Posted tagged ‘corporate taxes’

IRS Not Suited for Certifying Tax Software Privacy, Accuracy, ETAAC Says

June 25, 2010

The Internal Revenue Service should not be forced into the “ill suited” role of certifying and enforcing privacy and accuracy standards for tax software providers, but should turn instead to established outside providers for those services, members of an Electronic Tax Administration Advisory Committee (ETAAC) said June 16.

Industry advisers presented their 2010 ETAAC recommendations to Congress to IRS officials, and also made a special report on a new subcommittee formed to address e-file security and tax software policies and programs. The report is expected to be released June 17.

This year’s annual recommendations focus on tax preparer e-filing, business systems modernization, the IRS return preparer review, and new information reporting requirements.

The push to certify that tax software is accurate is coming from a number of different directions, ETAAC Chairman Phillip Poirier, a vice president in Intuit’s consumer tax group, said. The Government Accountability Office has recommended that IRS do a risk assessment of the reliability, security, accuracy, and privacy of tax software.

“Software is a term that is too narrow,” he said. “It’s really all the pipes to get the return from the preparer or the taxpayer to the IRS e-file system.” To that end, IRS has included software in its return preparer review, commenced a tax software risk assessment, and formed an ETAAC subcommittee.

That subcommittee’s principal spokesman, Dave Olsen, said tax software certifications should not be left up to the IRS. “Effective and efficient oversight should not be attempted by trying to force the IRS into what may be ill-suited roles, by making them the direct certifier or enforcer of some of these requirements; but rather it would make sense to rely on third-party certification processes and standards-setting that can be applied in that broader context across the different portions of the industry,” Olsen, director of product management with CCH Small Firm Services, said.

Olsen told BNA that IRS has an interest in making sure standards are put in place for oversight and verification of IRS electronic systems that deal with transfer of tax data. These controls would deal with security and privacy. Oversight and verification of tax software will be necessary to address accuracy and reliability, he said. However, IRS is not the appropriate agent to create these measures, he said. “It does not have the resources or the expertise.”

The standards should be established by a self-regulatory organization with third parties being brought in to review the controls that have been put in place, he said.

Olsen also said there needs to be a full understanding of the differences between professional and self-preparer software. “Professionals do things differently than a self-preparer does,” he said.

Information Reporting

Some stakeholders have recommended accelerating Form 1099 information return reporting, but ETAAC said it has some concerns with that.

The IRS needs to consider the full impact of accelerated information reporting on both businesses and taxpayers, especially small- and medium-sized businesses, said Grant DeMeritte, tax compliance manager with Howard Hughes Medical Institute.

Beginning in 2012, businesses will be required to use Form 1099 to report to the IRS all payments to corporations in excess of $600 for goods or services, not just services and supplies, which had previously been the case, he said.

“We want to make sure the IRS is ready to handle the significant increase in the number of e-filed information returns—and not just the number of e-filed returns, but the potential for an increase in the number of e-filers,” he said. Many businesses may exceed the 250-form threshold for having to file in this category due to the new legislation, which was an offset to a portion of the Patient Protection and Affordable Care Act ( Pub. L. No. 111-148)—a requirement from which corporations were previously exempt.

IRS Response

An IRS official responded to the ETAAC recommendations by saying she heard a consistent theme—that more and better communication is needed. “It’s so important but difficult to do well,” said Norma Brudwick, IRS deputy director for electronic tax administration and refundable credits. She also said IRS recognizes the importance of partnering with the industry, in part because of IRS’s limited resources.

Brudwick also said she was glad to hear that industry understands that IRS is willing to make allowances for taxpayers that do not want to e-file. “We need to really always keep in mind the taxpayer,” she said.

Gustavo A Viera CPA

CPA in Miami Since 1983 Stumbleupon Technorati Digg

Say Goodbye to Checks – Peer-to Peer Payments Gain Momentum

June 25, 2010

Small business owners and their customers no longer have to rely on checks to make and accept payments thanks to new peer-to-peer payment services cropping up.

Peer-to-peer payment services, which are being offered from a slew of banks, lets business owners transfer money to a customers’ accounts or vice versa using just an e-mail address or mobile phone number.

Users can conduct the transaction from their existing bank account, which means they won’t have to visit a different Web site to access the service.

“Billions of dollars are transferred back and forth from one business to another via check,” said Steve Shaw, Internet banking and electronic payments group director at Brookfield, Wisc.-based Fiserv (FISV), which later this month will launch ZashPay, its P2P transfer service.

Shaw said more consumers and businesses are looking for ways to make payments sans the check as their comfort level with conducting financial transactions online grows.  “Either the check is put in the mail or handed to someone. It takes time and effort [to cash the check].”

