August 2007

Good for Business, Good for You

For richer, for poorer, for better, for worse. If you own a small business, these familiar wedding vows might signify more than promises to a spouse. They might describe your relationship with your business as well. And with good reason if your personal financial well-being is closely tided to how well your business is doing.

A strong cash flow is good for business and good for you. If your company's case flow isn't as healthy as you'd like it to be, here are some things to consider.

Rely on Reports What you don't know can hurt you, especially when it comes to cash flow. If you're not already checking them, start generating cash flow and cash balance reports on a monthly basis. If your figures are "off" for even a few months, find out why. A problem could be lurking.

Market, Market, Market When things are slow, developing new business opportunities is critical to your cash flow - and perhaps, your company's survival. But it's also critical when things are good. You can't afford to be complacent about the future. If you stop devoting time to rowing your business, your success may be short-lived.

Look at Limits In a cash crunch, many small business owners instinctively dip into their personal accounts to help their businesses over the hump. While this may be simpler and faster than some other solutions, it could turn disastrous fro an owner's personal finances if the business is seriously failing. If you haven't already decided how much of your personal assets you're willing to invest in your business, now may be a good time to come up with a limit.

Credit a Credit Line Even if you're doing everything right, you could still hit a rough patch. Or, an opportunity might come up that requires some quick financial maneuvering. Instead of using your own money, consider using a line of credit. For maximum flexibility, establish a line o credit for your business before you need it. If you wait to apply until you're in a bind or a hurry, you might be turned down.

Wedded Bliss If your personal and business finances are intertwined, your planning should integrate the two. We'd be happy to review your situation with you.

If you use the Internet, the chances are pretty good that you also use passwords to keep your online accounts protected. By their very nature, passwords should be kept private . . . but only up to a point.

Eventually, your family or other heirs will need those passwords (as well as other account information, such as usernames and the answers to any security questions you had to provide). If they don't have th em - and permission to access your online accounts - there could be problems while settling your estate.

Just as your estate plan should include pertinent information about your baking, investment, and retirement accounts, it should also address your Internet accounts, including e-mail. When making your plan, be sure to spell out who can access your Internet accounts after your death and include a document that provides Internet addresses, passwords, and other pertinent access information for all your online accounts.

In a recent survey, over three quarters (76%)of American workers ages 35-44 and 60% of workers ages 45-54 said they have less then $100,000 in savings and investments, and a full quarter of workers in all age groups said they have no savings at all.* Since many of today's workers won't receive traditional pension benefits after they retire, their future financial security may depend on saving more during their working years. Identifying where the money goes now can be a first step to freeing up "extra" money for saving.

The Basics According to government statistics, on average, Americans devote about half of their household budgets to food, clothing and housing.** Of those three basic necessities, housing consumes by far the largest share of expenditures.

Plus Transportation and Health Care Spending for transportation, with an 18% share, ranks above spending for food and clothing combined. While many consumers are feeling the pinch of higher health-care costs, spending for health care still represents only 5.7% of total household expenditures.

Changing Attitudes Additional research reveals that the number of things Americans say they can't live without is growing.*** The table shows some of the items that consumers increasingly rank as necessities rather than luxuries.

% of adults rating item as a necessity

Dividing a budget into "must have" and "would like to have but could do without" categories can help individuals prioritize their spending and allocate money for long-term goals.

*The Retirement System in Transition: The 2007 Retirement Confidence Survey, by Ruth Helman, Mathew Greenwald & Associates: Jack VanDerhei, Temple University and EBRI Fellow; and Craig Copeland, EBRI. EBRI Issue Brief No. 304, April 2007. Primary residence and any defined benefit plan are not counted in determining the under $100,000 total.
**Consumer Expenditures in 2005, U.S. Department of Labor, U.S. Bureau of Labor Statistics, Report 998, 2007.
***Luxury or Necessity? Thing We Can't Live Without: The List Has Grown in the Past Decade, Pew Research Center, 2006.

Nonprofit organizations are increasingly under the watchful eye of lawmakers and government regulators, including the IRS. Recently, the IRS issued governance standards for 501(c)(3) organizations. While following the standards is not mandatory, organizations should view them as useful guidelines and consider voluntarily adopting them.

Helpful "Best Practices" Good Governance Practices for 501(c)(3) Organizations suggests some "best practices" that can help nonprofits achieve regulatory compliance and maintain public support, both of which are required for 501(c)(3) organizations to retain their tax-exempt status.

The guidance, which is available on the IRS website, advises nonprofit boards to:

• Adopt a mission statement to guide the organization.
• Create a code of ethics and a whistleblower policy.
• But policies and procedures in place that will help them act in good faith and in the charity's best interest.
• Adopt and regularly evaluate an effective conflict-of-interest policy.
• Strive for full transparency in all activities.
• Have appropriate fund raising policies to ensure that activities are legal, materials are accurate and truthful, and costs are reasonable.
• Ensure that financial resources are used to further charitable purposes.
• Control compensation for board members (if appropriate), officers, and staff.
• Design document-retention policies (pertaining to paper, electronic, and other types of documents) to ensure that information can be provided as necessary to satisfy regulators and the public.

