Monthly Archives: October 2013

Review your business tax planning at year-end

As the end of the year approaches, you probably have a pretty good idea of your business’s bottom line. Now it’s time to determine what tax strategies you can implement before December 31. Here are two.

  • Clean up loans and receivables. Did you lend money to a now-former employee or client? Are you certain you’re not going to be repaid? Take steps before year-end to establish the worthlessness of the debt. How? Going to court is not always necessary. You can prove your good faith attempts to obtain repayment with documented phone calls, letters, or correspondence with collection agencies.

    Business bad debts are generally deductible in the year they become worthless.

  • Think charitably. Your business can donate items such as cash, inventory (including food), equipment, and real property to qualified charities. The amount of your deduction depends on the type of property and the form of your business. For example, corporations may be limited to a deduction of 10% of taxable income.

    Donations of food and business inventory offer enhanced tax breaks. If your corporation is a qualified farming or ranching operation, a conservation easement contribution qualifies for special preferential deduction percentages and carryforward options.

    Remember, whatever type of contribution your business makes, you’ll need to keep records, including acknowledgement from the charity.

For more tax-saving ideas for your business, give us a call.

2013 year-end tax planning for individuals

So how much will you owe with your 2013 federal income tax return? Not sure? You still have time to calculate your liability — and perhaps reduce it. Here are planning ideas to consider in the final months of the year.

  • Check your income. Your tax rate is based on your “bracket,” which is a range of income. For example, when you’re single and your 2013 taxable income is between $8,926 and $36,250, you’re in the 15% bracket. Additional income, up to $87,850, will be taxed at the next rate, which is 25%.
  • Planning strategy 1. Consider ways to keep your income within a lower bracket as you approach the next level. One example: Increase pre-tax retirement plan contributions. For 2013, the 401(k) contribution limit is $17,500. When you’re age 50 and over, you can also make an additional catch-up contribution of $5,500.
  • Planning strategy 2. Consider selling real or personal property on an installment basis. Electing to receive part of the proceeds in future years allows you to defer the income and the related tax.

Estimating your taxable income before year-end opens up opportunities for effective planning. Give us a call. We’ll help you choose strategies that will give you the most benefit.

Do you have unrelated business taxable income in your IRA?

What does unrelated business taxable income have to do with your IRA?

You probably think of your individual retirement account as a personal savings vehicle, not a business. Yet it’s considered a trust, and in some instances earnings in your account that are generated by a trade or business can be subject to federal income tax. Those earnings include income from certain LLCs, publicly traded partnerships, and real estate activities such as receipts from properties your IRA takes on debt to purchase.

Because the IRA is the owner of the assets, the income is reported separately from your individual return (Form 1040). If the gross amount of unrelated business income within your IRA exceeds $1,000 in a year, your IRA will need to file Form 990-T, Exempt Organization Business Income Tax Return. The form is due April 15 and your IRA must pay the tax, which means the money comes from cash or other assets already in the account.

When the income is substantial and ongoing, your IRA may need to make estimated tax payments. State taxes may also be due.

Give us a call if you’re considering a nontraditional investment for your IRA. We’ll help you figure out the tax implications.

Education benefits can cut your tax bill

Dorm, sweet dorm. After organizing your college student’s new digs, it’s time for an extra credit assignment: sorting out the education benefits you can claim on your 2013 federal income tax return.

In general, tax breaks for education fit into three broad categories.

  • Deductions, such as qualified tuition and fees and student loan interest, reduce your gross income. These are called “above the line” deductions because you can claim them even if you’re not planning to itemize deductions.
  • Exclusions from income include amounts you use for educational expenses that might otherwise be considered taxable, such as scholarships, or certain withdrawals from your individual retirement account. Interest you receive on savings bonds that you redeem and spend on qualified educational expenses may also be excludable from income.
  • Credits. The American Opportunity Credit and the Lifetime Learning Credit are effectively treated as payments on your return, and offset the tax you owe. The American Opportunity Credit is partially refundable, which means you can receive a refund even when you owe no tax.

You might also benefit from other education tax breaks. For example, if your child is between the ages of 18 and 24 and a full-time student, you may be able to claim a dependency exemption ($3,900 for 2013).