According to Javelin Research, nearly 44% or 38 million of the 86 million online households made at least one online P2P fund transfer in 2009, up from 27% in 2008. Javelin is forecasting 60 million American households will use P2P transfers by 2014. The oldest and most popular form of P2P payments comes via PayPal. With the new services, however, the customer will be able to make the payment through an existing bank account.

Fiserv’s product, dubbed ZashPay, will launch in late June with 100 banks committed to offering the service with more being added each week.

If a bank is offering the service, the business owner would login to the bank account, input an email address and send a message to the recipient and transfer the money. The service lets you make transfers online or via a browser-enabled mobile phone.

The recipient would then login to claim the money, which would automatically be deposited into the account as soon as the next day.

If the banks for the payee and the person receiving the money don’t offer the service, Fiserv is launching a public web site where after signing up, people can transfer money back and forth. The banks determine the fee the sender of the money has to pay with a suggested fee of 50 cents. will charge $0.75 for each payment initiated at the site.

The service is just as secure as the existing bill pay service offered by Fiserv thanks to fraud tools built in to ensure the payment is coming from a valid e-mail address and going to a verified location. If a red flag arises, the payment won’t be sent.

For small business owners and their customers P2P lending may be attractive because they will no longer have to write a check, buy a stamp, mail it and then wait for the check to clear.  Shaw noted small businesses can use it as a way to manage and reconcile invoices.

“It helps from a convenience and speed perspective because they can reconcile more accounts,” said Shaw.

Fiserv with ZashPay isn’t the only financial company launching P2P payment services. CashEdge of New York has its Popmoney P2P payment service and in May announced Bank of the West is using the service.

Like ZashPay, Popmoney lets bank customers send money from their bank account using a recipients email address, mobile phone number or bank account information.  Intuit has its PaymentNetwork service that charges small businesses 50 cents per payment received. Like the other services with PaymentNetwork the small business would receive payments from anyone with an email address with the funds directly transferred into the small businesses bank account.  Among the banks offering P2P payment services are PNC (PNC)  and Wells Fargo (WFC), to name a couple.

Gustavo A Viera CPA

CPA in Miami Since 1983

Certified Public Accountants, the Preferred Financial Planner

June 25, 2010

The time has come to take stock of the options that Certified Public Accountants (CPAs) have for their clients’ financial planning needs. Whether it is incorporating a financial-planning practice in a firm, partnering with a Miami CPA financial planner or referring business to a Miami CPA financial planner, never has there been a greater number of resources and guidance to help the Miami CPA firm develop an additional service line, the sole practitioner to develop a new practice for the benefit of clients and colleagues or for CPAs to cultivate relationships with CPA financial planners to work with the CPA, PFS to help ensure that their client is well cared for.

Many thousands of Miami CPA’s and across the United States practice financial planning, a profession with many facets. For years, members of the accounting profession have taken tepid steps forward only to step back to evaluate what may be appropriate for the firm and for their suite of services provided. Recognition of barriers is the important first step to the integration of financial planning into an additional practice line within the firm. A greater focus should be examined on what is making CPAs overwhelmingly successful with their clients; the holistic approach that CPAs across America take when engaging with clients. The anecdotal evidence points to the clients of CPAs being in far better shape than most as it applies to their clients’ finances. When it comes to barriers, one key obstacle is a lingering discomfort with the misinformed notion that CPAs would recommend specific product. Others are more fundamental. There may be a cultural clash within firms between the profession of financial planning and the more traditional services. During the ramp-up years, there is a feeling that the financial-planning practice is being subsidized due to the revenue streams achieving insufficient results when compared to traditional lines of the practice; usually for the first five years. When the building of the practice is complete, the CPA financial planner enjoys a significantly greater revenue stream and the work hours may not match the other areas of traditional practice.

In addition, others may find it difficult to distinguish the profession of CPA financial planning from the financial services industry. In fact, the very possibility of a loss in a portfolio increases trepidation. While many non-CPA financial planners have a primary focus on investments, there are key aspects that separate CPAs from the financial services industry, including the deep tax knowledge they bring to the table, the holistic approach of covering all elements of a client’s financial plan as well as a high standard of care. There has been talk of how the fiduciary standards may not be applied to certain financial planners and exempting some relationships from fiduciary standards that focus on one or two areas of financial planning. The discussion among CPA, PFS financial planners is not how to escape fiduciary responsibilities with their client, but rather questioning the appropriateness of escaping fiduciary responsibility in financial planning, even if only a couple of the elements of the financial planning process are engaged.

Regardless of how we feel about the investment side of planning, the reality is that markets rise and fall and that most money is made in a down market, which is counterintuitive. If we lose a fraction of what the S&P 500 loses, then we don’t have to come back nearly as much and can give significant benefits to our clients on the rebound. The 58 percent market drop this last time around requires a greater than 100 percent return to get back to even. CPAs in financial planning understand what risk is, how to explain it to clients and help clients assess their risk and position assets that are consistent with their risk tolerance.