Getting the best deal possible when you're buying a car can take some negotiating. Then there's the question of what to do with your old car. Should you sell it or trade it in? If you've used the car for business, you'll want to factor taxes into the equation.

While selling a business car typically produces a gain or loss for tax purposes, a trade-in doesn't. Instead, the old car's tax basis is added to the cash paid for the new car, and that total is the "cost" that can be written off by way of depreciation and/or the Section 179 expensing election.

So, strictly from a tax viewpoint, which option is better?

• In a loss situation (old car's anticipated selling price is lower than its remaining undepreciated cost), selling will let you benefit from the loss deduction.
• In a gain situation (anticipated selling prices is more than remaining undepreciated cost), a trade may be preferable. That way, you'll avoid having to pay taxes on the gain.

If you sell merchandise over the Internet, you probably already know the good news: Credit cards make purchasing fast and simple. You might already know the bad news too: If a charge is fraudulent, the merchant - not the card issuer - is usually responsible.

Who Pays? Did you think the credit card companies were responsible? They are when a customer presents a stolen credit card in a store, as long as proper protocol is followed. But with "card not present" transactions over the Internet (and telephone), merchants are usually liable. Even if card issuers agree to pay disputed charges, it may result in your having to pay higher fees to third-party card processing companies. You could even lose service altogether.

What Can You Do? Although you may not be able to totally eliminate fraudulent charges, there are several things you can do to reduce their frequency. First, you can require customers to provide card verification codes. These are three or four digit numbers that appear only on the credit cards themselves, eliminating the possibility of someone using a stolen statement or receipt to place an order.

You can also employ an address verification system (AVS) during the card authorization process. An AVS program matches the billing address the customer provides with the billing address on file for that credit card account. Unfortunately, this step is far from perfect.

Is Something Fishy? Scanning your orders for red flags can also pay off. Here are some things to watch out for, especially from first-time customers.

• Orders that ship to post office boxes.
• Billing and shipping addresses that don't match (a problem with gift orders).
• Incorrect or missing phone numbers.
• E-mail addresses from free web accounts rather than commercial Internet service providers.
• Particularly large orders.

If you suspect something is awry, try calling or e-mailing to verify the customer's order. The extra time may be well spent.

Municipal bond investors are likely to have more than a passing interest in the outcome of a case that is to be argued before the U.S. Supreme Court. At issue in the case is a Kentucky state law that exempts from state income tax interest earned on municipal bonds issued within Kentucky, while taxing most out-of-state municipal bond interest. Many other states have similar laws.

Not being able to find a salesperson to help when needed was high on the list of retail customer complaints in a recent Wharton School/Verde Group survey. A Wharton analysis estimates that American retailers lose 6% of their customers to sales associates who are "missing in action."

Copies of any Form 990-T filed by a public charity with the IRS after August 17, 2006, must be made available for public inspection. Although churches are not required to file Form 990-T, they must file form 990-T to report unrelated business taxable income and are subject to the public disclosure requirement. Returns filed solely to request a refund of the federal telephone excise need not be made available.

Nicole's elderly father came to live with her early this year. Since then, she has continued to pay for almost all of the household expenses without his assistance while also helping him with his medical bills. Nicole wonders whether she can qualify for any tax benefits to help ease the financial burden.

Nicole should first determine whether her father meets the tax law tests to qualify as her dependent. For one, Nicole must provide more than half of her father's total financial support. In addition, her father's annual gross income, not including nontaxable Social Security benefits, must be less than the $3,400 exemption amount (for 2007). (Certain other requirements apply).

Even if Nicole's father doesn't qualify as a dependent because of the gross income requirement, she still may be able to include any medical expenses she pays on her father's behalf when determining her own medical deduction on her federal income-tax return. Nicole also could be entitled to claim a dependent care tax credit if she pays someone to care for her father while she is working.

Filing status is another consideration. Nicole may be eligible to file her return as a head of household if she is unmarried and her father does, in fact, qualify as her dependent.

Our experienced professionals are fully prepared to help taxpayers like Nicole take advantage of all available tax benefits. If you have questions regarding your personal ax situation, we'd be happy to discuss them with you.

Question: I'm considering offering employees a direct deposit option for payroll checks. Besides speed and convenience, what are the benefits?
Answer: No live checks are needed for employees who opt for direct deposit, so there is less risk of check fraud. In addition, the cost of tracing and replacing lost or stolen checks is reduced. Direct deposit can also help with cash management since you'll know exactly when our payroll account will be debited. However some employees might not choose the new option.

Question: Is my son's college scholarship taxable?
Answer: Scholarships are generally not taxable as long as the money is used to pay qualified expenses, such as tuition and fees (but not room and board). Unless your son received a full scholarship, he should receive a Form 1098-T from his college next January showing the scholarship amount. Note that an education ax credit or deduction isn't available for expenses paid with a tax-free scholarship.