May 2007

Maintaining Public Charity Status

Public charities in good standing with the IRS enjoy an exemption from federal income and unemployment ax, along with several additional benefits, including the ability to accept tax deductible contributions, reduced postal rates, and tax-exempt financing. After an organization obtains official 501(c)(3) status, maintaining it become critical.

Four types of activities can put an organization's tax-exempt status at risk.

(1) Private Benefit/Inurement A public charity's activities must benefit the public interest. The charity may not take part in activities that substantially benefit, monetarily or otherwise, the "private interest" of an individual or another organization. (This prohibition does not apply to paying employees reasonable salaries and providing employees reasonable salaries and providing individuals with services that are in keeping with the charity's exempt purpose

A charity must also avoid inurement. This occurs when an "insider" - an individual with a personal or private interest in the organization, such as a founder, director, or key employee - receives income (other than a reasonable salary) from the charity or uses its assets inappropriately for personal gain. Any infringement of the inurement rule will jeopardize an organization's exempt status.

(2) Lobbying It's not unusual for public charities to be interested in legislative issues. And some lobbying is permitted. But a public charity can lose its exempt status for "substantial" lobbying. How much is substantial? The IRS will decide by measuring how much was "spent" on lobbying efforts in terms of time and money.

(3) Political Campaign Activity Charities are expressly prohibited from getting involved, either directly or indirectly, in a candidate's political campaign. This includes making campaign contributions and speaking out for or against a candidate in a public forum. There are a few allowable political activities - but charities should tread very carefully here.

(4) Unrelated Business Income Unrelated business income (UBI) is income generated by an activity that is not related to a charity's exempt purpose. This type of income is taxable, even when it's used to help pay for exempt activities. Generating some UBI is not bad, but too much may signal a shift in focus away from a charity's tax-exempt purpose.

If you own a vacation home - or plan to buy one - keep these tax rules in mind.

Just you and the family If you keep your vacation spot to yourself, mortgage interest and property taxes are generally deductible for a second residence, just as they are on your primary residence.

Limited rental. Now, say you rent your property. As long as you don't rent it for more than 14 days during the years, the rental income is tax free.

Come one, come all. Rent your home for more than 14 days and you'll have to report the income. However, you generally can deduct rental expenses up to the amount of the income. If you limit your personal use of the home to 14 days (or 10% of the total number of days the home is rented, whichever is greater), all rental expenses are deductible, although loss deductions are restricted.

Quick - name your ten biggest clients. Are they also your best clients? If you haven't looked at your customers in terms of profitability lately, you may not know the answer to that question. Not all big customers are good customers. Finicky, high maintenance accounts require extra effort and that can eat into your profits. Maybe it's time to refocus.

Identify the Good Guys Take a look at your customer list. Taking the cost of providing support and customer service into account as well as overall sales, identify your most profitable clients. Now, try profiling them. Do they have any traits in common? Why do they buy from you? The answers will not only highlight your company's strengths, they can help you zero in on new prospects.

Show Your Appreciation Focus on making your best customers happy. Let them know they're appreciated with a personal note, extra discount, or invitation only event. Another way to cultivate your relationship with good clients is to treat them like partners. Talk with them about what you can do to help them expand their business - because your business will benefit from their prosperity.

Work on Your Margins There may be some simple changes you could make that might help turn your not-so-good customers into better ones. Raising prices or cutting the internal cost of servicing accounts are two possible ways to increase profitability. And you might try cross-selling to beef up profits - but only to customers with good credit and solid payment histories.

Don't Waste Your Time It's possible that you could end up identifying clients that are never going to be profitable. Does this mean you should dump them? As difficult as it is to think about, some accounts are, literally, more trouble than they're worth. If you can't come up with a way to turn things around, letting go may be the best thing for your bottom line.

You're in business to make money. You need to use your resources to be as profitable as you can. That means focusing your time and energy on your core business, your best clients, and your best prospects for the future.

Moving your retirement savings from your employer's 401(k)plan to an individual retirement account (IRA) when you change jobs or retire keeps your money tax deferred. But did you know that the tax law also lets you move money from an IRA to a 401(k)?

You don't have to be on the move yourself to do an IRA-to-401(k) plan rollover. You can transfer your IRA money anytime, assuming your employer's plan will accept the rollover.

An IRA-to-401(k) plan rollover may be smart if leaving your job in your mid-fifties is a possibility and you anticipate need access to your IRA money at that time. A rollover may be a way to avoid the 10% penalty that generally applies to IRA withdrawals taken before age 59-1/2. A 401(k) plan can make penalty-free distribution to you after you leave employment - including distributions of amounts transferred into the plan from your IRAs - provided you are at least age 55 in the year you separate from service.

Nondeductible IRA contributions aren't eligible for rollover. But don't rule out a rollover simply because your IRA contains nondeductible contributions. Moving all but those amounts to your employers plan would give you the flexibility to draw down our remaining IRA balance (i.e., the nondeductible contributions) before age 59-1/2 without worrying about taxes and penalties. They would apply only to the extent of any IRA earnings that accrue after the rollover.