Make no mistake about it. There are plenty of balanced portfolios that have similar risk characteristics to being fully invested in the stock market. I would suggest that any CPA who does not currently have a professional relationship with a CPA, PFS (Personal Financial Specialist) to pick up the phone and have a CPA, PFS financial planner explain why financial planning is based on the very powerful questions identifying what the client’s mission, values and goals are before they recommend specific strategies and products in all aspects of planning. To find a PFS in your neighborhood, go to For investments, spend some time with a CPA, PFS to discuss risk, portfolio volatility and the steps the CPA, PFS goes through to ensure that clients are well positioned to weather any economic storm. Any perception of similarity between CPA financial planners and the financial services industry is not only incongruent with reality, it could very well invalidate in excess of 100 percent of the benefit clients derive from your tax-and-accounting expertise. The comparison is similar to CPA tax preparers and enrolled agents. While we would all agree that enrolled agents provide important and valuable services to society and recognize that some enrolled agents can stand shoulder to shoulder with CPAs preparing taxes, generally there is a significant additional benefit that CPA tax preparers bring to their clients.

Given the markets that have always been volatile throughout American history (Table 2), clients cannot afford to risk working with those who consistently demonstrate a heavy bias toward firm products that vanish into the haze after they post inferior results. While it is recognized that across America firms provide some very important products, CPAs apply analytical tools and due diligence to evaluate specific investment options to ensure that the client receives service in an unbiased and objective environment. As I travel across America, I have borne witness to CPA, PFS after CPA, PFS who delivered dynamically different results from their non-CPA peers. This is not to say that there aren’t any extraordinary non-CPA financial planning practitioners, because there are. However, on the whole, the CPA, PFS has a background and experience that is significantly more beneficial to clients than the non-CPA financial planners.

CPAs tend to focus on a variety of issues and take time to explain the most critical areas of investment planning. Just three technical areas discussed involve risk and the specific dollar impact that ups and downs can have on a portfolio with 95 percent confidence, what makes a good long-term investment and set the table on how money grows over time (the power of compounding) This is a brief sample of just one area of financial planning.

If firms recalibrate their perspective toward financial planning, it will come with the recognition that it is a terrific time for accounting firms to evaluate and add financial services as an additional service line for clients or when a conflict arises, to work with other CPA firms to work together in an environment to deliver superior planning services to their clients.

Gustavo A Viera CPA

CPA in Miami Since 1983

The IRS Scrutinizes 401(k) Cash for Small Business

June 23, 2010

As the credit crisis has made it tougher for small businesses to get funding, some would-be entrepreneurs have exploited a loophole that lets them finance a startup with 401(k) retirement funds without facing any taxes or penalties. Now the technique is catching the attention of the IRS, which plans to step up audits of such transactions. “We are seeing problems,” says Monika Templeman, acting director of employee plans at the IRS. “It is open to abuse.”

The transactions typically require an entrepreneur to create a new corporation, establish a 401(k) plan for it, and move existing 401(k) funds into the plan. Money from the new 401(k) is used to buy shares in the new company, and that provides the business with capital while retaining the tax advantages of the 401(k). Without such a rollover, funds withdrawn from a 401(k) are subject to income taxes. A 10 percent penalty applies if the funds are withdrawn by a person under the age of 59 1/2. Templeman says the IRS has seen questionable valuations for the new stock, and in a few cases the money was used to buy recreational vehicles and other personal assets.

While financial advisers began promoting such rollovers in the early 1990s, the credit crisis has made them more attractive. This year at least 4,000 people are likely to use the strategy, an increase over previous years, according to companies that help craft the plans. The typical transaction involves between $100,000 and $200,000 in retirement funds. Advisers charge about $5,000 for the paperwork, plus annual fees of at least $800 to run the new 401(k) plan. “When you start comparing it with a 15 to 20 percent interest rate on a loan…people are saying ‘I’d rather be my own investor,’ ” says Jeremy Ames, chief executive of Guidant Financial Group, a Seattle company that helps business owners roll over 401(k)s.

Ames and other advocates of the rollovers say their transactions are legal. That doesn’t mean the IRS will see it that way. Stephen Dobrow, president of benefits consultancy Primark Benefits, says even plans the IRS has examined may face renewed scrutiny. The IRS, he says, “can still blow up those plans even though they’ve passed on them once.”

The bottom line: Using 401(k) funds to finance startups got more popular during the recession, but some of the transactions may violate tax law.

Gustavo A Viera CPA

CPA in Miami Since 1983 Stumbleupon Technorati Digg

Do Americans Pay Too Much in Taxes?

June 22, 2010

Nobody likes paying taxes, but it’s the only way to pay for those basic government services that everyone agrees are necessary, such as defense. There is no agreement, however, on a host of other government services that push up spending, which means there is no consensus on how high taxes need to be. In fact, the Tea Party movement grew out of a sense that taxes are too high. “Tea” is actually an acronym for Taxed Enough Already.

