March, 2006

Reflections on a Tax Refund

It's hard not to like a tax refund. Any many taxpayers receive them - over 106 million federal income-tax refunds were issued to individual taxpayers in just one recent fiscal year, according to IRS data. If you expect to receive a refund this year, here is some food for thought.

Plan for Your 2006 Taxes
The reason you are receiving a refund is that you paid too much tax, either through wage withholding or by making payments of estimated tax. Instead of giving the IRS what amount to an interest-free loan, you could have invested your money or used it for other things during the year.

For 2006, it might make sense to have your employer withhold less tax from your wages or to reduce your quarterly estimated tax payments. but don't pay too little. Then, you would have a large tax bill when you file your 2006 taxes - and you could be subject to an underpayment penalty.

Make Hay This Year
Now let's look at this year's refund for tax year 2005. What are you planning to do with it? Something impulsive, like take a vacation or make a purchase you wouldn't otherwise make? If your finances are in good shape, then go for it. If not, you might want to consider the following possibilities.

Debt reduction. If you routinely carry credit card balances, use your refused to make a dentin your debt. With the average interest rate on credit cards around 13%-14%, any reduction will help improve your financial situation.

Retirement Savings. Unless you already have a healthy nest egg, investing your tax refund in a tax-advantaged retirement account is a step toward a more secure future.

College savings. Both Coverdell education savings accounts (ESAs) and Section 529 college savings plans provide tax benefits - two good ways to use your refund to save taxes and help with future expenses.

Emergency fund. If the money you have socked away for emergencies is running low, your tax refund could replenish it. If you don't have an emergency fund, consider using your tax refund to start one. Aim for having enough liquid savings to cover between three and six months worth of expenses.

The IRS has set the standard mileage rate at 44.5¢ per mile for business miles driven after 2005. The rate for the last four months of 2005 was 48.5¢.

Taxpayers using the standard mileage rate figure their deduction for business use of a car by multiplying the number of business miles driven by the applicable rate. Amounts spent for parking and tolls can be deducted separately.

Use of the standard mileage rate is optional. Taxpayers can deduct the actual costs of operating a car for business (gasoline, oil, insurance, repairs, maintenance,etc.), plus depreciation or lease payments, rather than using the standard mileage rate.

The standard mileage rate is easier to use than the actual expense method, but it doesn't always produce the largest deduction. We can help you choose the method that will work best for you.

If you're in retail, your store may be an especially attractive target for people passing bad checks. Since the odds of your being able to collect on a bad check aren't very good, you'd better arm yourself. The best defense is to limit your exposure: Keep yourself and your staff informed and aware of the latest trends - and keep your eyes open for bad checks.

Your Check Checklist

One of the best ways to protect against bad checks is for you to inspect every one personally. but that may not be practical - or possible. As a backup plan, instruct all employees who might be presented with checks to watch for the following and to bring any potential problems to you.

Nonlocal banks. Pay special attention to checks from out-of-town banks. Get a local and an out-of-town address and phone number from the customer and write them on the back of the check.

Legibility. Don't take any check that has erasure marks on it, or has been rewritten (especially the amount). Checks that aren't legibly written out in your or an employee's presence are suspect.

Payee. Checks should be made payable to your business. Accepting two-party checks is risky.

Purchase. Look at the merchandise the customer is buying. If price doesn't seem to be an issue, caution may be in order.

Your Posted Policy

Be sure you have an up-to-date check policy and post it where employees and customers can see it. Here are some key things to include:

Require identification (spell out what's acceptable) for anyone who pays by check and have employees write the information on the check.

Set lower and upper limits on check amounts - and enforce them.

Require that checks be written for the exact amount of the purchase.

Don't accept undated or postdated checks or checks that are older than 30 days.

Don't case checks for anyone.

But what about a retiree who wants you to cash a Social Security check? Unless you know the person, forget it. According to the Small Business Administration, government checks are frequently stolen and you should be very cautious.

Medicaid, a government program that pays for health and long-term care, is available only to individuals with very limited financial resources. For the parents of a disabled child, this can create a planning dilemma: how to provide the child with resources that will enhance his or her quality of life without compromising the child's access to Medicaid.

A specific type of trust - called a "special needs" or "supplemental needs" trust - can be a solution. If the trust meets various requirements, the government will not count the trust in determining whether the disabled beneficiary is eligible for Medicaid.

A special needs trust can pay for a variety of items that government benefits won't cover. Some examples:

Education and training.

Someone to help the disabled beneficiary with activities of daily living (bathing, etc).

A wheelchair-accessible van or other specially equipped vehicle.

Upgraded accommodations in a skilled nursing facility exceeding what Medicaid will pay for

Vacations and recreational activities

Special needs trusts funded with a disabled person's own assets - money received in settlement of a personal injury lawsuit, for example - generally must contain a "Medicaid payback' provision. When the disabled beneficiary dies, the state is reimbursed from the remaining trust funds. This provision isn't required in trusts funded with money a parent (or other third party) contributes. Remaining assets may pass to another beneficiary.