It's wise to set money aside in an easily accessible account that you can tap for large, unexpected expenses. With adequate money in an emergency fund, you won't be forced to sell investments at a bad time or run up costly credit card debt.

Don't pay - collect! Even relatively small bills can grow into big expenses if you aren't able to pay them off quickly. Instead of paying out interest on credit cards, put money in an account that will pay you interest until you need your money.

Little by Little. Ideally, you should try to keep three to six months' worth of living expenses in your emergency fund. If you're starting from scratch, it will probably take awhile to save that amount of money. Once you do, be sure to replenish your emergency fund regularly.

Samantha just launched her own marketing business and is excited about all the travel she'll be doing. She may want to prepare for an unglamorous facet of business travel - keeping track of her expenses for tax purposes.

Recordkeeping If Samantha wants to claim tax deductions for her business travel expenses, she'll need proper documentation for the IRS. First, she'll need to record all of her expenses. Using a log book or PDA, Samantha should document the cost, date, location (or description), and business purpose of each expense. And she should keep all of her travel-related receipts together in one place.

Travel, Lodging, and Meals Samantha can deduct the cost of traveling away from home on business. In addition to the cost of reaching a business destination, lodging, meals, and incidental expenses during her stay are also deductible, as long as they are reasonable and appropriate, and related to business. In general, only 50% of business meal expenses can be deducted.

If she wants, she can use standard IRS amounts to deduct mileage (48.5 cents per miles in 2007 for car travel) and meal and incidental expenses (rates very with location) instead of using actual expenses figures, which will reduce recordkeeping tasks.

Entertainment and Gifts On occasion, Samantha will be taking clients out for dinner or other events. Up to 50% of the cost of entertaining clients is also deductible - as long as the expense is ordinary and necessary, and business is conducted before, during, or after the entertainment activity. If Samantha gives her clients gifts, the annual deduction limit is $25 per person each year.

Side Trips While extending a business trip over the weekend to go skiing in Utah or surfing in Hawaii is allowed, none of the costs incurred during such side trips are deductible. Samantha should be sure to keep her expenses separate if she decides to tack some personal travel onto a business trip.

E-commerce sales are suffering as a result of consumer concern about Internet safety. Among online shoppers, security concerns cost businesses an estimated $913 million of lost 2006 sales, according to a survey by Gartner, Inc. But the lost sales among those who simply refused to shop online were even greater - amounting to another $1 billion.

Multitasking appears to be rampant among today's drivers. A recent Nationwide Mutual Insurance survey reveals that 73% of respondents use their cell phones while driving. Over one third (37%) of the youngest respondents reported sending text or instant messages while driving.

Commerce Department data show the U.S. personal savings rate in negative territory again in 2006, dipping to negative 1% from the prior year's rate of negative .4%. A negative rate means that people are borrowing money to using existing savings to finance current spending, rather than confining their spending to after-tax income or adding to savings.

Almost 70% of companies surveyed by the Profit Sharing/401(k) Council of America allow new employees to join the company 401(k) plan within three months of hire.

Pete has a small business and plans to hire his teenage son Chris to work with him over the summer.

That's a good idea for a number of reasons, not the least of which is that it gives Pete the opportunity to introduce his son to the challenges of running a small business. Who knows, Chris may want to take over his father's business some day. Of course, Pete can't just put his son on the payroll. The position and the responsibilities must be legitimate, and the wage that Chris earns must be reasonable.

Another good reason for Pete to hire his son: potential tax savings. In 2007, a dependent child can earn up to $5,350 tax free because of the standard deduction. If Chris continues to work during the school year and earns more than $5,350, the wages over that amount would likely be taxes at the lowest 10% rate. In 2007, the 10% bracket extends to the first $7,825 of taxable income for single filers.

Pete will be able to deduct Chris' wages from his business income, which will reduce both income and self-employment taxes. And, because Pete's business is not incorporated, he won't have to withhold (or pay) Social Security taxes on his son's earnings.

If you have a small business, we're prepared to help. Please contact us for information about our services.

Question: I plan to expand my local business into other states. Will sales taxes be an issue?
Answer: You didn't specify the type of business you have or how you will be expanding it, but, in general, a state can require a business to collect sales tax if it determines the business has sufficient presence - or - "nexus" - in the state. States use different criteria for making this determination, so you should check the rules of every state in which you will have business activity to determine the precise requirements and what your sales tax obligations may be.

Question: Our son is looking for a job in a major metropolitan area that has a high cost of living. How can he estimate how much he'll need to earn there to maintain his current lifestyle?
Answer: His best bet may be to look for cost of living index numbers for his new city and current locality at the library or online. By dividing the two index numbers (new/current) and multiplying the result by his current salary, he'll have a better idea of the salary level he should be targeting in his job search.