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Greece Lists Tax Dodgers

May 20, 2010

Trying to crack down on rampant tax evasion, the Greek authorities have made good on promises to name — and shame — some of the worst offenders.

The Finance Ministry made public a list of 57 Athens doctors who officials believe are guilty of a variety of tax offenses, including failing to give patients receipts for their fees or even recording the visits.

Twelve of the doctors had reported a combined income of slightly more than $15 million from 2001 to 2008, yet they had deposited more than twice that much — about $39 million — in their bank accounts, the ministry said Thursday.

Experts estimate that the Greek government may be losing as much as $30 billion a year to tax dodgers, a figure that would have gone a long way to solving the nation’s debt problem.

When the authorities audited the tax returns filed by 150 doctors with offices in one of Athens’ most expensive neighborhoods last year, they found that more than half of them were claiming incomes of less than $40,000. Such an income would have made it virtually impossible to pay the rent.

Thirty-four of them claimed they earned less than $13,300, making them exempt from paying any tax. And tax inspectors said that one dentist in the area reported an income of just $375.

So far, 11 doctors have been fined a total of $5.4 million. The fines range from $70,840 for a radiologist to $1.7 million for the head of a diagnostic center. Some will face criminal charges.

The list dominated the television news cycle, though the doctors’ names were published in only a few newspapers. It drew fire from the general secretary of the Athens doctors association, Giorgos Eleftheriou, who told Imerisia, a business newspaper, that doctors were being unfairly singled out.

Gustavo A. Viera, CPA

States limit sweeping tax hikes

May 20, 2010

While much of the nation may be focusing today (May 18) on key U.S. Senate primaries in Arkansas, Kentucky and Pennsylvania, a special statewide election in Arizona could gauge voters’ temperature on the question of whether or not to raise taxes.

Arizona voters will decide whether to endorse Republican Governor Jan Brewer’s proposal to raise the state sales tax by a penny to 6.6 percent. The proposed tax hike would last for three years, raising $1 billion. If approved, it would mark a departure from what many state legislatures have been doing in 2010 to balance their books.

Few states are going for across-the-board hikes in sales taxes, one of their major sources of revenue. Instead, they are slapping higher sales taxes on particular items, from tanning beds in Indiana to wind energy in Wyoming.

The Kansas Legislature is the lone exception thus far. Kansas bumped up its rate by a penny, from 5.3 percent to 6.3 percent starting July 1.

Compare these moves to last year, when California, Massachusetts, Nevada and North Carolina all went after higher sales tax rates.

If Arizona voters endorse the governor’s tax plan, they would join Oregon voters, who in January approved a general tax increase, although Oregon’s targeted corporations and the wealthy.

At least 28 statehouses have completed their sessions for the year. Some of the most cash-strapped states, such as California, New Jersey, Ohio, Pennsylvania and Rhode Island, are among those whose legislatures are still in session and working on new budgets that begin July 1.

While the revenue picture appears to be brightening, states are facing a third straight year of cutting spending and raising taxes and fees. And it won’t be the last. At least two more lean years are in the offing because tax collections plunged more than 18 percent during the recession.

Here’s how states are responding, thus far, on the tax front:

Higher taxes on candy and soda passed in Colorado and Washington State. A similar measure is pending in Massachusetts.

Cigarettes are still a target, as New Mexico, Utah and Washington all raised the tax by $1 per pack, while Hawaii boosted its rate by 20 cents. Over the governor’s objections, South Carolina raised its tax by 50 cents, so the state no longer has the lowest-in-the-nation cigarette tax (Missouri now holds that distinction). Sixteen states raised tobacco taxes last year.

The “Amazon” tax— essentially, enforcing the sales-tax law on Internet purchases — is still getting a look even though the legality of it is in question. Colorado acted this year. North Carolina and Rhode Island were among states that passed last year, following New York’s lead.

Discontinuation of tax breaks or exemptions is increasing. Colorado dropped a sales-tax exemption for “to-go containers” and other items ranging from printed materials used in direct-mail advertising to compounds used in agriculture. Iowa dropped $115 million worth of tax credits it didn’t think created jobs and suspended for three years its incentives for boosting film productions in the state. Hawaii suspended the claiming of technology investment tax credits and repealed deductions for political contributions.

Gustavo A. Viera, CPA

Increase in payroll taxes needed for Social Security

May 20, 2010
Social Security faces a $5.3 trillion shortfall over the next 75 years, but a congressional report says the massive gap could be erased with only modest changes to payroll taxes and benefits.

Some of the options are politically dangerous, such as increasing payroll taxes or reducing annual cost-of-living increases for Social Security recipients. Others, such as gradually raising the age when retirees qualify for full benefits, wouldn’t be felt for years but would affect millions.

Many wouldn’t affect current recipients, according to the report by the Senate Special Committee on Aging. Sen. Herb Kohl, chairman of the committee, said small “tweaks” are all that is needed to bolster Social Security’s finances for future generations of retirees.

READ: Congressional report on Social Security

Currently, 53 million Americans get Social Security benefits averaging $1,067 a month. In 75 years, 122 million, or one-fourth of the population, will be drawing benefits.

On its current path, Social Security is projected to run out of money by 2037, largely because of aging baby boomers reaching retirement. For the first time since the 1980s, Social Security will pay out more money in benefits this year than it collects in payroll taxes. The longer action is delayed, the harder it will get to address the program’s finances.

“Modest changes can be made over time that will keep the program in surplus,” Kohl, D-Wis., said. “They are not draconian, as the report points out, and they can be done and will be done.”

The committee is scheduled to release its report Tuesday. The report, obtained by the Associated Press, lays out options for fixing Social Security but doesn’t endorse any of them.

Kohl said lawmakers will probably combine several options to ease their impact. No action is expected this year, with midterm congressional elections looming in November. Lawmakers have said they hope to take up the issue next year.

Social Security is financed by a 6.2% payroll tax on wages below $106,800. The tax is paid by workers and matched by employers. Older Americans can apply for early retirement benefits, starting at age 62. They qualify for full benefits if they wait until they turn 66, a threshold that is gradually increasing to 67 for people born in 1960 or later.

The entire $5.3 trillion shortfall over the next 75 years would be wiped out if payroll taxes were increased 1.1 percentage points for both workers and employers. It would also disappear if Congress started taxing all wages, not just those below $106,800, said the Senate report, citing projections by the Social Security Administration.

On the benefits side, more than three-fourths of the shortfall would vanish if Congress reduced annual cost-of-living increases 1 percentage point each year. Social Security recipients get annual increases based on inflation. This January, for the first time since automatic adjustments were adopted in 1975, there was no increase because prices decreased last year.

