more. To read this article in its entirety, please visit TaxSmartMag.com.
Now more than ever a tax-planning strategy should be one of the top items on your after-tax-season “to do” list. If you are a tax professional, you should be opening your files, determining who would benefit from your help, and letting them know during their tax season appointment that you’ll be calling them in after April 15 for a free consultation. Your client’s job is to build their wealth, your job is to help preserve it through effective tax planning. We are in the middle of a very tough recession. Many business owners are struggling to stay afloat and the idea of paying taxes when they are having trouble making payroll leaves them in a state of ice cold fear. Knowing they have someone willing to put in hours of research to help them keep more of their money at least minimizes their worries. By the same token, if you are a taxpayer and have not received word from your tax professional, you should be asking him/her for a free consultation for a tax planning strategy. If he/she does not specialize in this, and it is a specialty, a list of professionals who do it everyday can be found on the directory on page 22. For more details on a healthy tax diet and research links go to TaxSmartMag.com.
ON THE UP AND UP
The IRS has recently announced it is stepping up the examination and auditing of tax returns in an effort to increase compliance as well as tighten the multi-billion dollar “tax gap”. High on the list of growing IRS audits will be self-employed taxpayers who file a Schedule C with their tax return. Estimates range from a 50% to a 74% increase in these taxpayer audits. Some of the examination issues include unreported income, particularly for small businesses with large cash volume, issues surrounding expense deductions, payments for independent contractors (possible employee issues), mileage deductions, or expenses that may be personal in nature versus legitimate business expenses. Another target for examination and audit is the S corporation. Issues include reasonable salary, losses in excess of the basis in stock, accountable reimbursements paid under a plan and corporate compliance. The IRS will be paying special attention to the business record-keeping practices for sole proprietors and all entities. To read this article in its entirety and find out what you can do to prepare yourself, be sure and visit TaxSmartMag.com.
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TAX BULLETIN IRS Imposes New Taxpayer & Preparer Fines and Penalties By James Harnsberger The IRS has introduced a series of new penalties related to the preparation of tax returns. With passage of “The Small Business Work Opportunity Act of 2007” (The Act), a tax preparer may now face a myriad of penalties related to the preparation of a tax return: accuracy, understatement, and negligent acts.
on the issue of new penalties is advised as follows:
Section 6694 Penalties – The Act amended Section 6694(a) to now include a penalty if:
Provisions of these new penalty assessments are retroactive back to May 26, 2007, for any such return. Finally, the IRS also ushered in a host of new penalties for taxpayers regarding the following:
a) the tax return preparer knew or reasonably should have known of the position; b) there was not a reasonable belief that the position would more likely than not be sustained on its merits; c) the position was not disclosed (to the IRS) as provided in the section. The Act increased penalties under this section from $250 to $1,000 or 50% of the fee, whichever is higher. This penalty relates to reporting any item on an information return (including any Form 1040) where the return preparer knew, or should have known, that the item reported would more than likely not be sustained on its merits. In addition a failure to disclose such an item to the IRS using IRS Form 8275 or 8275-R will result in the imposition of the penalty. Also, a second tier of penalties can be imposed if the IRS determines in any case that the conduct of such reporting is willful, or reckless in disregarding the rules. The penalties in such a case will now be $5,000 for each case or 50% of the fee, whichever is higher. In another example, the IRS will now impose penalties in any case where the return preparer fails or refuses to sign a return they have prepared. Under the old law the penalty was $50 for each violation. Under the new law the penalty has been increased to a maximum of $25,000 where a preparer has failed or refused to sign the return. The new penalty assessments are retroactive back to May 26, 2007 for any such return. Tax preparers are advised to adopt a series of steps in their practice to assist the client in understanding the new requirements, as well as providing disclosure to the client of these requirements. Adopting a Client Acknowledgement
a) Adopt a procedure that ensures every client is interviewed in the appointment. b) Adopt a procedure to review all tax returns before providing them the client using a checklist.
Taxpayer Requirements • • • • • • •
RECORD KEEPING SUBSTANTIATION PROPER REPORTING FILING REQUIREMENTS UNDERPAYMENT OF TAX UNDERSTATEMENT OF TAX FAILURE TO COMPLY WITH REPORTING AND FILING REQUIREMENTS
Tax professionals are advised to provide the client with a FULL DISCLOSURE of the possible penalties they now face and advise the client of the requirements including interviewing the client, reviewing client records, substantiation of items reported on any return, and the DISCLOSURE TO THE IRS in accordance with FORM 8275 and 8275-R. Conclusion The IRS announced that over the course of the next fiscal year, starting October 1, 2008, it anticipates it will generate between $80 Million and $180 Million in new fines and penalties. As an added problem the E&O insurance and bond may not cover the preparer or their client in these cases of the more serious penalties now imposed.
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The Tax Pro Game Plan By Nick Angello It happens in every industry. You've been working hard and putting in long hours, but you haven't been able to break through to the next level. Sometimes, however, hard work needs to be coupled with established fundamentals before success can be realized. Pro athletes obviously spend a lot of time practicing, but they don't just practice hard, they practice smart. With the help of a coach, they work toward a single goal by focusing on sound, proven techniques. For tax professionals, and really any service industry, there are four fundamentals that should be kept in mind to help you not only work hard, but work smart as you go about building your business.
learn the business of running a business. Not only will your finances improve, but you will have a deeper understanding of the challenges your business clients face. Good or bad, word travels fast. When people mention your name, you want it to be for a referral.