But are we?

Historically, taxes are actually fairly low as a percentage of personal income, according to the Bureau of Economic Analysis, and as a percentage of GDP, according to the Organization of Economic Development. They’re also low in comparison with the rest of the world. Of 30 developed countries across the world, including all of western Europe plus South Korea, Canada, Mexico, Japan and a handful of eastern European countries, the U.S. ranks fifth lowest measuring as a percentage of GDP. And that includes state and local taxes plus payroll taxes for unemployment, etc., as well as federal income taxes.

Though 2006 is the latest year for which data are available, the rankings don’t shift much from year to year — just one or two spots.

Which raises the opposite question: Are U.S. taxes too low? Should they be raised to help close the budget deficit?

Not necessarily. Keep in mind that low taxes typically correlate well with high productivity gains. Ireland, Poland, South Korea and Slovakia, for example, enjoyed strong growth in labor productivity in the last expansion. All have subpar tax burdens. So higher taxes could have a negative effect on productivity, which would slow growth.

It’s something to think about as Congress searches for tax hikes in order to offset spending and reduce the deficit.

Gustavo A Viera CPA

CPA in Miami Since 1983 Stumbleupon Technorati Digg

House Votes to Eliminate Tax Break

June 22, 2010

The House passed a bill on Friday that would end a tax break for executives of investment funds, leaving hedge funds, private equity firms and venture capitalists scrambling to ease the effects of the bill before it is taken up by the Senate next month, The New York Times’s David Kocieniewski reported.

The measure was part of a broader tax bill, passed by a vote of 215 to 204, that would extend benefits for unemployed people. It seeks to change the tax treatment of “carried interest,” which is the portion of a fund’s investment gains taken by fund managers as compensation.

Under current rules, carried interest is taxed federally at a rate of 15 percent because it is treated as a capital gain. That contrasts with the tax rate on ordinary income, which can be as high as 35 percent.

The plan approved by the House, which overcame strong lobbying pressure from Wall Street, amounted to a compromise that would tax 75 percent of carried interest as ordinary income and 25 percent as capital gains. It is expected to raise more than $17 billion in tax revenue over the next decade.

Although similar attempts to increase taxes on carried interest have died in the Senate for three consecutive years, concerns about the nation’s billowing debt are so great that Senate leaders say they expect to pass a measure resembling the one approved by the House.

That has left lobbyists for fund managers searching for ways to mitigate the tax increase. In fact, in the hours before the House vote, opponents of the measure managed to postpone the date it took effect until Jan. 1, 2011. In the coming weeks, they hope to persuade lawmakers to have the tax increase phased in over several years and have a lower percentage of carried interest considered as ordinary income.

Douglas Lowenstein, president of the Private Equity Council, said he and other lobbyists were also trying to scale back a provision in the bill affecting what they call the “enterprise tax.” That provision would require the founders of hedge funds to pay ordinary income tax rates on proceeds they received from selling their firms.

“If you sell a building, a bond, or a business, you are taxed for capital gains in this country,” said Pam Olson, a former Treasury official who now represents the private equity industry. “This would make us the only business in America denied capital gains treatment, which is discriminatory and unfair.”

The protracted fight over carried interest underscores the difficulty Congress faces in trying to close tax loopholes for businesses, even at a time of sprawling budget deficits and widespread public dismay about Wall Street’s influence in Washington.

Fund mangers are typically paid a 2 percent management fee plus 20 percent of any profit they generate, the portion known as carried interest. Because their compensation is based on investment performance, they have argued that that money should be taxed at the lower capital gains rate.

But Victor Fleischer, the University of Colorado professor whose paper on the subject helped prompt Congress to act, said that carried interest should not qualify as capital gains because fund managers risk mostly other people’s money rather than their own. “They’re being paid a fee for a service, so it’s fair that they would pay the same rates as others who perform services,” Mr. Fleischer said.

As recently as January, the prospect of any change in taxes on carried interest appeared remote. Senate leaders had privately assured fund managers that if they needed revenue to pay for a package of tax breaks for certain industries, including wool production and publishing, they would close a loophole that lumber companies had used to claim billions of dollars in clean energy credits.

But in March, two factors changed. First, Representative Sander M. Levin, Democrat of Michigan, who had long championed the tax change for carried interest, became chairman of the Ways and Means committee, which writes tax policy.

Then Congress closed the lumber industry loophole in an effort to provide financial support for President Obama’s health care bill.

As the Senate Democrats sent signs that they were open to a tax increase, investors and their lobbyists mobilized quickly, warning that the proposal could stifle investments that create jobs.

A group of 80 venture capitalists traveled to Boston to urge Senator John Kerry and Representative Barney Frank, Democrats of Massachusetts, to exclude their business from the tax change, according to Jeffrey Bussgang, a partner at the Boston venture capital firm Flybridge Capital Partners.