About 23% of the shortfall would be erased if Congress gradually increased the age when retirees qualify for full benefits from 67 to 68. Nearly a third of the shortfall would disappear if the full retirement age were gradually increased to 70.

The Social Security trust funds have built a $2.5 trillion surplus over the past 25 years. But the federal government has borrowed that money over the years to spend on other programs. The government must now start borrowing money from public debt markets — adding to annual budget deficits — to repay Social Security.

The Senate panel’s report will be presented to President Obama’s deficit reduction commission, which is expected to review all entitlement programs in the search for savings.

Many of the options sound simple, but most would have widespread ramifications, said Barbara Kennelly, president and CEO of the National Committee to Preserve Social Security and Medicare.

“If you raise the retirement age and you don’t do anything about the pension law or anything about retraining, and there’s been no discussion on that, where are the jobs?” asked Kennelly, a former Democraticcongresswoman from Connecticut. “It’s not so simple.”

One expert cautioned that adjustments designed to fully fund Social Security for only 75 years will almost certainly have to be revisited well before then.

Here’s why: In 15 or 20 years, the Social Security trustees will be looking at a new 75-year window, one that includes future shortfalls beyond the current 75-year horizon. Those shortfalls will have to be addressed years in advance to avoid dramatic tax increases or significant benefit cuts, said Kent Smetters, a professor at theUniversity of Pennsylvania‘s Wharton business school.

“If you only fix it for 75 years at a time, the same problem suddenly reappears every 15 to 20 years,” Smetters said.

Gustavo A. Viera, CPA

Source: USA Today

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Top 20 Consumer Complaints in Miami for 2009

May 20, 2010

(Miami-Dade County, FL) — The Miami-Dade Consumer Services Department released its Top 20 complaint list for 2009, today. The yearly report comes as the department celebrates its third consecutive year hitting the million-dollar mark for recoveries.  Through its free mediation services designed to settle disputes between consumers and businesses, the department obtained $1,168,447 in reimbursements for consumers in the form of currency, goods and/or services.  In total, the Miami-Dade Consumer Services Department assisted in the resolution of 5,373 complaints for 2009.

Common consumer grievances were due to monetary losses or dissatisfaction with a product or service.  Topping the list for 2009 was motor vehicle repair complaints for the third year in a row, with 745 complaints.

The most notable increases in complaints from the previous year consisted of mail order — up 293%, Internet — up 252% and medical issues — up 96%.  Significant decreases in complaints were seen in furniture and cable-related issues.

Towing was the fourth most-cited problem.  To deter would-be violators, the department headed 28 investigations into illegal towing activities and collaborated with several law enforcement agencies for special operations, netting 206 citations and $64,407 in fines.  The department also conducted regular towing audits that resulted in $1,982 in consumer reimbursements and $9,400 in Assurance of Voluntary Compliance (AVC) agreements to correct mistakes.  Some of the violations included towing without a license or decal; failing to provide manifests, which document the ownership of vehicles; and missing trip sheets, which record towers’ daily activities.  Some also failed to use safety chains or have proper vehicle markings identification, solicited at accident scenes or disabled vehicle sites, and overcharged consumers.

Rank Category Number of Complaints % Increase (Decrease)
1 Motor Vehicle Repair 745 5%
2 For-Hire Transportation 710 25%
3 Mail Order 381 293%
4 Towing 204 -4%
5 Housing – Service 190 -12%
6 Credit 188 3%
7 Automotive Sales 188 21%
8 Cable 169 -18%
9 Internet 148 252%
10 Electronics Sales 132 -4%
11 Retail stores (excluding appliance, pet and furniture) 130 57%
12 Landlord / Tenant 129 42%
13 Utilities 119 11%
14 Medical 110 96%
15 Electronics Service 110 13%
16 Cell Phones 107 -12%
17 Furniture 93 -23%
18 Transportation 90 -10%
19 Travel Related & Tours 67 -15%
20 Gas Stations 46 7%

“The department works hard to enforce business regulations and stop marketplace fraud and deception where it occurs.  However, it’s also up to the consumer to stay informed of the law and their rights so that they can avoid running into trouble,” said Miami-Dade Consumer Services Department Director Cathy Grimes Peel.

“Both consumers as well as businesses should know that we are here to help, provide information and advice.  Contacting us is as simple as making a phone call or website visit.”

Consumers who use the department’s mediation services rely on in-house experts to navigate through difficult channels of communication to reach a satisfactory resolution with businesses.  To register a complaint or receive general information on consumer issues, log on to the Consumer Services Department website atwww.miamidade.gov/csd or call (305) 375-3677.  Remember, it is always a good idea to inquire about a company’s service history prior to doing business with them.

Gustavo A. Viera, CPA

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Buying a Franchise: A Consumer Guide

May 20, 2010

When you buy a franchise, you often can sell goods and services that have instant name recognition, and get training and support that can help you succeed. But purchasing a franchise is like every other investment: there’s no guarantee of success.

The Federal Trade Commission, the nation’s consumer protection agency, has prepared this booklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest.

I. The Benefits and Responsibilities of Franchise Ownership

A franchise enables you, the investor or franchisee, to operate a business. You pay a franchise fee and you get a format or system developed by the company (franchisor), the right to use the franchisor’s name for a limited time, and assistance. For example, the franchisor may provide you with help in finding a location for your outlet; initial training and an operating manual; and advice on management, marketing, or personnel. The franchisor may provide support through periodic newsletters, a toll-free telephone number, a website, or scheduled workshops or seminars.

Buying a franchise may reduce your investment risk by enabling you to associate with an established company. But the franchise fee can be substantial. You also will have other costs: for example, you may be required to give up significant control over your business while you take on contractual obligations with the franchisor.

Typically, franchise systems have several components.

Costs

In exchange for the right to use the franchisor’s name and assistance, you will pay some or all of the following fees.

Initial Franchise Fee and Other Expenses

Your initial franchise fee, which will range from several thousand dollars to several hundred thousand dollars, may be non-refundable. You may incur significant costs to rent, build, and equip an outlet and to buy initial inventory. You also may have to pay for operating licenses and insurance, and a “grand opening” fee to the franchisor to promote your new outlet.

Continuing Royalty Payments

You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. Often, you must pay royalties even if your outlet isn’t earning significant income. As a rule, you have to pay royalties for the right to use the franchisor’s name. Even if the franchisor doesn’t provide the services they promised, you still may have to pay royalties for the duration of your franchise agreement. Indeed, even if you voluntarily terminate your franchisee agreement early, you may owe royalties for the remainder of your agreement.