As simple as it sounds, clients are people first. Even if you're the best tax pro in town, people feel most comfortable pihsnoitaleR sdradnatS when you foster a solid working relationship to accompany your skills. This means provide FEES value, communicate that value, and educate your client. For Most tax offices are greatly unexample, if your client is a sole dervalued! Know your office. proprietor that could benefit Based on your financial numbers, from forming an S-Corporation, figure out what you need to make then your job is to communia profit (and a salary) and charge cate the value while educating fees accordingly. It's tempting, the client on entities and combut DO NOT set fees based on pliance and the tax consewhat you think your client will pay quences involved. Your client or what you think the guy down can now make an informed dethe street is charging. Base your cision. Also if you are preparing fees on business acumen. If you a return with the client sitting are truly practicing the above across from you, stop it. You three fundamentals, your fees for are doing little more than the most clients will be secondary. client could do with a software program Many tax professionals have no idea quence. If you are in touch with them, at home. This does nothing to build a re- you have the potential to help them with what they are actually trying to accomlationship or justify the fees you are these decisions. As the professional, you plish, and even if they do, they don't worth. No matter how simple the return, actually have a better understanding of know where to start. Take some time and a part of your value is preparing good their tax needs than they do. The ultimate decide where you want to be in three work papers and substantiation in case years. Reread everything above and goal is to become a trusted member of there is an audit. See your clients periodi- their team. layout a timeline, recognizing that Relacally throughout the year for tax planning tionship, Needs, Standards and Fees are inSTANDARDS Set them high and donâ€™t waver. Tax and updates. Start today building strong terrelated with multiple components that professionals are required to receive 20 client relationships. can be accomplished simultaneously. hours of continuing education each year, Next work backward and set goals that FILL A NEED As you build client relationships, you but that should be the bare minimum. will move you closer to your dreams. will begin to discern their needs. There You should get at least 100 hours CE Think positively. Good luck! are plenty of opportunities in your client through a quality CE program and by base if you take the time to look and listen doing research on your own. With infor them. An opportunity for both of you creased knowledge and a burgeoning Nick Angello holds a Bachelorâ€™s Degree from Vanderbilt University. He is an accomplished writer to benefit strengthens your symbiotic re- skill set, you build not only confidence living in San Diego. lationship. Also, throughout the year but new services to provide your clients. nearly every one of your clients is going to Make a commitment to your education. make a decision that has a tax conseYou should also set aside some time to Comments: Please visit TaxSmartMag.com/2cents.
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THE INSIDIOUS NATURE OF THE AMT By Susan Harnsberger
The Alternative Minimum Tax (AMT) was introduced by the Tax Reform Act of 7 ITEMS THAT CAN CONTRIBUTE TO AMT LIABILITY 1969, and by 1970 it was up and running. This tax was originally intended to prevent a few wealthy families from paying little or no income tax using 1. Personal Exemptions The more you claim on your regular tax repreferential tax treatment under the tax code of the time. turn, the likelier you will have AMT liability.
the regular income tax. Effectively, the higher of the two gets paid. Most people are unaware they are even paying AMT. Software does everything and many tax preparers simply provide the client their return and tell them how much they owe. It is not always obvious. Efforts have been made to reform or repeal the AMT, but Congress has dropped the ball time and again, year after year. Instead they have done nothing more than put forth yearly “patches”. The latest patch for 2008 was included in the first “bailout” measure last October, The Emergency Economic Stabilization Act of 2008. Table 1. This Bill, passed by the Senate and the House and signed by President Bush on % of Taxpayers Annual Income October 3, increased the exemption for ~ 30% > $500,000 married filing jointly from $66,250 to ~ 66% $50,000 to $100,000 $69,950, half that for married filing sepa> 90% $100,000 to $500,000 rate, and filing single or head of household the exemption was increased from Percentage of taxpayers in various income levels $44,350 to $46,200. to pay AMT in 2010. Data obtained from the Congressional Budget Office. The AMT taxable income (AMTI) is, The AMT is a tax that, for certain taxpay- however, still taxed at 26% up to ers, for a combination of reasons, must be $175,000 and 28% for any AMTI above calculated under an alternative set of $175,000. This calculation is called the rules. Any amount of AMT over the reguTentative Minimum Tax (TMT). The lar income tax must be paid along with $150,000 phase-out threshold, which has Now almost 40 years later, the AMT has become an extremely complex and insidious tax. In years gone by the AMT was paid by the top 1% of taxpayers. However, since its inception, it has never been indexed for inflation. Every year more and more people owe AMT. By 2010 the Congressional Budget Office estimates that about 20% of all taxpayers and about 40% of married couples will pay AMT. Of those numbers most are middle class not the wealthy for whom this tax was originally created. Table 1 illustrates that within particular income levels, some percentage of taxpayers will likely pay AMT by 2010.
AMT TIMING◄►AMT MANAGING HOW AND WHEN IS VITAL in managing AMT liability. Here is a heads-up list of issues to be aware of and ask your tax professional to outline and manage during your tax planning session. 1. Large capital gain 2. Dual Basis Assets 3. Exercising ISOs and timing 4. Business expense on Schedule C 5. SEP, IRA, Simple IRA, 401(k) 6. Home office deduction 7. Some tax-exempt bonds 8. Timing real estate tax and state and local income tax In Issue 2 in April, we really dig into timing, managing, and reducing AMT liability, addressing each of these issues and more.
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2. Credits Like personal exemptions, many of these are not allowed when calculating AMT.
3. State and Local Taxes If your locale has high state and local tax, you are likely to owe AMT. AMT does not allow these deductions.
4. Mortgage Interest Mortgage interest to buy, build or improve your home is allowed. Mortgage interest for anything else is not AMT deductible.
5. Incentive Stock Options This is a timing issue that may cause AMT liability. (More details in the April Issue. )
6. Itemized Deductions Many deductions when itemizing are limited or not allowed under AMT rules.
7. Long-Term Cap Gain This comes into play with large cap gain which pushes you over the AMT thresholds. See Issue 2 in April for ways to minimize and manage AMT liability.
not been adjusted for inflation since it was enacted in 1986, essentially means that any TMT over $150,000 will be taxed another 25%. This effectively pushes the two tax rates, 26% and 28%, up to 32.5% and 35%, respectively. Very simply, up to $150,000 AMTI, the rate is 26%; between $150,000 and $175,000 AMTI the rate is 32.5%; and greater than $175,000 AMTI the rate is 35%. For capital gains the rates are effectively 21.5% to 22% instead of just the 15% calculated under regular income tax rules. This is because for every dollar of cap gain, 25 cents more of ordinary income is subject to the 26% or 28% rate. So, for example, for a $100 cap gain, you have $25 of the cap gain taxed at 26% or 28% ($6.50 or $7.00 in tax) plus the $100 cap gain taxed at 15% ($15 in tax). Adding the two is $21.50 or $22.00 in tax, which on a $100 cap gain is an effective rate of 21.5% or 22%, respectively.
The road to
OWN A BUSINESS? STARTING A BUSINESS? GROWING A BUSINESS? Let our experts help you plan. TaxSmart America速 Business Centers are dedicated professionals who specialize in business tax planning. Each office is independently owned and operated and commited to more than 200 hours per year in small-business, tax-planning courses. We provide a free consultation and business evaluation to assess your business and tax planning needs. Turn to page 22 to find the office located nearest you.