The Real Estate Roundtable also tried to negotiate an exemption for real estate investment trusts, arguing that the higher tax rates would hurt the recovery of the real estate market.

Robert L. Johnson, founder of the Black Entertainment Television, said the tax change would inadvertently squeeze out minority entrepreneurs because, he contends, they rely heavily on start-up financing from venture capital and private equity firms.

“This legislation would cause a rapid decline in minority private equity firms and possibly eliminate minority participation in this important financial sector of the American economy,” he said.

By early this week, Congressional leaders had agreed to reject exemptions for any type of investment fund.

“This is an issue of fundamental fairness,” Mr. Levin said in a conference call on Tuesday.

During floor debate Friday, carried interest received little mention, except from several Republicans who warned that a tax increase for fund managers would slow the economic recovery.

“This is not a time to raise taxes on investments in business. That’s a sure way to kill jobs,” said Representative Lee Terry, Republican of Nebraska.

As the bill moves to the Senate, lobbyists say they are focusing on a handful of Democrats — including Robert Menendez of New Jersey, Maria Cantwell of Washington and the chairman of the budget committee, Kent Conrad of North Dakota — to reach a further compromise that would lessen the sting of the change. One proposal would lower the amount subject to ordinary rates to 60 percent, from 75 percent.

Mr. Lowenstein of the Private Equity Council said he was encouraged by some of the last-minute changes made this week, before Congress breaks for a weeklong recess, and hoped to further lessen the impact.

“We will press our case during the recess and hope to build support for an outcome that is pro growth and advances the recovery,” he said.

Gustavo A Viera CPA

CPA in Miami Since 1983

June 18, 2010

(Wall Street Journal) The health-care bill that Congress passed in March contained two surprising new taxes to help pay for the changes: an extra 0.9% levy on wages for couples earning more than $250,000 ($200,000 for singles) and a new 3.8% tax on investment income on those same people (technically, people with “adjusted gross incomes” above those amounts).

Each tax signals a radical change in policy. For workers, the extra 0.9% levy puts a progressive element in what used to be a totally flat tax. The 3.8% tax on investment income also knocks down a longstanding wall by applying a “payroll” tax to unearned income. Until now, FICA taxes for Social Security and Medicare have applied only to wages, not investment income.

While many details remain unclear and the Internal Revenue Service hasn’t issued any guidance, here are preliminary answers to the most important questions taxpayers are asking.

These taxes take effect in 2013, two elections away. Might they be repealed first?

Not likely. “Congress would have to undo the health reform, and budget constraints would still be there,” says Clint Stretch of Deloitte Tax. “Even if Republicans take control of Congress, President Obama holds the veto pen until Jan. 20, 2013.”

How does the 0.9% tax work?

If Joe and Mary each earn $175,000, their total employment income is $350,000. Currently they owe 1.45% — $5,075 — of regular Medicare tax, and their employers owe a matching amount. In 2013, the couple will owe an extra 0.9% — $900 — on their wages above $250,000, which is $100,000. Their employers pay nothing extra.

What about the 3.8% tax on net investment income?

This levy is keyed to “modified adjusted gross income,” with a threshold of $250,000 for couples and $200,000 for singles. (This is simply adjusted gross income for nearly everybody except expatriates, who must add back certain exclusions.) The tax is a flat 3.8% on investment income above the threshold.

How would this work?

Example 1: John and Jane, a married couple, have $400,000 of AGI — $200,000 of wages plus $200,000 of investment income. Because they have $150,000 of investment income above the $250,000 threshold, they would owe an extra $5,700.

Example 2: Anne, a single filer, earns $40,000 but has an investment windfall of $190,000, for total income of $230,000. Because she has investment income of $30,000 above her $200,000 threshold, she would owe $1,140 of additional tax.

Example 3: Retirees Mary and Bill have no wages but they do have a taxable IRA payout of $90,000, plus investment income of $150,000, for a total of $240,000. They don’t owe the new tax, because they have no investment income above the $250,000 threshold.

What is investment income?

Interest, except municipal-bond interest; dividends; rents; royalties; and capital gains on the sales of financial instruments like stocks and bonds. The taxable portion of insurance annuity payouts also counts, unless it is from a company pension. So do gains from financial trading, as well as passive income from rents and businesses you don’t participate in. All are subject to the 3.8% tax on amounts above the $250,000 or $200,000 threshold, as described above.

Not taxed: Distributions from regular and Roth IRAs and other retirement accounts, including pensions and Social Security, and annuities that are part of a retirement plan. Life-insurance proceeds, muni-bond interest and veterans’ benefits don’t count, nor does income from a business you participate in, such as a Subchapter S or partnership.

Could the 3.8% tax apply to gains on the sale of a home?