Advertising Fees

You also may have to pay into an advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your particular outlet.

Controls

To ensure uniformity, franchisors usually control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own business judgment. Here are a few examples.

Site Approval

Many franchisors pre-approve sites for outlets, which, in turn, may increase the likelihood that your outlet will attract customers. At the same time, the franchisor may not approve the site you’ve selected.

Design or Appearance Standards

Franchisors may impose design or appearance standards to ensure a uniform look among the various outlets. Some franchisors require periodic renovations or seasonal design changes; complying with these standards may increase your costs.

Restrictions on Goods and Services You Sell

Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. If you own an automobile transmission repair franchise, you may not be able to perform other types of automotive work, like brake or electrical system repairs.

Restrictions on Method of Operation

Franchisors may require that you operate in a particular way: they may dictate hours; pre-approve signs, employee uniforms, and advertisements; or demand that you use certain accounting or bookkeeping procedures. In some cases, the franchisor may require that you sell goods or services at specific prices, restricting your ability to offer discounts, or that you buy supplies only from an approved supplier even if you can buy similar goods elsewhere for less.

Restrictions on Sales Area

A franchisor may limit your business to a specific territory.While territorial restrictions may ensure that you will not compete with other franchisees for the same customers, they also could hurt your ability to open additional outlets or to move to a more profitable location. In addition, a franchisor may limit your ability to have your own website, which could restrict your ability to have online customers. Moreover, the franchisor itself may have the right to offer goods or services in your sales area through its own website or through catalogs or telemarketing campaigns.

Terminations and renewal

You can lose the right to your franchise if you breach the franchise contract. Franchise contracts are for a limited time; your right to renew is not guaranteed.

Franchise Terminations

A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment.

Renewals

Franchise agreements may run for as long as 20 years. At the end of the contract, the franchisor may decline to renew. Renewals are not automatic, and they may not have the original terms and conditions. Indeed, the franchisor may raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. Any of these changes may result in more competition from company-owned outlets or other franchisees.

II. Advance Work: Before You Select a Franchise System

Before you invest in a particular franchise system, think about how much money you have to invest, your abilities, and your goals. Be brutally honest.

Your Investment

  • How much money do you have to invest?
  • How much money can you afford to lose?
  • Are you purchasing the franchise alone or with partners?
  • Do you need financing? Where’s it coming from?
  • What’s your credit rating? Credit score?
  • Do you have savings or additional income to live on while you start your business?

Your Abilities

  • Does the franchise require technical experience or special training or education (for example, auto repair, home and office decorating, or tax preparation)?
  • What special skill set can you bring to a business, and, specifically, to this business?
  • What experience do you have as a business owner or manager?

Your Goals

Write down your reasons for buying a particular franchise:

  • Do you need a specific annual income?
  • Are you interested in pursuing a particular field?
  • Are you interested in retail sales or performing a service?
  • How many hours can you work? How many are you willing to work?
  • Do you intend to operate the business yourself or hire a manager?
  • Will franchise ownership be your primary source of income or a supplement to your current income?
  • Do you get bored easily? Are you in this for the long-term?
  • Would you like to own several outlets?

III. Selecting a Franchise

Purchasing a franchise is like any other investment: it comes with risk. When you think about a particular franchise, think about the demand for the products or services it offers, competitors that offer similar products or services, the franchisor’s background, and the level of support you will receive.

Demand

Is there a demand for the franchisor’s products or services in your community? Is it seasonal or ever- green? Could you be dealing with a fad? Does the product or service generate repeat business?

Competition

What’s the level of competition—nationally, regionally, and locally? How many franchised and company-owned outlets are in your area? Does the franchise sell products or services that are easily available online or through a catalog? How many competing companies sell similar products or services? Are they well-established or widely recognized by name in your community? Do they offer a similar product at a similar price?

Your Ability to Operate the Business

Sometimes, franchise systems fail. What will happen to your business if the franchisor closes up shop? Will you need the franchisor’s ongoing training, advertising, or other help to succeed? Will you have access to the same suppliers? Could you conduct the business alone if you have to cut costs or lay anyone off?

Before you invest in a particular franchise system, think about how much money you have to invest, your abilities, and your goals. Be brutally honest.

Name Recognition

Buying a franchise gives you the right to associate with the company’s name or brand. The more widely recognized the name, the more likely it is to draw in customers.

Consider:

  • name and brand recognition for the company and its product or service
  • whether the company has a registered trademark
  • how long the franchisor has been in business
  • whether the company’s reputation is for quality products or services
  • whether consumers have filed complaints against the franchise with the Better Business Bureau or a local consumer protection agency

Training and Support Services

What training and continuing support does the franchisor provide? Does the franchisor’s training measure up to the training for workers in the particular industry? Can you compete with others who have more formal training? What backgrounds do the current franchise owners have? Is your education, experience, or training similar?

Franchisor’s Experience

Many franchisors operate well-established companies with years of experience both in selling goods or services and managing a franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful entrepreneur can successfully manage a franchise system. Find out:

  • how long the franchisor has managed a franchise system
  • whether the franchisor has enough expertise to make you feel comfortable. If the franchisor has little experience managing a chain of franchises, take any promises about guidance, training, and other support with the proverbial grain of salt.

Growth

A growing franchise system increases the franchisor’s name and brand recognition and may enable you to attract customers. But growth alone doesn’t ensure successful franchisees. Indeed, a company that grows too quickly may not be able to support its franchisees with the support services it promises them. Investigate the franchisor’s financial assets and resources; are they sufficient to support the franchisees?

IV. Finding the Right Opportunity

There are many, many ways to find franchise opportunities. Some franchisors have websites with information about their franchises. Franchise expositions are another good source of information, as are franchise brokers—companies or people that specialize in matching individuals with franchise companies. It’s always a good idea to visit franchised outlets in your area and talk to the owners about their experience with particular franchisors.

Shopping at a Franchise Exposition

Attending a franchise exposition allows you to see and compare a variety of franchise possibilities under one roof. Before you attend, research the kind of franchise that may best suit your budget, experience, and goals. When you attend, visit several franchise exhibitors who deal with the type of industry that appeals to you. Ask questions.

  • How long has the franchisor been in business?
  • How many franchised outlets exist? Where are they?
  • What is the initial franchise fee? What additional start-up costs can you expect? Are there continuing royalty payments? How much? What do other franchisees pay?
  • What management, technical, and other support does the franchisor offer?
  • What controls does the franchisor impose?

Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise in greater detail. These meetings can be another source of information and another opportunity to raise questions. Be prepared to walk away from any franchise opportunity—and promotion—that doesn’t fit your needs.

Using a Franchise Broker

Franchise brokers—who also refer to themselves as “business coaches,”“advisors,”“referral sources,” or “sales consultants”—help people who want to buy a franchise. They often advertise on the Internet and in business magazines that they will help you select among various franchise options.Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources.A broker also may help you complete applications and the paperwork to consummate the sale. Remember that franchise brokers often work for franchisors, and get paid only if a sale is completed.

Limited Opportunities

Some franchise brokers may claim to be able to match you with “the perfect opportunity” because they represent a wide range of business sellers. That may be true—or not. In some instances, franchise brokers represent only a few franchisors, and, as a result, their suggestions may be limited.

Selection Standards

Some franchise brokers may claim that they will suggest only those franchises that meet certain standards. You may think this means that your financial risk is limited because the broker is weeding out the poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. If you rely on a broker, be skeptical: you may be directed to a franchise that is failing or that doesn’t have a track record.

Upselling

Some brokers earn a flat fee regardless of the price of the franchise they sell; others earn a commission pegged to the price of the franchise the broker sells. The more costly the franchise, the bigger the broker’s commission. Some brokers may steer you toward a more costly franchise to beef up their own commission.

Unauthorized or Misleading Earnings Representations

To convince you to buy a particular franchise, a broker may make certain representations about income. Earnings claims may not be true, and sometimes, can be misleading even if literally true. For example, the figures may be based on earnings in an area where demand for the business’ goods or services is high. Or the earnings claimed may be based on outdated industry data. In some instances, earnings claims may be gross sales figures: when you factor in likely expenses, actual earnings can be far less. Because earnings representations may be misleading, many franchisors prohibit their sales representatives from making them.

Before using a franchise broker, ask yourself:

  • whether you need the services of a franchise broker. Can you get enough information shopping online or reading trade magazines?
  • whether the broker is paid by the franchisor. Are there any fees you must pay the broker? If so, how much you are willing to pay?
  • whether the broker’s commission depends on the price of the franchise. If it does, consider the fact that the broker may be leading you toward a higher-priced franchise. Ask about alternatives in the same field that may cost less.
  • how many franchisors the broker represents. If it’s a small group, the potential match-ups may be limited.
  • how the broker selects franchisors to represent. Are the selection criteria in writing? Ask to see them. How many franchisors has the broker turned down in the recent past?
  • about potential earnings claims. Verify whether the franchisor has authorized the claims. Ask the franchisor for the written documentation that lays out the basis for the claims. Think about consulting an accountant to determine whether the claims are reasonable and if they are applicable to where and how you intend to operate your business.

You should receive the names and contact information for other buyers of the franchise— current and former franchisees. Talk to them, rather than relying on information from the broker alone.

Speak to them about their experience within the franchisor.

V. Investigating Before You Invest

The All-Important Disclosure Document

Before you invest in any franchise system, get a copy of the franchisor’s disclosure document. Under the Franchise Rule, which is enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for—and get—a copy of the disclosure document once the franchisor has received your application and agreed to consider it. Indeed, you may want to get a copy of the franchisor’s disclosure document before incurring any expenses to investigate the franchise offering.

The franchisor may give you a copy of its disclosure document on paper, via email, through a web page, or on a disc. The cover of the disclosure document should have information about its availability in other formats. Make sure you have a copy of the document in a format that is convenient for you, and keep a copy for reference.

Read the entire disclosure document. Don’t be shy about asking for explanations, clarifications, and answers to your questions before you invest. Among the key sections in a complete disclosure document are:

Franchisor’s Background

This section tells how long the franchisor has been in business, likely competition, and any special laws that pertain to the industry, like any license or permit requirements. This will help you understand the costs and risks you are likely to take on if you purchase and operate the franchise.

Read the entire disclosure document. Don’t be shy about asking for explanations, clarifications, and answers to your questions before you invest.

Business Background

This section identifies the executives of the franchise system and describes their experience. Pay attention to their general business backgrounds, their experience in managing a franchise system, and how long they’ve been with the company.

Litigation History

This section discusses prior litigation—whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also says whether the franchisor or any of its executives have been held liable for—or settled civil actions involving—the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with its performance.

This section also should say whether the franchisor has sued any of its franchisees during the last year, a disclosure that may indicate common types of problems in the franchise system. For example, a franchisor may sue franchisees for failing to pay royalties, which could indicate that franchisees are unsuccessful, and therefore, unable or unwilling to make their royalty payments.

Bankruptcy

This section discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy, information that can help you assess the franchisor’s financial stability and whether the company is capable of delivering the support services it promises.

Initial and Ongoing Costs

This section describes the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases, or rentals. It also explains ongoing costs, like royalties and advertising fees. In addition, ask about:

  • continuing royalty payments
  • advertising payments, both to local and national advertising funds
  • grand opening or other initial business promotions
  • business or operating licenses
  • product or service supply costs
  • real estate and leasehold improvements
  • discretionary equipment, such as a computer system or a security system
  • training
  • legal fees
  • financial and accounting advice
  • insurance
  • the costs of compliance with local ordinances, such as zoning, waste removal, and fire and other safety codes
  • health insurance
  • employee salaries and benefits

Starting your business may take several months. Estimate your operating expenses for the first year and your personal living expenses for up to two years. Compare your estimates with what other franchisees have paid and with competing franchise systems. You may be able to get a better deal with another franchisor.An accountant can help you evaluate this information.

Restrictions

This section tells whether the franchisor limits:

  • suppliers from whom you may purchase goods
  • the goods or services you may offer for sale
  • your customers
  • where you can sell goods or services
  • your use of the Internet to sell goods or services to customers in and out of your territory and the right of the franchisor (or other franchisees) to use the Internet to solicit customers or to sell in your territory

These kinds of restrictions may limit your ability to exercise your own business judgment in operating your outlet. That said, if the franchisor does not limit the territory where each franchisee can sell, the franchisor and other franchisees may compete with you for the same customers, either by establishing their own outlets, or by selling to customers in your area through the Internet, catalogs, telemarketing, and the like.

Terminations

This section spells out the conditions under which the franchisor may end your franchise and your obligations to the franchisor after termination. It also defines the conditions under which you can renew, sell, or assign your franchise to others.