TAX SERVICES | BUSINESS ENTITY | BUSINESS SUPPORT | REFUND RECOVERY | AUDIT PROTECTION
Things get really heinous if the taxpayer happens to be benefit from preferential tax treatment not recognized under AMT rules. Some of these include deducting accelerated depreciation of business assets, incurring net operating losses, receiving incentive stock options, (ISO), etcetera. In addition there are timing issues that need to be considered: when to earn income, when to pay for activities that may be deductible, when to exercise ISOs, to name a few. These timing issues can have a significant effect on AMT liability, (see the box on the previous page for a summary of AMT timing issues). There are AMT rules specific to carry-forward losses, carryforward cost basis, carry-forward tax credits, and carryforward passive losses. Further the portion of the tax considered AMT may be used in future years as a minimum tax credit. This is money all too often left on the table. “The tax professional who can successfully maneuver in the quagmire of the AMT is invaluable. Our knowledge can mean thousands of dollars to our clients.” – TaxSmart America Business Centers
Comments: Please visit TaxSmartMag.com/2cents.
TaxSmart America®Magazine is published quarterly by TaxSmart America® Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123. Opinions expressed herein are solely those of the editors and contributors. Readers are advised to take special care in relying upon opinions or recommendations. The reader is responsible for verification of any information provided herein.
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OIC – OH, I SEE By Susan Harnsberger The Offer in Compromise (OIC) program is one of the most complex, time consuming services a tax professional can offer with a very low probability of success. Simply stated the OIC is an IRS debt relief program for a very select group of taxpayers in which the IRS may agree to settle the taxpayer’s debt for less than what is owed. It is a program that is misunderstood by both taxpayer and tax professional alike. It is also fodder for scammers who promise to settle the debt for “pennies on the dollar”. The first step in submitting an OIC is to explore all other payment options. This is a submission requirement by the IRS. Pay close attention to the Partial Payment Installment Agreement (PPIA). This may be a good alternative to the OIC. However, if your client is still intent on submitting the OIC, the next step is to determine which type of OIC. There are three: Doubt as to Collectibility – There is doubt the taxpayer could ever pay in full the amount of tax within the statutory period for collection. Doubt as to Liability – Legitimate doubt exists that the calculated tax liability is accurate due to examiner error; the examiner did not consider evidence submitted; or the taxpayer has new evidence. Effective Tax Administration – There is no doubt as to liability or collectibility. Instead the taxpayer must prove that full pay would lead to economic hardship or be unfair and inequitable. One example is that the taxpayer is responsible for long-term care for a dependent child and will need to use the equity in assets to provide for basic living expenses and medical care for the child. All three types of OIC require the taxpayer to fill out and submit extensive amounts of paperwork. This should be thoroughly researched in IRS form 656. Next your client needs to understand how the payments work.
They are required to submit $150 with the OIC application which is non-refundable. If they cannot pay the $150, another slew of paperwork must be submitted and approved. They are also required to determine if they will pay in full the amount offered in the OIC or if they will make payments throughout the IRS statutory collection period. If it is the former, 20% of this amount must be included with the submission and is non-refundable. If it is the latter, the first payment must be made and monthly payments must continue to be made throughout the two-year period the IRS has to decide. None of this money is refundable regardless of the IRS’s final decision. BTW, the IRS must decide within the two-year period or your client is automatically approved for the OIC. The client is required to be on time and pay the full amount of subsequent tax liability for the next five years or the agreement can be cancelled with the full amount owed and may include interest and penalties. All money paid to that point is non-refundable. At the end of the day there are five and only five strategies for getting out of tax debt: 1. Installment Agreement (IA) – IRS agrees to a monthly payment plan 2. Partial Payment IA – IRS agrees to long-term plan at a reduced $ amount 3. Offer in Compromise – debt relief program; see IRS form 656 4. Not Currently Collectible – IRS agrees not to collect for a year or so 5. Bankruptcy – discharges tax debt under the rules of chapter 7 and/or 13 Any one of these is likely to be more effective than the OIC for most people, including bankruptcy, and should be thoroughly researched. For info on PPIA or bankruptcy strategies go to TaxSmartMag.com. Comments: Please visit TaxSmartMag.com/2cents.
ON TOP OF THE WORLD – My Accounting Center, Inc. A Certified TaxSmart America® Business Center Nestled in the heart of Glendale, California, is MAC, Inc., a successful business advisory and consultation firm. The creative, business-savvy entrepreneur behind it is 26 year- old Jay Chimayan. A few doors down is Chimayan Financial Services, a business he and his brother Jevan are poised to take over upon the retirement of the Founder and President, Sirvard Chimayan. The two companies offer just about any service a business owner could need from a team of professionals in many fields. This is what Jay has envisioned and produced. But he hasn’t done it alone. He is fortunate to have a tight-knit, talented family who support him and each other and specialize in their own areas of expertise. Below Jay shares his story with us, how TaxSmart America® University and TaxSmart America® Business Centers have helped expedite the path to success and his dreams for the future. Photo: Nick Angello
TSA MAG: Jay, you have two offices here. Chimayan Financial Services and My Accounting Center, Inc. (MAC). Tell us about the two and how they tie together. Jay: Chimayan Financial was started in 1996 by my Mom, Sirvard Chimayan. She does tax preparation, bookkeeping, and payroll for mostly start-up businesses up to three years. My Accounting Center started in 2006. It mostly deals with businesses after they’ve been in business for more than three years. Chimayan Financial specializes in tax returns. MAC is a business advisory and consultation. I’m the President of My Accounting Center. Sirvard Chimayan is the President of Chimayan Financial Services. When she retires, my brother and I will take over. TSA MAG: How many employees do you have? Jay: Currently we have nine employees. TSA MAG: How long have you been in this business? Jay: I started in 1999 with my Mom, doing clerical work, a little bookkeeping, and then moved up to payroll. Then I started doing consultations and entity formations. TSA MAG: Tell us what services you offer. Jay: Year ‘round we offer bookkeeping services, payroll services, amended returns, and audit representation. We do tax planning, consultations and financial advisory, entity formation and compliance for corporations and LLCs, and living trusts. We also offer financial services, IRAs and such.
the four tests (at the time of this interview). I expect to hang my license in late ‘09. TSA MAG: You were a student last year with TaxSmart University for professional development and continued education. What is your impression of this school? Jay: Really impressive. We’re learning a lot of new things that we didn’t know before. Other programs talk about the laws, but they don’t explain the laws, how it affects clients. TSU actually explains in full detail how to apply it to the client and how a client will benefit or be affected by it. We have also learned a great deal about successfully managing a tax practice. The support we receive from TaxSmart is invaluable. TSA MAG: Most tax professionals take about 20 hours a year of continued education which is all that is required. Whatever possesses you to take 150 to 200 hours per year? Jay: It’s needed. Just reading the tax law and going to the lectures and workshops, it’s going to be over a hundred hours. TSA MAG: At the rapid pace you’re moving in the development of your business, and as a licensed TaxSmart America® Business Center, where do you see yourself in five years? Jay: On top of the world (laughing)! Basically, running a successful practice, buying new practices, and continuing to grow with TaxSmart.