Yes, if there is a taxable gain above the $500,000 ($250,000, single) exclusion for gains on the sale of your residence.

Example: Fred and Fran, who bought their home in a New York suburb for $50,000 in 1972, sell it in 2013 for $1 million. After subtracting the $50,000 cost and $500,000 exclusion, they have investment income of $450,000. If they also have a taxable IRA payout of $70,000 and a pension of $30,000, they would owe the tax of $11,400 on $300,000.

What happens if a taxpayer who owes the new tax on investments also has a large itemized deduction — say, medical expenses or a theft loss?

Even if taxable income is zero because of deductions, he or she could still owe the 3.8% tax. Example: Myra is a single filer with investment income of $100,000 and wages of $200,000. But during the same year she loses $300,000 in a Ponzi scheme. She pays no income tax, but she still owes the new Medicare tax of $3,800 on her net investment income, says Sharon Kreider, a tax expert in Sunnyvale, Calif.

Does the 3.8% tax affect trusts and estates?

Yes, and it can hit them hard. The tax is levied on investment income as low as $12,000 that isn’t paid out to beneficiaries. Some believe the tax may also hit children’s unearned income subject to the “kiddie tax” if the parents owe it themselves.

What professions are able to avoid this tax?

Ms. Kreider and others see a sweet spot for real-estate professionals. The law deems their rents to be “active” income, so they wouldn’t be subject to the investment tax. Often they don’t owe self-employment taxes on that rental income, either.

What steps do experts recommend to minimize these taxes, other than taking capital gains before 2013 or buying municipal bonds?

• Examine both your regular and investment income: the higher your regular AGI, the more likely that your investment income will be subject to the new tax. So while Social Security and pensions don’t count as investment income, they raise AGI. This makes Roth IRA conversions even more attractive for many. “Roth withdrawals don’t raise AGI and aren’t investment income,” says Vern Hoven, a tax expert in Gig Harbor, Wash.

• Reconsider a defined-benefit pension if you’re eligible — say, you’re in a small business or have consulting income, says Mark Nash of PricewaterhouseCoopers. Pension payouts don’t count as investment income, and the older a taxpayer is, the more he can contribute.

• Taxpayers selling assets should consider installment sales, says Ms. Kreider, if spreading out the income would minimize the new tax.

• For some, life insurance may become more attractive. Because life-insurance proceeds at death aren’t subject to this tax, a taxpayer could buy a policy, borrow from it and settle up at death, avoiding income tax on investment gains within the policy. But Mr. Nash cautions that the savings must outweigh the fees and other disadvantages such policies may have.

Gustavo  A Viera CPA

CPA in Miami Since 1983 Stumbleupon Technorati Digg

Prepare For The Return Of The Estate Tax

June 18, 2010

The federal estate tax is coming back, while some state levies never went away. Act now to protect your family’s assets.

The federal estate tax lapsed on Jan. 1, 2010. But under current law, it will rise from the ashes on Jan. 1, 2011, and at that point—unless Congress intervenes—only $1 million per estate will be exempt from a stiff 55% tax. That compares with a $3.5 million exemption and a 45% rate in 2009.

The prospect of a $1 million exemption means many more families need to plan for the federal tax. Tally up the value of a house, life insurance (if you are foolish enough to die owning it yourself), retirement and other accounts, and you may be surprised to find yours is one of them. “It’s amazing to me that you can go from not having a problem to potentially having a problem that quickly,” says Joshua Mancell.

Assets left to a citizen spouse or to charity generally aren’t subject to either state or federal estate tax. But leaving assets to other beneficiaries will now take significantly more planning, says Ann Burns, a lawyer with Gray Plant Mooty in Minneapolis. Moreover, even if Congress returns the federal exemption to $3.5 million (as President Obama is on record as favoring), 19 states and the District of Columbia impose their own estate and/or inheritance taxes, some at far lower levels. Minnesota, for example, exempts only $1 million per estate from its tax, which starts at 41% and goes down to 9% as an estate’s size increases—a highly unusual system.

Regardless of your age or where you live, here are simple steps to help preserve your assets for your family.

Review life insurance policy ownership. “Don’t die owning life insurance,” says Joshua S. Rubenstein, a lawyer with Katten Muchin Rosenman in New York. “It’s like giving away money.” While life insurance proceeds aren’t subject to income tax, money from insurance a decedent owned is subject to estate tax if not left to a citizen spouse or charity. Yet with a little planning, insurance can be moved beyond the reach of the tax. The easiest way: make the family member who will receive the insurance proceeds (say, an adult child) owner of the policy.