Training

This section explains the franchisor’s training and assistance program. Check for information about:

  • who is eligible for training
  • whether new employees are eligible for training and, if so, at what cost. Who pays?
  • how long the training sessions take. How much time is spent on technical training, business management training, and marketing?
  • who conducts the training and their qualifications
  • whether the company offers ongoing training and at what cost
  • support staff available for trouble-shooting: Are they assigned to your area and how many franchisees they are responsible for?
  • whether on-site individual assistance is available and at what cost

The training you need will depend on your business experience and your knowledge of the franchisor’s goods and services. If you have doubts about whether the training offered is sufficient to give you the tools you need to handle day-to-day business operations, consider another franchise opportunity.

Advertising

This section has information on advertising costs. Franchisees often are required to contribute a percentage of their income to an advertising fund. Find out:

  • what part of the advertising fund is devoted to administrative costs
  • what other expenses are paid from the advertising fund
  • whether franchisees have any control over how the advertising dollars are spent
  • what advertising promotions the company has already engaged in and what’s on the drawing board
  • what percentage of the fund is spent on national advertising
  • what percentage of the fund is spent on advertising in your area
  • what percentage is devoted to selling more franchises
  • whether all franchisees contribute equally to the advertising fund
  • whether you need the franchisor’s consent to develop and buy your own advertising
  • whether there are rebates or advertising contribution discounts if you do your own advertising
  • whether the franchisor gets any commissions or rebates when it places advertisements, and who benefits from those—you or the franchisor
Current and Former Franchisees

This section has very important information about current and former franchisees. Many franchisees in your area may mean more competition for customers. The number of terminated, cancelled, or non-renewed franchises may indicate problems.

Some companies may repurchase failed outlets and list them as company-owned outlets.

Look for contact information for current franchisees and franchisees who have left the system within the last year; talking to them may be the most reliable way for you to verify the franchisor’s claims. Visit or phone as many of the current and former franchisees as possible to chat about their experiences, and the volume and type of business they’re doing. Note that some of them may have signed confidentiality agreements that prevent them from speaking with you. If that’s the case, try contacting others on the list.

If you buy an existing outlet that was reacquired by the franchisor, the franchisor must tell you who owned and operated the outlet for the last five years. Several owners in a short time may indicate that the location isn’t profitable or that the franchisor hasn’t supported that outlet as promised. Consider contacting several previous owners to learn more about their experience operating the particular outlet. You will want to learn:

  • how long the franchisee operated the franchise
  • where the franchise was located
  • whether they were able to open the outlet in a reasonable time
  • their total investment, including any hidden or unexpected costs
  • how long it took them to cover operating costs and earn a reasonable income
  • whether they were satisfied with the cost, delivery, and quality of the goods or services they sold
  • their backgrounds before becoming a franchisee
  • If you have doubts about whether the training offered is sufficient to give you the tools you need to handle day-to-day business operations, consider another franchise opportunity.
  • whether the franchisor’s training was adequate
  • whether the franchisor provided ongoing help
  • their satisfaction with the franchisor’s advertising program
  • whether the franchisor fulfilled its contractual obligations
  • whether the franchisee would invest in another outlet
  • whether the franchisee would recommend the investment

Some franchisors may give you a separate reference list of franchisees to contact. To ensure that you get the full picture, you may want to contact at least some references listed in the disclosure document that are not on the separate list.

Associations of Franchisees Operating Similar Outlets

There’s no question that the disclosure document is critical reading for potential franchisees. Associations of franchisees who are operating similar outlets are another important source of information. Whether or not these associations are sponsored or endorsed by the franchisor, they can provide information about the state of the relationship between the franchisor and its franchisees. You may want to ask a franchisee association about:

  • its membership
  • its history
  • its goals
  • its relationship with the franchisor
  • any benefits in buying from one franchisor versus a competitor
  • any problems franchisees are facing in the operation of their outlets

Earnings Information

You may want to know how much money you can make if you invest in a particular franchise system. Be careful. Earnings information can be misleading. Insist on written substantiation for any information you may receive that suggests your potential income or sales.

Franchisors are not required to disclose information about potential income or sales, but if they do, the law requires that they have a reasonable basis for their claims and that they make the substantiation for their claims available to you. When you review any earnings claims, consider:

Sample Size

Say a franchisor claims that franchisees in its system earned $50,000 last year. The claim may be deceptive if it doesn’t represent the typical earnings of franchisees. The disclosure document should tell the sample size and the number and percentage of franchisees who reported earnings at the level claimed.

Average Incomes

A franchisor may claim that the franchisees in its system earn an average income of, say, $75,000 a year. Average figures tell very little about how individual franchisees perform. An average figure may make the overall franchise system look more successful than it is because just a few very successful franchisees can inflate the average.

Gross Sales

5 Some franchisors provide figures for the gross sales revenues of their franchisees. These figures don’t really tell about the franchisees’actual costs or profits. An outlet with a high gross sales revenue on paper may be losing money because of high overhead, rent, and other expenses.

Net Profits

Franchisors often do not have data on net profits oftheir franchisees. If you get net profit information, ask whether it includes information about company- owned outlets; they often have lower costs because they can buy equipment, inventory, and other items in larger quantities, or they may own, rather than lease, their property.

Geographic Relevance

Earnings may vary with geography. If it’s reported that a franchisee earned a particular income, ask about the franchisee’s location. The disclosure document should note geographic or other differences among the group of franchisees whose earnings are reported and your likely location.

Franchisees’ Backgrounds

Keep in mind that franchisees have different skill sets and educational backgrounds. The success of some franchisees doesn’t guarantee success for all.

Reliance on Earnings Claims

Franchisors may ask you to sign a statement— sometimes presented as a written interview or questionnaire—that asks whether you received any earnings or financial performance representations during the course of buying a franchise. If you heard or got any earnings representations, report it fully during an interview or on a questionnaire or other statement. If you don’t, you may be waiving any right to contest the earnings representations that were made to you and that you used to make your decision to buy.

Financial History

The disclosure document gives important information about the company’s financial status, including audited financial statements. You can find explanatory information about the franchisor’s financial status in notes to the financial statements. Investing in a financially unstable franchisor is a significant risk; the company may go out of business or into bankruptcy after you have invested your money.

It’s a good idea to hire a lawyer or an accountant to review the franchisor’s financial statements, audit report, and notes. They can help you understand whether the franchisor:

  • has steady growth
  • has a growth plan
  • makes most of its income from the sale of franchises or from continuing royalties
  • devotes sufficient funds to support its franchise system

VI. Before You Sign the Franchise Agreement

The company’s disclosures may change between the time you receive the disclosure document and the time you sign the franchise agreement. For example, the company may have updated its disclosures; it is required to do that at least annually after its fiscal

year ends. You have the right to ask for a copy of any updated information before you sign the franchise agreement. An updated disclosure document may indicate the filing of new suits by or against the franchisor, changes in the franchisor’s management team, new financial data, and more current financial performance data, among other information.