TSA MAG: Where did you go to university, and what was your major? Jay: I went to California State University at Northridge, majored in accountancy, graduated in 2005. TSA MAG: What do you enjoy most in your business? Jay: Helping clients get educated in the tax field and providing consultation and advisory for their businesses. It’s great because when we help out a client, we’re giving them value and it makes us feel good. TSA MAG: What’s the biggest challenge for you? Jay: Most businesses think they have to have a CPA to do their bookkeeping, payroll, or taxes. We have to explain to them that most clients don’t need CPAs and that we can still help them out. I am currently pursuing my CPA license. I have passed two of
c r in e t n unting ce
My Accounting Center is Located at: 460 S. Central Avenue Glendale, CA 91204 (818) 500-0714
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Money Recession or Not By James Harnsberger
DURING TIMES WHEN OUR ECONOMY heads toward recession, it is important to know there are some things we can do to help the financial pinch. There are three areas that should be considered for review especially during an economic recession: • Income (these are revenues) • Expense (what can be done) • Services (building opportunity) Income – Many are tempted to begin slashing prices in the hope of attracting new clients or out of fear of losing existing clients. Don’t panic. Slashing fees will only accelerate your demise. Here are some IMPORTANT TIPS regarding your fees. First, communicate value, never sell price. When you sell the price for a service, you communicate to a client that there is little or no value, and the client then moves to find a competitive price lower than yours. Worse yet, you also communicate that your previous prices were over-stated and that these new lower prices really are what your service is worth. Instead you can communicate to your client that you will provide “additional” value-based service for the same or slightly higher fee, and invite them to take advantage of cost-cutting tax tips by offering free consultations after tax season. Another strategy during a recessionary period is adding new value-based services to your office that compliment your tax preparation core business. For example, you may wish to offer small business clients record keeping/organizing or bookkeeping services. Or perhaps offer tax
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Feature Story Since a majority of the revenue is derived during tax season, planning for small businesses that help reduce their taxes by imperhaps you might consider expanding your services to offer plementing fringe benefit plans, medical reimbursement plans mid-year and end-year tax planning and records-review servor accountable reimbursement plans that shift otherwise taxices to your existing clients using FREE consultations. First, it able profits to deductible benefits tax free. In this manner you costs you no more rent since you are already paying rent and help the client reduce taxable profits and at the same time pronot using the office as much as might be possible. As for your vide a value-based added service for which the client is more time, well you already have time where you are making no than willing to pay a reasonable fee. In the Service section below money, so perhaps you can use that time by creating opportuvalue-based service enhancements are discussed. nity where you might be able to make money In summary, you need to guard revenue “If you desire to operate at a if a client has an additional need you can fill. to avoid losing ground and hopefully find a As mentioned previously, you might offer method to add to revenue by expanding 50% gross profit margin, tax planning tips or records review services service and value at little or no additional then every dollar you spend cost to your firm. Revenue is the life-blood must produce two dollars in or perhaps a service that aims at tracking more deductions using more efficient record of any business, and if you lose income, it income in order to support keeping. In each of these areas you have a takes a significant amount of time and that one dollar in spending. value-based additional service that is in line money to replace the lost revenue with new Conversely, if you save one with the core service of your firm, tax prepaclients. Expenses - Now we move to the second dollar in expense, it has the ration. In this article we have looked into a few level of effort and focus during a recession: economic effect of producing areas where you might consider a more efthe expenses you pay to operate your busitwo dollars in income. “ fective method to shield against adverse imness. First and foremost, a clearly defined pacts that often come in any recession—increasing revenue, and detailed list of the total monthly business expenses is recutting expense, and adding services. Think of how much more quired. On this first round of analysis you are simply looking at valuable and financially sound your firm will be using these and the nature and amount of each expense to determine what they hundreds of other ideas after the tide turns again and we move are and then determine if in fact they are within a range that alout of the recession. You will benefit greatly in that you have not lows a safe operation of your business in order to generate a reaonly survived and perhaps even grown in a recessionary period, sonable profit. but you are stronger than ever financially for the good economic Many items on the expense side of your business can be imtimes that always follow a recession and down turn. proved if you take some time and evaluate your business and Also consider the importance of assisting clients in doing the the expenses involved in the operations. By reviewing what you same for their financial concerns. By always adding value to the spend money on and how much you spend, you can begin to relationship, you can be certain that in most cases the client will see your performance. Using this information you can next appreciate your expertise and dedication even if your fees are begin looking to see if there are some types of expense where slightly higher. Never approach the relationship by simply adin fact you can trim your spending. justing your fees for the sake of generating additional revenue. Once you analyze the data and begin drafting a budget, you If the value is not present first, last, and always, the client will can then apply discipline in your spending habits in order to prenot be there for long either. At the end of the day your most serve your hard-earned capital. If you desire to operate at a 50% valuable asset is your client, and you want to do all that is posgross profit margin, then every dollar you spend must produce sible to safeguard that important relationship. two dollars in income in order to support that one dollar in Small business owners are the life-blood of our economy. Our spending. Conversely, if you save one dollar in expense, it has free-market system has many cycles, and it may be the recesthe economic effect of producing two dollars in income. So exsion we are in will worsen. Those who thrive and grow are those penses are very important, and budgeting your spending bewho plan and prepare and execute well-defined plans. These comes critical. plans should insulate and protect the business in downturns Services – One of the most important things that can be and position it to grow in the upturns of each cycle. done in a recession is to add value-based services to your practice. Finally, remember the three rules in any recession. What are value-based services? They are services that enhance the firm’s offering to clients and thereby increase the 1. Don’t panic. value of the firm. Important in this process is to look at the core 2. Don’t panic. services you might now offer and review these services to determine what additional value-based add-ons can be imple3. DON’T PANIC! mented at little or no cost to the firm but that communicate value to the client. This in turn opens up opportunities for the James Harnsberger has been in the tax industry for over 23 years. He is the Founder of TaxSmart America® Business Centers and TaxSmart America® client to use the firm in new or improved ways. University where he has taught almost 5000 tax professionals. 1998. Let’s examine how you might use this approach if yours is a firm that offers tax preparation for individuals and perhaps has Comments: Please visit TaxSmartMag.com/2cents. some number of small business clients.