As owner, your child must pay the premiums. But you can give the beneficiary the money to do this using the yearly $13,000 gift tax exclusion—anyone can give anyone else up to that amount every year without worrying about estate or gift taxes. If the beneficiary is a minor or you don’t want him or her to receive the proceeds outright, you can set up an irrevocable life insurance trust to own the policy. With this setup, too, you can make annual gifts to finance the premiums, but it’s a little trickier. One condition for the $13,000 annual gift exclusion is that the gift must be a present interest—meaning something the recipient can use right away—rather than a future one. The most common way to satisfy this requirement is to give beneficiaries (or their parents, if the beneficiaries are minors) what’s known as Crummey powers—the right for a limited time, usually 30 or 60 days, to withdraw from the trust the yearly gift.

The Mancells have set up his and her trusts to hold their insurance policies, with a death benefit of $1.5 million apiece. Sara Mancell’s sister is the trustee, and Eli and any other children the couple might have are the beneficiaries. This arrangement removes the insurance proceeds from their estates.

Put some assets in your own name. Couples in a stable first marriage generally set up estate plans designed to make use of the estate tax exemption of the first spouse to die, without leaving the surviving spouse short of funds. So, for example, the Mancells have left everything to each other. But for maximum flexibility they have also created a family trust benefiting Eli and any other children they might have. When one spouse dies, the survivor, depending on the couple’s net worth and the federal and state estate tax laws at the time, can disclaim (or turn down) some assets, funneling them into this trust to make use of the deceased spouse’s estate tax exemption. If need be, the survivor can still receive income or principal from the trust, but whatever remains in it bypasses the survivor’s estate.

The problem is that for this to work each spouse must have some property in his or her own name—otherwise there won’t be assets available to fund the bypass trust. Jointly held property (for example, real estate or bank accounts) doesn’t count because when one owner dies, full ownership automatically passes to the other. So do what the Mancells did: Look over your balance sheet to determine whether any property should be transferred from one spouse to the other or out of joint ownership into the name of one of you individually. Unfortunately, this strategy doesn’t work for retirement accounts; you can’t give them away while you are alive. Another consideration: If you shift assets to a spouse who is not a U.S. citizen, you may have to pay gift tax.

Maximize annual gifts. If you are confident you’ll have enough for your own retirement, start making annual gifts. Remember, you can give up to $13,000 a year to as many recipients as you like; spouses can combine their exclusions to give $26,000 jointly to any person. If you want to give away more than that, you can count your gift against your $1 million lifetime gift tax exemption—the total of taxable gifts each person can make without incurring tax. (Each dollar of gift exemption used reduces your estate tax exemption by a dollar.)

Although cash is the most common type of gift, you can transfer assets, too. For gift tax purposes you count the value of the asset at the time of the transfer. Any appreciation after that is not subject to estate or gift tax. You may want to give appreciated stock, if the recipient can sell it at a lower capital gains rate than you would pay. But don’t transfer stock with a built-in loss—the recipient’s basis will be the current market value. Instead, sell the stock, book the tax loss yourself and give the cash. (For ideas on transferring a vacation home, see “How To Pass Down Your Family Vacation Retreat”)

Fund college savings plans. A popular use of the annual exclusion is to fund a Section 529 state college savings plan for each family member you want to benefit. Earnings in a 529 are exempt from federal and state income tax, provided the money is withdrawn to pay tuition or certain college or graduate school expenses. The law permits lump-sum deposits of as much as $65,000 a person ($130,000 for married couples), provided you file a gift tax return that treats the gift as if it had been spread over five years. If you die before the five years is up, however, part of the gift goes back into your estate.

While 529s are often thought of as an estate planning tool for grandparents, they can work for parents, too. Young parents can each establish a 529 with the child as the beneficiary, use annual exclusion gifts to fund it and name the other parent as the successor owner of the account. Should one spouse die prematurely, the surviving spouse has control of the money as successor owner—and can tap the money if he or she needs it (although any earnings that are withdrawn for purposes other than college are subject to income tax and a 10% penalty). If the survivor doesn’t touch the money, it won’t be counted as part of either spouse’s estate, Rubenstein says.

Pay tuition and medical expenses. Without eating into your $13,000 annual exclusion, you can pay tuition, dental and medical expenses for anyone you want—provided you pay the providers of those services directly. This rule allows you to pick up big-ticket health care expenses, including health insurance premiums, orthodontia, medically necessary home improvements or home-care attendants.

Convert to a Roth IRA. In a conversion you declare a traditional individual retirement account or 401(k) taxable, pay any income taxes on pretax contributions and earnings (preferably from funds outside the retirement account) and hold the funds in a Roth, where all future growth is tax free. With a Roth you avoid the requirement to take yearly minimum distributions starting at age 701/2, which can leave more for beneficiaries if you don’t need to use the money for your own retirement. What’s in the Roth IRA still counts in your estate and is subject to estate tax, assuming your estate is big enough to be taxable. But the taxes you prepay at conversion reduce the size of your estate, and your heirs get an income-tax-free pot of money that they can husband and stretch out over their own life spans.