Additional Sources of Information

Accountants and Lawyers

In addition to reading the company’s disclosure document—including any updates—and speaking with current and former franchisees, consider talking to an accountant and a lawyer. An accountant can help you understand the company’s financial statements, develop a business plan, assess any earnings projections and the assumptions they’re based on, and help you pick a franchise system that is best suited to your investment resources and your goals.

A lawyer can help you understand your obligations under the franchise contract. These contracts usually are long and complex. A contract problem that arises after you have signed the contract may be very expensive to fix—if it can be fixed at all. Choose a lawyer who is experienced in franchise matters, but rely on your own lawyer or accountant for a recommendation, rather than the franchisor’s recommendation.

Banks and Other Financial Institutions

These organizations can offer an unbiased view of the franchise opportunity you are considering. They should be able to get a Dun and Bradstreet report or similar financial profile of the franchisor.

Better Business Bureau

Check with the local Better Business Bureau (BB in the city where the franchisor has its headquarters. Ask whether there are complaints on file about the company’s products, services, or personnel.

Government

Several states regulate the sale of franchises. Check with the state office that regulates franchising—it may be the Office of the Attorney General—for more information about your rights as a franchise owner in your state.

Gustavo A. Viera, CPA

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Profit Sharing Plans for Small Businesses

May 19, 2010

WHY PROFIT SHARING PLANS?


ESTABLISHING A PROFIT SHARING PLAN


Profit sharing plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.

Employers start a profit sharing plan for a host of reasons:

❑ A well-designed profit sharing plan can help attract and keep talented employees.

❑ Contributions to a profit sharing plan are discretionary. The employer can choose when and how much to contribute.

❑ This type of plan gives employers flexibility in design of key features.

❑ A profit sharing plan benefits a mix of rank  and-file employees and owner/managers.

❑ The money contributed may grow through investments in stocks, mutual funds and other investment vehicles.

❑ Contributions and earnings generally are not taxed by the Federal government or by State governments until they are distributed.

❑ A profit sharing plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.

SHARING PLAN

When you establish a profit sharing plan, you must take certain basic actions. One of your first decisions will be whether to set up the plan yourself or to consult a professional or financial institution — such as a bank, mutual fund provider, or insurance company — for help with establishing and maintaining the plan. In addition, there are four initial steps for setting up a profit sharing plan:

❑ Adopt a written plan document,

❑ Arrange a trust fund for the plan’s assets,

❑ Develop a recordkeeping system, and

❑ Provide plan information to participants.


Adopt a written plan document — Plans begin with a written document that serves as the foundation for day-to-day plan operations. If you have hired someone to help with your plan, that person likely will provide it. If not, consider obtaining assistance from a financial institution or retirement plan professional. In either case, you will be bound by the terms of the plan document. A profit sharing plan allows you to decide (within limits) from year to year whether to contribute on behalf of participants. If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money is accounted for separately for each employee. Your contributions to the plan can be subject to a vesting schedule (which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time). Annual testing ensures that benefits for rank-and-file employees are proportional to benefits for owners/managers. Once you have decided on a profit sharing plan for your company, you will have flexibility in choosing some of the plan’s features — such as when and which employees can participate in the plan. Other features written into the plan are required by law. For instance, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan. Unless it includes a 401(k) cash or deferred feature, a profit sharing plan does not usually allow employees to contribute. If you want to include employee contributions, see 401(k) Plans for Small Businesses (Publication 4222). A profit sharing plan can be for employers of any size.

Arrange a trust fund for the plan’s assets — A plan’s assets must be held in trust to assure that assets are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to handle contributions, plan investments, and distributions. Since the financial integrity of the plan depends on the trustee, selecting a trustee is one of the most important decisions you will make in establishing a profit sharing plan. If you set up your plan through insurance contracts, the contracts do not need to be held in trust.

Develop a recordkeeping system — An accurate recordkeeping system will track and properly attribute contributions, earnings and losses, plan investments, expenses, and benefit distributions. If a contract administrator or financial institution assists in managing the plan, that entity typically will help keep the required records. In addition, a recordkeeping system will help you, your plan administrator, or financial provider prepare the plan’s annual return/report that must be filed with the Federal government.

Provide plan information to participants — You must notify employees who are participants in the plan about certain benefits, rights, and features. In addition, a summary plan description (SPD) must be provided to all participants. The SPD is the primary vehicle to inform participants and beneficiaries about the plan and how it

operates. The SPD typically is created with the plan document.

OPERATING A PROFIT SHARING PLAN Once you have established a profit sharing plan, you assume certain responsibilities in operating the plan. If you hired someone to help in setting up your plan, that arrangement also may have included help in operating the plan. If not, another important decision will be whether to manage the plan yourself or to hire a professional or financial institution — such as a bank, mutual fund provider, or insurance company — to take care of some or most aspects of operating the plan. Elements of operating profit sharing plans include the following:

❑ Participation

❑ Contributions

❑ Vesting

❑ Nondiscrimination

❑ Investing profit sharing plan monies

❑ Fiduciary responsibilities

❑ Disclosing plan information to participants

❑ Reporting to government agencies

❑ Distributing plan benefits

Participation

Typically, a plan includes a mix of rank-and  file employees and owner/managers. However, some employees may be excluded from a profit sharing plan if they:

❑ Have not attained age 21;

❑ Have not completed a year of service (2 years

in certain plans); or

❑ Are covered by a collective bargaining

agreement that does not provide for participation in the plan, if retirement benefits were the subject of good faith bargaining. Employees cannot be excluded from a plan merely because they are older workers.

Contributions

In a profit sharing plan, you can decide on your business’s contribution (if any) to participants’ accounts in the plan. You have the flexibility of changing the amount you contribute to the plan each year, according to business conditions.

If you do make contributions, you will need to have a set formula for determining how the contributions are allocated to participants’ accounts. The simplest, and most common, allocation formula specifies that the employer contribution is allocated so that each participant receives an amount that is the same percentage of his or her compensation.

Contribution Limits

Employer contributions and forfeitures (nonvested employer contributions of terminated participants) are subject to a per-employee overall annual limitation. This limit is the lesser of:

❑ 100 percent of the employee’s compensation, or

❑ $49,000 per year for 2009 and 2010.