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BEST OF THE BEST – TAX-411 A Certified TaxSmart America® Business Center Business owner, entrepreneur, wife, and mother: Diane Jara of Downey, California, somehow manages to do it all and do it successfully. From the vibrant decor to the innovative branding, Diane’s business, Tax-411, a Certified TaxSmart America® Business Center, is an office that exudes professionalism and expertise. But while the marketing and branding bring clients into Tax-411, it’s Diane’s warmth, knowledge, and honesty that keep her clients returning for the high quality tax and business services she provides. Here Diane shares a bit about herself, her success, and her vision for Tax-411. Photo: Nick Angello
TSA MAG: Tax-411 is a great name. How did you come up with it? Diane: Since my husband is in the marketing business, he came up with the name TAX-411. He wanted a name that would be understandable by all people of any language. Everyone understands what 411 means. My goal is to educate my clients about their taxes. I do my best to provide extraordinary service, honesty, and integrity in all I do. TSA MAG: I know you’re a full-service, year-round practice. What services do your offer? Diane: My office offers a variety of business services, such as tax returns, corporate returns, business returns, estimated payments, bookkeeping, refund recovery, property tax, sales tax, entity formation and compliance and audit representation. TSA MAG: Is there any one service that you feel is your specialty? Diane: Audits are my specialty. I have a great deal of knowledge and experience with them. Having worked for the IRS for a number of years, I have the advantage of understanding the process and successfully helping my clients save money. TSA MAG: What is most rewarding in your work? Diane: Saving my clients money and educating them about their taxes. Also providing a solution to their problems and helping them succeed. I love that. TSA MAG: What is the biggest challenge? Diane: It was finding the right place to continue my education in tax law. There was really nothing out there to assist me in growing my practice until I found TaxSmart America University. As a professional, I want to continue expanding my knowledge and being up to date with the many tax law changes. Knowledge is value.
TSA MAG: What do you think about the TaxSmart America Business Centers concept and the professional development? Diane: I have learned so much from them. I believe in the concept of TaxSmart. It is a well-put-together organization, and I am so excited to be a part of it. TSA MAG: You mentioned you worked for the IRS. How has that helped you in your business? Diane: When I worked at the IRS, it gave me valuable experience and knowledge to better understand my clients’ needs. This has been a great asset when representing them in audits. TSA MAG: What made you finally say, I’m going to start my own practice? Diane: I wanted to make a change in people’s experiences when dealing with a tax professional. Also it is my desire to educate and provide a unique service. TSA MAG: How do you juggle family and business? Diane: I understand how to use time management and prioritize my life. Also my husband and I raised our children to be flexible because it is what life requires. As a result, I have the support of my family. This makes my family and business life more successful. One minute I am a soccer mom, the next minute I am an IRS tax professional with an audit. Life is good. TSA MAG: What are some of your plans over the next several years? Diane: I am excited to make the transition from a tax preparation office to a practice. That is going to be one of my greatest accomplishments for 2009. My success comes from being dedicated to my clients and helping them succeed in their financial future.
TSA MAG: Most tax preparers spend only the required 20 hours per year in continued education. Last year you will have spent between 150 to 200 hours through TaxSmart University’s lectures, workshops and coaching. For the next 18 months as a licensed TaxSmart America Business Center you will have spent that much time if not more in education. That’s dedication. Diane: Twenty hours is not enough to allocate to this business. My commitment to clients is why I continue my education, which allows me to master my profession and deliver extraordinary results. TAX-411 is Located at: 11455 Paramount Blvd. Suite A Downey, CA 90241 (562) 869-4000 • www.tax-411.com
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TAX PLANNING TIPS FOR THE BUSINESS OWNER By James Harnsberger If you are a business owner looking for cost cutting ideas here are eight tax planning tips that may result in substantial tax savings for this year and next. These tax planning ideas are sometimes missed by business owners. You should, however, consult a qualified tax advisor to determine which of these are appropriate for you and your business. 1. S Corporation: Set up an S corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $102,000 of 2008* profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $102,000 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S corporation is not subject to self-employment tax on the profits earned. However, you must take "reasonable" compensation as salary subject to F.I.C.A. 2. Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end. If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that amount at the time you turn over the receivable to the agency. 3. Equipment Expense: For 2008*, Section 179 of the Tax Code lets companies deduct up to $250,000 of new equipment, subject to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation. 4. Home Office Expense: You can take this deduction even if you use the space for administrative purposes, as long as there is nowhere else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc., as well as all costs for the room such as carpeting. Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence. (If you need a qualified tax advisor, please see page 22.) 5. Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2008* will also double the amount of Social Security tax owed up to the first $102,000 of income. 6. Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2008* you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break too. Have your children put $4,000 into a Roth IRA where it will compound tax-free over time. If the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings. If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages. 7. Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2008*, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months. 8. Education: Set up a company tuition-reimbursement plan to pay a child’s school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually, each employed child, parent or other qualified employee. The business owner’s children must work for the company, be older than age 21, own no company stock, and cannot be claimed as a dependent on the business owner’s tax returns. The benefit is that the amounts paid under the tuition plan are a business deduction, thus reducing taxes for the business owner, and the amounts paid to the child are not taxable income.
* Updates and changes for 2009 visit TaxSmartMag.com. Comments: Please visit TaxSmartMag.com/2cents.