Give us a call. We’ll help you make sure you get that extra credit, deduction, or exclusion.

Some early 401(k) withdrawals are penalty-free

To encourage workers to set aside money for retirement, Congress modified the tax law in the late 1970s. The new provisions offered certain tax advantages to companies that established “defined contribution” plans. Unlike traditional pensions, such plans do not provide for specific pension payouts during retirement. Instead, they establish how much an employee can contribute. The most common of these plans, as defined by its subsection in the Internal Revenue Code, is the 401(k).

In an effort to keep employees from raiding their retirement accounts too soon, the tax code also assesses stiff penalties for early withdrawals. In general, if you’re still working and pull money out of your employer-sponsored 401(k) account before age 59½, you’ll be socked with a 10% penalty on the withdrawal, in addition to regular income taxes.

Nevertheless, some provisions of the tax code allow for penalty-free withdrawals from a 401(k) account before age 59½.

Think long and hard, however, before taking an early withdrawal. Presumably, the longer you contribute to a 401(k) account, the more savings will be available to meet your retirement needs. Considering the meager retirement savings of many Americans — one recent study found that the median retirement savings of households nearing retirement is $12,000 — the decision to make an early withdrawal should not be taken lightly.

Following are two ways your traditional 401(k) account can be tapped without incurring the 10% penalty. Note that different rules apply to distributions from Individual Retirement Accounts (IRAs) and Roth 401(k) plans.

  • Age 50 withdrawals for public safety employees and reservists. If you’re a police officer, firefighter, or medic working for a state or city government, you won’t be subject to the 10% penalty on early withdrawals if you leave your job in or after the year you turn 50. This provision also applies to certain active-duty reservists.
  • Age 55 withdrawals after separation from service. If you leave your employer in or after the year you reach age 55, you can take penalty-free distributions from your company’s qualified 401(k) plan. Note, however, if you retire before that year and wait until you’re 55 to take the distribution, you’ll be subject to the 10% penalty.

In addition to these two provisions, the tax code provides additional limited exceptions to the 10% penalty rule. If you’re considering an early withdrawal from your retirement accounts, give us a call.

Check your company’s key financial ratios

In the hustle and bustle of daily business, getting a firm grip on your company’s financial health may seem elusive. Fortunately, a wealth of diagnostic information — like the annual physical exam that highlights the need for a change in medication or a revised diet — is often displayed in plain sight on the company balance sheet or income statement. Performing simple arithmetic operations on key numbers can provide insight to pinpoint existing problems or correct weaknesses — aspects of your business that, if left unchecked, may evolve into crises. Especially when monitored over time, the following three ratios can spotlight your company’s vitality or lack thereof.

  • Profit margin. Divide net income by net sales to arrive at this ratio. Commonly used to evaluate a firm’s efficiency in controlling costs and expenses relative to sales, the profit margin is often a good indicator of a firm’s financial health. In general, the lower a company’s expenses relative to sales, the higher the sales dollars available for other activities. Other things being equal, you want this number to remain stable or increase over time. A falling profit margin may signal that burgeoning expenses are draining any increases in sales revenue.
  • Current ratio. Also known as the working capital ratio, this number provides insight into a company’s ability to meet its short-term obligations. Divide current assets (cash, receivables, inventories) by current liabilities (routine accounts payable, accruals for taxes and payroll, the current portion of long-term debt) to calculate this ratio. A current ratio of 1.0 means that you are able to meet current obligations without drawing down savings or charging up the company credit card. If this number drops below 1.0, you may be headed for trouble. Your goal: keep the current ratio well above that number. A healthy current ratio indicates that, like a financially solvent household, your firm is living within its means.
  • Debt ratio. Divide total liabilities by total assets to find this ratio. This important number highlights the percentage of company assets that are contributed by creditors. Generally speaking, creditors prefer a low debt ratio because, if your business declines, their interests are better protected. In addition, a company with a low debt ratio (relative to other firms in the same industry) is often given preference by lenders.

If you’d like more information on how to evaluate your company’s profitability, liquidity, and stability over time, give us a call.