Employers can deduct amounts that do not exceed 25 percent of aggregate compensation for all participants and the per-employee limits mentioned above.

Vesting


In profit sharing plans, you can design your plan so that employer contributions become vested (nonforfeitable) over time, according to a vesting schedule. If you require 2 years of service to participate, all contributions are immediately vested. All employees must be vested according to plan terms.

Nondiscrimination


In order to preserve the tax benefits of a profit sharing plan, the plan must provide substantive benefits for rank-and-file employees, not just business owners and managers. These requirements are called nondiscrimination rules and compare both plan participation and contributions of rank-and-file employees to owners/managers. Traditional profit sharing plans are subject to annual testing to assure that the amount of contributions does not discriminate in favor of owners and managers. If you allocate a uniform percentage of compensation to each participant, then no testing is required because your plan automatically satisfies the nondiscrimination requirement.

Investing Profit Sharing Plan Monies


After you decide on a profit sharing plan, you can consider the variety of investment options. One decision you will need to make in designing a plan is whether to permit your employees to direct the investment of their accounts or to manage the monies on their behalf. If you choose the former, you also need to decide what investment options to make available to the participants. Depending on the plan design you choose, you may want to hire someone either to determine the investment options to make available or to manage the plan’s investments. Continually monitoring the investment options ensures that your selections remain in the best interests of your plan and its participants.

Fiduciary Responsibilities


Many of the actions needed to operate a profit sharing plan involve fiduciary decisions. This is true whether you hire someone to manage the plan for you or do some or all of the plan management yourself. Controlling the assets of the plan or using discretion in administering and managing the plan makes you or the entity you hire a plan fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not a title. Be aware that hiring someone to perform fiduciary functions is itself a fiduciary act.

Some decisions with respect to a plan are business decisions, rather than fiduciary decisions. For instance, the decisions to establish a plan, to include certain features in a plan, to amend a plan, and to terminate a plan are business decisions. When making these decisions, you are acting on behalf of your business, not the plan, and therefore, you would not be a fiduciary. However, when you take steps to implement these decisions, you (or those you hire) are acting on behalf of the plan and thus, in making decisions, may be acting as fiduciaries.

Basic Responsibilities


Those persons or entities that are fiduciaries are in a position of trust with respect to the participants and beneficiaries in the plan. The fiduciary’s responsibilities include:

❑ Acting solely in the interest of the participants and their beneficiaries;

❑ Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;

❑ Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters;

❑ Following the plan documents;

❑ Diversifying plan investments.

These are the responsibilities that fiduciaries need to keep in mind as they carry out their duties. The responsibility to be prudent covers a wide range of functions needed to operate a plan. And, since all these functions must be carried out in the same manner as a prudent person would, it may be in your best interest to consult experts in various fields, such as investments and accounting.

The plan must designate a fiduciary, typically the trustee, to make sure that contributions due to the plan are collected. If the plan and other documents are silent or ambiguous, the trustee generally has this responsibility. As part of following the plan documents in operating your plan, the plan document will need to be updated from time to time for changes in the law.

Limiting Liability

With these responsibilities, there is also some potential liability. However, there are actions you can take to demonstrate that you carried out your responsibilities properly as well as ways to limit your liability. The fiduciary responsibilities cover the process used to carry out the plan functions rather than simply the end results. For example, if you or someone you hire makes the investment decisions for the plan, an investment does not have to be a “winner” if it was part of a prudent overall diversified investment portfolio for the plan. Since a fiduciary needs to carry out activities through a prudent process, you should document the decision-making process to demonstrate the rationale behind the decision at the time it was made.

In addition to the steps above, there are other ways to limit potential liability. The plan can be set up to give participants control of the investments in their accounts. For participants to have control, they must have sufficient information on the specifics of their investment options. If properly executed, this type of plan limits your liability for the investment decisions made by participants. You can also hire a service provider or providers to handle some or most of the fiduciary functions, setting up the agreement so that the person or entity then assumes liability.

Hiring a Service Provider

Even if you do hire a financial institution or retirement plan professional to manage the whole plan, you retain some fiduciary responsibility for the decision to select and keep that person or entity as the plan’s service provider. Thus, you should document your selection process and monitor the services provided to determine if a change needs to be made.

Some items to consider in selecting a plan service provider:

❑ Information about the firm itself: affiliations, financial condition, experience with profit sharing plans, and assets under their control;

❑ A description of business practices: how plan assets will be invested if the firm will manage plan investments or how participant investment directions will be handled, and proposed fee structure;

❑ Information about the quality of prospective providers: the identity, experience, and qualifications of the professionals who will be handling the plan’s account; any recent litigation or enforcement action that has been taken against the firm; the firm’s experience or performance record; if the firm plans to work with any of its affiliates in handling the plan’s account; and whether the firm has fiduciary liability insurance. Once hired, these are additional actions to take when monitoring a service provider:

❑ Review the service provider’s performance; ❑ Read any reports they provide; ❑ Check actual fees charged; ❑ Ask about policies and practices (such as trading, investment turnover, and proxy voting); and ❑ Follow up on participant complaints.

Prohibited Transactions and Exemptions

There are certain transactions that are prohibited under the law to prevent dealings with parties that have certain connections to the plan, self-dealing, or conflicts of interest that could harm the plan. However, there are a number

of exceptions under the law, and additional exemptions may be granted by the U.S. Department of Labor, where protections for the plan are in place in conducting the transactions.

One exemption allows the provision of investment advice to participants who direct the investments in their accounts. This applies to the buying, selling, or holding of an investment related to the advice as well as to the receipt of related fees and other compensation by a fiduciary adviser. Please check www.dol.gov/ ebsa for more information.

Another exemption in the law permits you to offer loans to participants through your plan. If you do, the loan program must be carried out in such a way that the plan and all other participants are protected. Thus, the decision with respect to each loan request is treated as a plan investment and considered accordingly.

Bonding

Persons handling plan funds or other plan property generally must be covered by a fidelity bond to protect the plan against loss resulting from fraud and dishonesty by those covered by the bond.

Disclosing Plan Information to Participants

Plan disclosure documents keep participants informed about the basics of plan operation, alert them to changes in the plan’s structure and operations, and provide them a chance to make decisions and take timely action with respect to their accounts.

The summary plan description (SPD) — the basic descriptive document — is a plain- language explanation of the plan and must be comprehensive enough to apprise participants of their rights and responsibilities under the plan. It also informs participants about the plan features and what to expect of the plan. Among other things, the SPD must include information about:

❑ When and how employees become eligible to participate in the profit sharing plan;

❑ The contributions to the plan;

❑ How long it takes to become vested;

❑ When employees are eligible to receive their

benefits;

❑ How to file a claim for those benefits; and

❑ Basic rights and responsibilities participants have under the Federal retirement law, the Employee Retirement Income Security Act (ERISA).