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Business Owner not subject to corporate taxes, and more importantly the “The leading feature of an S profits pass through to the corp is that the profits of the owner-shareholders and are business are not subject to corporate taxes . . . and the not subject to self-employprofits pass-through to the ment taxes. owner-shareholders and are As with every benefit pronot subject to self-employvided by the code, there ment taxes.” comes with it a cost. In this case the cost here is that the ownerS CORP WHY AND HOW shareholders must receive a “reasonable” Many businesses begin their life as a salary in the form of taxable wages. In ad“Sole Proprietorship” in terms of the tax dition, the corporation must maintain a structure of the business. Defining the tax more strict manner of conducting busistructure can be as important as the busi- ness in that it must adhere to the formalness itself because each form of business ity requirements and conduct its affairs as structure has with it specific tax requirea corporation accordingly. ments, as well as benefits. Items such as using corporate funds for First, let’s define the term “S” corporapersonal expenses, not maintaining cortion. “S” refers to sub-chapter S of the tax porate minutes, not conducting regular code. In short, an S corporation is consid- monthly meetings, or not maintaining ered a pass-through entity in which the formal books and records can be a probincome and certain tax items passlem that could result in loss of the special through to the shareholders of the corpo- S status of the corporation. ration. When considering the use of an S corThe leading feature and consideration poration, here are some important confor selecting an S corporation is that in siderations to review: most cases the profits of the business are • Use a qualified tax professional to de-
termine all tax benefits (see page 22). • Compare the forecasted tax savings. • Consider the time and expense involved in operating as an S corp. • Consider the long term benefits for potential exit from the business. • Consider the use of retirement plans and any impact the S corp may have. By far the use of an S corporation can provide significant tax benefits both in short as well as long term business planning. As with any business objective, careful planning is always advised to review both short term as well as long term business objectives. Educate yourself by reading articles or self-help books. Meet with your advisor or find a qualified advisor within our directory to assist you in making an evaluation. You should avoid the use of do-it-yourself services in this area due to the complex nature of tax issues that require careful consideration and planning. – James Harnsberger
SCOOPING UP ROCK-BOTTOMS How the Cost Segregation Method Helps You Keep Even More of Your Money With the downturn in the housing market, sub-prime industry scandals, and record-level foreclosures, many savvy investors are sitting on the sidelines waiting for the economic bottom before jumping into the real estate market again. There are, however, other considerations important in the purchase of that next property, be it residential rental, commercial rental, new development, or even rehab property, and that is Cost Segregation. One of the feature benefits of investing in real property is the depreciation of the property. Typically, depreciation does not include an allocation toward the land cost of the property. Instead the price is adjusted to exclude the value of the land, and depreciation is spread out over a life-period of 27.5 years for residential rental and 39 years for commercial. However, the IRS has another option that could spell significant tax savings on future capital gains when the property is later resold. The cost segregation method allocates various components of the property into alternative economic class groups with shorter life periods, thus increasing the deduction today and perhaps saving on capital gains tax in the future. This is possible because recapture is not required for some components. As an example, let’s assume you purchase a rental home for $450,000 which has a land value allocated at $100,000. You would have a basis of $350,000 for depreciation, and a useful life of 27.5 years resulting in an annual deduction of $6,364 the first year and $12,727 each year thereafter. With cost segregation you
could allocate the property based upon a study to reflect the price of $450,000 and $100,000 for land of which $40,000 in the land represents improvements in and upon the land (sidewalks, sewer lines, plants, trees and shrubs) leaving you with $60,000 in land value and no depreciation. Then on the building you would allocate, based upon the same study, $30,000 for fixtures, and $40,000 for equipment and finishing, leaving you with $280,000 in structure. These “segregated” amounts have far lower class-life than the 27.5 years, thus increasing your deduction in the first 5 to 7 or 10 years of ownership. When the property is later sold, the amount on these lower allocated assets would generally not be subject to recapture since you would claim the straight-line method of depreciation versus accelerated. If the rental activity is passive, of course the losses would remain suspended; however, you would have far greater suspended losses to offset future gains when you sold, thus providing significant tax savings on the total investment. NOTE: Before using cost segregation, review the rules with a qualified tax professional (see page 22), and obtain a cost segregation study to support the claim. Attach IRS Form 8275 to your return to disclose any contrary positions to the IRS. – James Harnsberger Comments: Please visit TaxSmartMag.com/2cents.
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The Subtle Erosion of Wealth
you drop a frog into a pot of boiling water, he’s going to leap out. But if you put him in a pot of tepid water and ever so slowly turn up the heat, he’ll be cooked before he knows it. Old story, but perfect analogy. For the past nearly 100 years the tax and economic systems of our government have been turning the heat up ever so slowly on our proverbial pot. If we really want to build our wealth and someday pass something on to our heirs, we had better have an understanding of what we are up against so we can generate a viable plan before we truly are cooked. This is not another article about wealth redistribution, although it could be. Instead it is addressing a subtle wealtheroding mechanism we never really acknowledge in a meaningful way. Never mind for now all the “hidden” taxes—the excise taxes, the use taxes, import, transport, utilities taxes. Never mind the tax charged to insurance companies on gross premiums—for California the rate is 2.35%. Never mind the excise taxes on tires, countless taxes on a gallon of gas, taxes on vaccines, prescriptions, airline tickets, hotel rooms. I could go on and on and every single one of these hundreds if not thousands of taxes gets passed on to the consumer ever so slowly eroding our wealth. This we get. We don’t like it, but we get it and for the most part try to plan for it—maybe not as effectively as we could, but we do understand. So for now, let’s just never mind those. Instead I’m going bring the pot to a boil and hope to get your attention. Let me show you a subtle erosion of your wealth that will never ever be called a tax, yet it has the same effect. We call it
Part 1of 4 in a series of articles that deals with the three stages of wealth—Wealth Accumulation (Part 2), Wealth Preservation (Part 3), and Wealth Transfer (Part 4). This first article serves to educate us about how individual wealth can quickly erode if we are not paying attention.
By Susan Harnsberger
inflation. I’m going to show you how your tax bracket of, say, 34% can become 183% if you’re not watching the heat. At the time of this writing inflation was 5.7% over last year according to the Bureau of Labor Statistics. So suppose you put $10,000 in a one-year investment instrument in October of 2007. Suppose you earned 7% interest or $700 at maturity in October of 2008. That means that you now have $10,700, principal plus interest. So tax season comes, and here you are, handing over your 1099 to your tax professional who then reports this $700 income. Now let’s suppose you are in the 28% federal tax bracket and 6% state. Your combined tax on this income will be 34%. So 34% of $700 is $238 in taxes. Again you may not be happy about this, but you knew it was coming. The problem is with a 5.7% rise in prices (inflation) over the course of the year, it turns out you would need $10,570 in October of 2008 to have the same purchasing power as you had with your $10,000 back in October of 2007. So before you even pay the $238 in taxes, it turns out your real income generated from your $10,000 one-year investment instrument is $130. That is, $10,700 (what we hold in our hand on date of maturity) minus $10,570, our principal adjusted for inflation. It’s bad enough to find out effectively you only earned $130 income instead of $700, but would you like to guess your tax bracket? It’s tax paid divided by income made times 100. Paying $238 in tax on inflation adjusted income of $130 means you paid 183% on this particular income. This is important. It’s important because now you understand how subtle the erosion of your wealth can be if you’re not paying attention. Something needs to be done. And that’s the good news—there is a solution. In our next issue I’m going to show you how to build your wealth regardless of taxes and inflation and taking into consideration any tax changes under our new administration. Comments: Please visit TaxSmartMag.com/2cents.
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Parse with the Pro—James Harnsberger James Harnsberger has been in the tax industry for over 23 years, during which time he has owned five tax offices, obtained his paralegal license, and worked as a paralegal researching tax law. He is the Founder and CEO of TaxSmart America® Business Centers and TaxSmart America® University where he has taught almost 5000 tax professionals since 1998.