You know e-mail is here to stay when companies are drafting formal policies regarding proper procedures for this popular form of communication. Why are such policies necessary?

Education

E-mails can be easily misdirected. Far too many messages are needlessly - and thoughtlessly - sent using "reply to all." Abuse of the "cc" and "bcc" lines can also clog inboxes unnecessarily. Educating your employees can help prevent these problems.

Risk Reduction

Errant e-mails can be more than a nuisance; they can be a liability resulting in lost business. Sensitive e-mails in particular should be addressed and routed very carefully. If you routinely discuss sensitive issues via e-mail, you may want to consider encryption software.

Professionalism

E-mails have replaced business letters in many cases. The same attention to proper spelling, grammar, and tone should apply when drafting an e-mail as would be expected in a formal letter.

What's the difference between an S corporation and an LLC? If you're starting a business, you should understand the different ways a business can be organized. Here are a few key features of some common business structures.

Sole Proprietorships A sole proprietorship can have only one owner-operator. The owner is personally responsible for all business activities and debts because the sole proprietorship is not a separate legal entity. Even with liability insurance, the owner's personal assets are at risk if claims against the business aren't covered.

Sole proprietors report business income and expenses on their personal tax returns. The business doesn't have to file a separate federal income-tax return.

Corporations A corporation can have one or more owners (shareholders) and is a separate legal entity. As such, it is responsible for paying its debts and obligations. Shareholders generally can't lose more than their investment in the corporation. However, lenders often require personal guarantees from shareholders before approving loans to closely held corporations.

Corporations must abide by the Internal Revenue Code's corporate tax rules. Unless shareholders make a valid "S" election for the corporation, any tax due on corporate income is payable by the corporation. jSahreholders must pay tax on any dividends received from the corporations.

With certain exceptions, an S corporation's income is not taxed at the corporate level for federal tax purposes. Instead, the corporation's income is allocated to the shareholders in proportion to their individual stock ownership and reported on their respective tax returns.

Partnerships and LLCs

In a partnership, at least one general partner must retain personal liability. Partnerships are called "pass-through" entities. This means that although a partnership return usually must be filed, income is passed through and taxed to the partners.

Limited liability company (LLC) owners (members) are not personally liable for the company's debts and liabilities. LLCs with more than one number are typically taxed as partnerships for federal income-tax purposes.

While 90% of the investors responding to a Securities Investor Protection Coproration survey siad they review their mutual fund and/or brokerage statements regularly, few than 58% have ever read a prospectus.

Employers are now allowed to pay the balance due ono their payroll tax returns (forms 941 and 940) by credit card. New IRS Form 944 replaces Form 941 for certain small employers.

Product philanthropy appears to be thriving. According to a recent Conference Baord survey, over 50% of the charitable donations by U.S. companies in 2004 were in the form of goods, not cash.

Can an employer dock the pay of an exempt employee who fils to report to work because of inclement weather without putting the employee's exempt status in jeopardy? "Yes," said the U.S. Department of Labor in a recent opinion letter. As long as the employee misses an entire day of work and the employer was open for business, it is acceptable to dock the employee a full day's pay (and not allow the employee to use vacation or sick time.)

Adrian is concerned because business has been flat for about a year. He's considering making an offer to buy out a local competitor who is struggling.

Buying out or merging with another business seems like a reasonable way for a small business to expand. However, the results frequently fail to meet expectations.

One of the reasons for this is that the synergy between two businesses is an unknown. While owners can try to predict how compatible and financially successful a business combination will be, the reality often falls short. Then there's the challenge of integrating the businesses. Taking too long to integrate them, or not managing to integrate them at all, can be costly. And conflicting company cultures and personalities can create unexpected snags.

Successful mergers or buyouts on the small business level can be particularly challenging because busy owners often don't have the time and/or resources to adequately research and analyze the target business and its financial records.

These are just a few reasons why Adrian should make sure he has a thorough understanding of his competitor's business and its financial status. If he's still enthusiastic about a buyout, he should plan a thorough review of his own finances to see if he can afford it. He might also want to research other ways of expanding, such as adding product lines.

If you're thinking about a buyout or merger, you can count on us for the professional support and expertise you'll need.

Q. I have a traditional (non-Roth) individual retirement account. What's the deadline for taking my first required minimum distribution? I'd like to keep the money tax deferred for as long as possible.

A. You must take your first required minimum distribution by April 1 of the year after the year you turn age 70-1/2. You'll have to pay a penalty if you don't.

Q. I'm in the process of getting a divorce. My spouse is proposing that I pay her a specified amount each month as "alimony." As I understand it, if she dies before our son reaches age 21, I'd have to continue making the payments to a trust for our soon until he turns 21. Would my payments be tax deductible?

A. Payments do not qualify as tax-deductible alimony if the divorce instrument requires the payor (in this case, you) to continue making them beyond the death of the recipient spouse. Under the circumstances you describe, you couldn't deduct any of your payments, even amounts you pay directly to your ex-spouse.