The SPD should include an explanation about the administrative expenses that will be paid by the plan. This document must be given to participants when they join the plan and to beneficiaries when they first receive benefits. SPDs must also be redistributed periodically during the life of the plan.

A summary of material modification (SMM) apprises participants of changes made to the plan or to the information required to be in the SPD. The SMM or an updated SPD must be automatically furnished to participants within a specified number of days after the change.

An individual benefit statement (IBS) shows the total plan benefits earned by a participant, vested benefits, the value of each investment in the account, information describing the ability to direct investments, and (for plans with participant direction) an explanation of the importance of a diversified portfolio. Plans that provide for participant-directed accounts must furnish individual benefit statements on a quarterly basis. Plans that do not provide for participant direction must furnish statements annually.

A summary annual report (SAR) is a narrative of the plan’s annual return/report, the Form 5500, filed with the Federal government (see Reporting to Government Agencies for more information). It must be furnished annually to participants.

A blackout period notice gives employees advance notice when a blackout period occurs, typically when plans change recordkeepers or investment options, or when plans add participants due to corporate mergers or acquisitions. During a blackout period, participants’ rights to direct investments, take loans, or obtain distributions are suspended.

Reporting to Government Agencies

In addition to the disclosure documents that provide information to participants, plans must also report certain information to government entities.

Form 5500, Annual Return/Report of Employee Benefit Plans

Plans are required to file an annual return/ report with the Federal government, in which information about the plan and its operation is disclosed to the IRS and the U.S. Department of Labor. Beginning with the reports for 2009, plans that must file the Form 5500 must do so electronically. These reports are made available to the public.

Depending on the number and type of participants covered, most profit sharing plans must file one of the following forms:

❑ Form 5500, Annual Return/Report of Form 5500,

Employee Benefit Plan,

❑ Form 5500-SF, Short Form Annual Return/ Report of Small Employee Benefit Plan (available January 1, 2010), or

❑ Form 5500-EZ, Annual Return of One- Participant (Owners and Their Spouses) Retirement Plan

Most one-participant plans (sole proprietor and retirement plan professional to see what further partnership plans) with total assets of $250,000 action is necessary to terminate your profit or less are exempt from the annual filing requirement. However, regardless of the value of the plan’s assets, a final return/report must be filed when a plan is terminated.

Form 1099-R

Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. is given to both the IRS and recipients of distributions from the plan during the year. It is used to report distributions (including rollovers) from a retirement plan.

Distributing Plan Benefits

Benefits in a profit sharing plan are dependent on a participant’s account balance at the time of distribution.

When participants are eligible to receive a distribution, they typically can elect to:

❑ Take a lump sum distribution of their account,

❑ Have their account transferred directly to an

IRA or another employer’s retirement plan, or

❑ Take periodic distributions.

TERMINATING A PROFIT SHARING PLAN

Profit sharing plans must be established with the intention of being continued indefinitely. However, business needs may require that employers terminate their profit sharing plans. For example, you may want to establish another type of retirement plan in lieu of the profit sharing plan.

Typically, the process of terminating a profit sharing plan includes amending the plan document, distributing all assets, and filing a final Form 5500. You must also notify your employees that the plan will be discontinued. Check with your plan’s financial institution or a sharing plan.

COMPLIANCE

Even with the best intentions, mistakes in plan operation can still happen. The U.S. Department of Labor and IRS have correction programs to help profit sharing plan sponsors correct plan errors, protect participants, and keep the plan’s tax benefits. These programs are structured to encourage early correction of the errors. Having an ongoing review program makes it easier to spot and correct mistakes in plan operations.

A PROFIT SHARING PLAN CHECKLIST

Have you decided how much to contribute to the plan this year? Have you decided to hire a financial institution or retirement plan professional to help with setting up and running the plan? Have you adopted a written plan that includes the features you want to offer, such as how contributions will be allocated and when they will be vested? Have you notified participants and provided them with information to help in their decision making? Have you arranged a trust fund for the plan assets or will you set up the plan solely with insurance contracts? Have you developed a recordkeeping system? Are you familiar with the fiduciary responsibilities? Are you prepared to monitor the plan’s service providers? Are you familiar with the reporting and disclosure requirements of a profit sharing plan?

F

Gustavo A. Viera, CPA

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Form to Claim Payroll Tax Exemption for Hiring New Workers Now Available

May 19, 2010

The Internal Revenue Service has posted on its website the newly-revised payroll tax form that most eligible employers can use to claim the special payroll tax exemption that applies to many new workers hired during 2010.

Designed to encourage employers to hire and retain new workers, the payroll tax exemption and the related new hire retention credit were created by the Hiring Incentives to Restore Employment (HIRE) Act signed by President Obama on March 18.

Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer’s share of Social Security tax on wages paid to these workers after March 18. This reduction will have no effect on the employee’s future Social Security benefits. The employee’s 6.2 percent share of Social Security tax and the employer and employee’s shares of Medicare tax still apply to all wages.

In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return. Further details on both the tax credit and the payroll tax exemption can be found in a recently-expanded list of answers to frequently-asked questions about the new law now posted on IRS.gov.

How to Claim the Payroll Tax Exemption

Form 941, Employer’s QUARTERLY Federal Tax Return, revised for use beginning with the second calendar quarter of 2010, will be filed by most employers claiming the payroll tax exemption for wages paid to qualified employees. The HIRE Act does not allow employers to claim the exemption for wages paid in the first quarter but provides for a credit in the second quarter. The instructions for the new Form 941 explain how this credit for wages paid from March 19 through March 31 can be claimed on the second quarter return. The form and instructions are now available for download on IRS.gov.

The HIRE Act requires that employers get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. Employers can use new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, released last month, to meet this requirement. Though employers need this certification to claim both the payroll tax exemption and the new hire retention credit, they do not file these statements with the IRS. Instead, they must retain them along with other payroll and income tax records.

These two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify as long as they are replacing workers who left voluntarily or who were terminated for cause and otherwise are qualified employees. Family members and other relatives do not qualify for either of these tax benefits.

Businesses, agricultural employers, tax-exempt organizations, tribal governments and public colleges and universities all qualify to claim the payroll tax exemption for eligible newly-hired employees. Household employers and federal, state and local government employers, other than public colleges and universities, are not eligible.

Gustavo A. Viera, CPA

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