If our child was born on the last day of the year, can we claim her as a dependent and can we also get the Child Tax Credit? - David O’Brien, Irvine If the exemption tests are met and the child was born alive anytime during the year, you may take the full exemption. You also may be entitled to the Child Tax Credit (CTC). See IRS.gov: Pub 501, TT 354. Also read the instructions on Form 1040 (CTC). Can I deduct alimony I paid to my former wife? - Chris Sheldon, Pacific Beach Yes, you may be able to deduct alimony that you have been ordered to pay. You may also be able to deduct separate maintenance payments that you are required to make to your spouse if you are separated. See IRS.gov: Pub 504 (divorced or separated) and TT 452 (alimony after 1984 and requirements). I purchased some land that I would like to build my dream home on. Is this interest deductible? - Nancy Simpson, Hemet You need to have begun construction on the home and be able to occupy it within 24 months to have the mortgage interest you paid qualify as deductible. See IRS.gov: Pub 936. What are the rules to be able to deduct the mortgage interest on my second home if I intend to rent it out in the summer? - Jerry Lopez, Northridge A second home is any residence that you treat as a second home, and there is no rule that you have to use it during the year unless you rent it out. You must then use it as a home during the year for 14 days or 10% of the number of days you rent it, whichever is greater, in order to have it qualify for the home mortgage interest deduction. See IRS.gov: Pub 936.
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My client has a Limited Liability Company and he is the sole owner with no employees. Does he still need a Federal Tax ID Number? - Jane Meyer, Oceanside A sole owner of an LLC with no employees does not need a separate Federal Tax ID number. He needs one if he hires an employee and elects to report and pay employment taxes through the LLC. An LLC with more than one owner will always need a separate Federal Tax ID number (Application: Form SS-4). LLC’s are one of the more complicated of the various entities, and I strongly advise that your client see a tax attorney to help navigate through the legal minefields. You can visit TaxSmartMag.com if you need an attorney referral. See IRS.gov: Pub 1635. I have a California corporation that had no income for the year. Must the corporation still file a tax return? -Mia Ng, Tustin Yes. Even if it has no taxable income, a domestic corporation must file an income tax return. A domestic partnership is a bit different. If there is no gross income and no paid or incurred amount used as a deduction or credit for federal tax purposes, then no income tax return needs to be filed. As always you are advised to visit a qualified tax professional who specializes in entity formation and compliance. Can I deduct the excise taxes for a vehicle? - Rob Garcia, Long Beach Yes. Excise taxes that are the ordinary and necessary expenses of doing business can be deducted. See IRS.gov: Pub 535.
We welcome your questions. Please email them to Pro@TaxSmartMag.com.
BIG, PLAN SMART By Susan Harnsberger
NEARLY EVERYONE AT SOME TIME in their life has had the dream of starting their own business. But when it comes down to it, the people who finally take the leap are the most daring among us. They are the most independent, the most passionate, and possess the greatest drive. We can, however, divide this group of entrepreneurs into two categories: those whose businesses succeed and those that fail. No one starting a new business goes out and becomes an expert in all areas, but it is a good idea to get enough background so that you are qualified to hire the right person to help you through. If you find your entrepreneurial desire heating up, and you have a great idea for a business, here are a few not so common things you need to know that can save you hundreds of thousands of dollars in taxes and give you legal piece of mind. ► The Tax Professional ► Choosing an Entity ► Federal/State/Local Requirements ► Avoid Hobby Status ► Implement Risk Management ► Tax Year Considerations ► Tax Accounting Method ► Exit Strategies THE TAX PROFESSIONAL – The most important person beside you is your Tax Professional, provided you choose the right one. He/she needs to be a business tax and business services specialist. This is a person whose expertise and talent will save you countless hours and potentially hundreds of thousands of dollars over the life of your business. Tax planning, audit protection, entity formation and compliance when the time is right, and a multitude of other business needs are frequently neglected by new business owners. Take the time to interview a few tax professionals when you are in the planning process. Ask for a free consultation and use that time to discern his/her qualifications (please see the TaxSmart America® Business Center Directory on page 22). In the next issue we will discuss how to conduct an effective interview with a tax professional.
CHOOSING AN ENTITY – There are tax and legal considerations regardless which you entity you choose. Choosing the correct one under which you do business does not guarantee success, but going with the wrong one or none at all, can contribute to your failure. Most new businesses start out as sole proprietors and move to entity status when tax and legal considerations dictate. Your tax professional will educate you and help you make a decision. Some of the considerations to compare among the entities are state and federal tax considerations, limited liability considerations, method of management, method of capitalization, and method of ownership transition. Once you have made your decision, your tax professional will form your entity and keep you in compliance. There may be occasion you will need legal advice, and again your tax professional will tell you when and what for. Entity compliance is extremely important and frequently neglected. Many small business owners go online and quickly and cheaply form an entity only to find during an audit or in court that formation, compliance or both have been done incorrectly and the entity will, therefore, be disregarded for tax and legal liability purposes. The message here is when an entity can save your business thousands if not hundreds of thousands of dollars and afford you legal liability protection, don’t take costly shortcuts. FEDERAL/STATE/LOCAL REQUIREMENTS– Information on each of these can be obtained by calling your county office or visiting their website. Your tax professional can also help you expedite these obligations. HOBBY STATUS – The Safe Harbor Rule and For Profit Motive – For tax purposes you do not want your business deemed a hobby. The code provides for safe harbor if you have been profitable for 3 of 5 years. If you meet the safe harbor, the burden is on the IRS to prove “lack of profit motive”. If you do not meet safe harbor, you must establish a profit motive. For more detail, ask your tax professional. RISK MANAGEMENT – Managing risk means getting the proper insurance. If your tax profes-
sional does not provide insurance services, (and many do not), ask for a referral or choose an agent yourself. Make sure the insurance agent is experienced in advising small businesses on the correct deductibles and limits. Then discuss with your tax professional which policy premiums are deductible that you are considering purchasing. TAX YEAR CONSIDERATIONS – There are two types of tax year: calendar and fiscal. Within fiscal there are a couple of options on which day to end. There are circumstances in which a calendar year is required for a business. In addition for each type of entity there are restrictions. Further you may be on a calendar year for financial reporting and a fiscal tax year. There are both tax and non-tax considerations which affect your year-end choice. An example of a nontax consideration is business cycle. You may wish to choose your year-end during your slow period. Taxation considerations vary with the type of entity. This is something your tax professional can help you with. TAX ACCOUNTING METHOD – There are three tax accounting methods: cash, accrual, and hybrid. The hybrid is a combination of both cash and accrual and should only be used if you can prove that it is a more accurate reflection of income than either cash or accrual alone. Most small businesses use the cash method. Your tax professional can help you decide. EXIT STRATEGY – Believe it or not, you should plan how you are going exit your business before you begin. Will you gift it, bequeath it, do an installment sale? Each entity has a tax consideration depending upon your exit choice. Your tax professional can explain the tax consequences so you can make an informed decision. The bottom line is, the more tools and knowledge you have as you move closer to pursuing the American Dream, the better your chances of success. Please visit our website TaxSmartMag.com for some great reference links to help you in your research for starting a new business. Comments: Please visit TaxSmartMag.com/2cents.