Gustavo A Viera CPA

CPA in Miami Since 1983

House approves small business tax relief

June 18, 2010

The bill, which would eliminate capital gains taxes on investments in small businesses, passed on a vote of 247-170.

It is a companion bill to legislation backed by President Barack Obama that the House is to consider on Wednesday. That bill would create a $30 billion fund to encourage community banks to lend to small businesses.

“Small businesses need capital to create jobs and lead our economic recovery and these bills contain important tax cuts and lending opportunities that will help give small business owners the resources and flexibility they need to help their businesses grow,” said House Ways and Means Committee Chairman Sander Levin.

The bill gives small businesses a bigger tax break on start up costs and creates a program to help small businesses struggling to repay loans.

The $3.5 billion in tax breaks would be offset in part by changes in rules for grantor retained annuity trusts and by tightening rules on $1.01 per gallon tax credit on the production of biofuels from cellulosic feedstocks.

The bill would make highly corrosive fuels such as crude tall oil, created as a waste product from paper manufacturing, ineligible for the tax credit.

The bill is to be joined with the legislation on small business lending before the package is sent to the Senate for its consideration.

Gustavo A Viera CPA

CPA in Miami Since 1983 Stumbleupon Technorati Digg

Starting and Growing an Online Business: An Entrepreneur’s Checklist

June 17, 2010

“I’m starting an online business – where do I start?”. It’s broad question, but is one that comes up repeatedly on small business forums and discussion boards.

Of course, an online business is merely a vehicle for the product or service you are selling. So starting a Web-based business – and making it a success – will take more than just “getting online”.

There are two fundamental steps you will need to take. The first is to treat your online business like any other business venture and pay attention to business start-up processes; second, you’ll need to generate traffic to your site.

Below are some tips and best practices that can guide you through these steps – with all your check boxes ticked.

Starting an Online Business: Be a Responsible Business Owner

Whether you are starting an innovative new online business or setting up a hot dog stand, you must pay attention to the fundamentals of business ownership. For online business owners, this means more than just building a Web site and registering your domain name. You’ll also need to comply with the regulations that govern your type of business and the products and services you sell.

You’ll also need to understand your tax obligations, make decisions about your business structure, know your responsibilities as an employer, and so on.

A useful resource to help you get your arms around being a responsible business owner is’s 10 Steps to Starting a Business.  This step-by-step government guide consolidates everything you need to know and do to honor your legal obligations as a new business owner.

If you are engaging in any form of e-commerce in your online business venture, you should also be aware of these federally-mandated e-commerce rules and regulations.

Marketing an Online Business: Using Online and Offline Channels

To succeed in your online business venture, it’s critical that you generate traffic. But without a store front or obvious physical business location, let alone any kind of physical signage, generating traffic is one of the biggest challenges of starting and online business.

Take time to write an integrated marketing plan that maximizes both online and offline channels – and delivers a consistent brand message through both.

Below are some tips for using both online and offline channels to market your online small business venture:

1. Promoting Your Online Business Using Online Channels

Using Web-based marketing channels to promote your online business can be accomplished in many ways. But, unless you have a substantial marketing budget, your best advice is to employ a mix of low cost and free tactics. At a minimum these should include these three intertwined tactics:

  • Organic Search Engine Optimization (SEO) – You don’t need to hire an SEO expert to help make your small business Web site search engine friendly. Getting your site to rank high in organic search results, such as Google, gives your site a “presence” and there are some basic strategies that you can implement. Here are some Tips on Doing SEO for Small Business.
  • Pay-per-Click (PPC) Advertising – PPC advertising is an online advertising model used on search engines (usually appearing under the heading “Sponsored Links”), advertising networks, and content sites, such as blogs, in which you only pay when your ad is clicked. It’s a cost-effective option for many small businesses who can’t afford more complex SEO campaigns. For more information on pay-per-click advertising read “Google AdWords Explained – Growing Your Small Business with this Cost Effective Marketing Tool“.
  • Social Media Marketing – From Twitter to Facebook to blogging, the concept of building the profile of online business through social media is being used by over 260,000 companies in North America, not just to engage with their markets, but to actually generate sales. John Jantsch at Duct Tape Marketing has many tips on social media marketing for small business. Read how to “Hit the Social Media Sweet Spot” or view  his archived webinar “Social Media for Small Business”.

To help track and measure the success of these initiatives, free tools such as Google Analytics orYahoo Web Analytics can provide insight on conversion rates, ROI, etc.

2. Promoting Your Online Business Using Traditional Offline Channels

If your online business is local in its focus, get out there and make the most of on-the-ground tactics such as flyers, or advertising in local newspapers, community newsletters or at niche market events. You can even generate free press for yourself by getting involved in cause-related events. If you have writing skills, contact your local free press and volunteer to write an article or quick column on your particular area of expertise.

Gustavo A Viera CPA

CPA in Miami Since 1983 Stumbleupon Technorati Digg