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Dedicated to Your Tax Full Service, Year-Round Practices
SAN DIEGO COUNTY CHULA VISTA Tax & Financial, Inc. Oscar A. Almada Carmen K. Aceves 2535 Windward Way Chula Vista, CA. 91914 (619) 422-1044 Office Email: firstname.lastname@example.org CHULA VISTA Mercado Tax & Business Service Michelle Mercado 44 Third Avenue, Suite C Chula Vista, CA 91910 (619) 427-6380 Phone (619) 427-6387 Fax Email: email@example.com LA MESA 1-800-TAX-LAWS R. Patrick Michael, EA 7800 University Avenue, Suite A2 La Mesa, CA 91941 (619) 589-8680 Office (619) 698-8500 Fax Email: firstname.lastname@example.org OCEANSIDE Jes Taxes Kasey Ortiz 909 S. Coast Blvd., Suite A Oceanside, CA 92054 (760) 529-9825 Office (760) 529-9837 Fax Email: email@example.com
SAN DIEGO TaxPro Terry Smith Richard Smith 3511 Camino Del Rio South, Suite 102 San Diego CA 92108 (619) 283-8055 Office Email: Realtaxes@aol.com SAN DIEGO Aalpha Oomega Enterprizes, Inc. KimR. Luna-Miller 3320 Kemper Street, Suite 202 San Diego, CA 92110 (619) 222-7551 Office Email: firstname.lastname@example.org www.aalphaoomega.com SAN DIEGO TaxSmart America of San Diego Daniel Love 4686 Mercury Street, Suite B San Diego CA 92111 (858) 614-1831 Office Email: email@example.com www.tsasd.com SAN MARCOS Paulino Olguin Income Tax Service Paulino Olguin Antonia Olguin 1551 W. Mission Road, Suite D San Marcos, CA 92069 (760) 471-8774 Office Email: firstname.lastname@example.org
PLACENTIA MBR Tax Services, Inc. Myrnah Basallo Ramos 414 N. Placentia Avenue Placentia, CA 92870-4916 (714) 577-9400 Office (714)496-6528 Cell Email: email@example.com SANTA ANA (Also See La Mirada) Bravo Tax & Financial Services, Inc. Flavio R. Bravo Warren D. Bravo, Leopoldo D. Bravo 517 N. Main Street, Suite 300 S anta Ana, CA 92701 (714) 571-0178 Office www.bravotaxandfinancialservices.com
LOS ANGELES COUNTY COVINA 1 Tax Pro, Inc. Tony Nevarez 1393 N. Citrus Avenue Covina, CA 91722 (626) 332-5900 Office Email: firstname.lastname@example.org www.1taxpro.com DOWNEY TAX-411 Diane Jara 11455 Paramount Blvd., Suite A Downey, CA 90241 (562) 869-4000 Office (562) 869-4122 Fax Email: Diane@Tax-411.com www.tax-411.com
TAX PLANNING | BUSINESS SUPPORT | TAX SERVICES | AMENDED RETURNS | BUSINESS ENTITY
Business Centers and Business Needs Independently Owned and Operated RIVERSIDE COUNTY
GLENDALE Chimayan Financial Services, Inc. Sirvard Chimayan Jevan Chimayan 432 S. Central Avenue Glendale, CA 91204 (818)-553-1815 Office Email: email@example.com GLENDALE My Accounting Center, Inc. Oganes “Jay” Chimayan 460 S. Central Avenue Glendale, CA 91204 (818) 500-0714 Office Email: firstname.lastname@example.org GLENDORA Garnett and Garnett Tax Service Jacqueline E. Ahlen, Ph.D., EA 1148 E. Route 66 Glendora, CA 91740 (626) 914-1622 Office (626) 375-4733 Cell HAWAIIAN GARDENS Farfan Tax Consultants Frank D. Farfan 21528 Norwalk Blvd., Hawaiian Gardens, CA 90716 (562) 865-8868 Office (562) 865-8583 Fax Email: email@example.com LA MIRADA (Also See Santa Ana) Bravo Tax & Financial Services, Inc. Warren D. Bravo Flavio R. Bravo, Leopoldo D. Bravo 14242 E. Imperial Hwy La Mirada, CA 90638 (562) 777-8213 Office www.bravotaxandfinancialservices.com
NORTHRIDGE EAST MTX Accounting Thomas Urquilla, EA 8707 Lindley Avenue, Suite D Northridge, CA 91325 (800) 866-0922 Toll Free (818) 772-2277 Office www.mtxaccounting.com
TEMECULA Reyes Financial Business Corp. Elvira “Bobbie” Reyes 27780 Jefferson Avenue, Suite B Temecula, CA 92590 (951) 699-7181 Office (951) 676-3833 Fax Email: firstname.lastname@example.org
SAN BERNARDINO CO.
NORTHRIDGE WEST New Era Tax & Accounting Enzo Paredes 8363 Reseda Blvd., Suite 203B Northridge, CA 91324 (818) 435-2321 Office Email: email@example.com www.newerataxaccounting.com
LOMA LINDA Tax & More Inc. Mike Chia Choo Chia 25655 Redlands Boulevard, Suite D Loma Linda, CA 92354 (909) 478 1919 Office
PANORAMA CITY MTV Tax Services, Inc. Ma. Teresita Viray 14650 Roscoe Blvd, Suite 5 Panorama City ,CA 91402 (818) 294-0058 Office Email : firstname.lastname@example.org
TAXSMART AMERICA SOUTHERN CALIFORNIA Regional Offices
WHITTIER Beachcomber Tax and Planning Jaime Aguayo 6713 Bright Avenue Whittier, CA 90601 (562) 696-5778 Office Email: email@example.com
San Diego TaxSmart America® Corporate James Harnsberger, CEO Susan Harnsberger, Sr. V.P. 8825 Aero Drive, Ste. 103 San Diego, CA 92123 (858) 277-0775
WOODLAND HILLS SCG Financial Services, APC Stephen C. Gilbert 6303 Owensmouth Avenue, 10th Floor Woodland Hills, CA 91367 (818) 936-3533 Office (818) 936-3065 Fax Email: SCGFS@Earthlink.net
Los Angeles TaxSmart America® LA James Harnsberger, CEO Susan Harnsberger, Sr. V.P. 14111 Freeway Drive, Ste. 411 Santa Fe Springs, CA 90670
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Published on Nov 4, 2009