New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

Final Regulations

The final regulations in T.D. 98xx_1 largely adopt the proposed regulations in NPRM REG-107892-18 (August 16, 2018), but with substantial modifications.

Taxpayers are likely to be disappointed in one thing that did not change: all items treated as capital gain or loss, including Section 1231 gains and losses, are still excluded from qualified business income (QBI). Taxpayers should continue to apply the Section 1231 netting and recapture rules when calculating the Code Sec. 199A deduction.

However, the final regulations drop the rule that treated an incidental non-specified services trade or business (SSTB) as part of an SSTB if the businesses were commonly owned and shared expenses, and the non-SSTB’s gross receipts were no more than five percent of the business’s combined gross receipts.

The final regulations make several adjustments to the proposed regulations for estates and trusts. Most significantly, the final regulations remove the definition of "principal purpose" under the anti-abuse rule that allows the IRS to aggregate multiple trusts. The IRS is taking this issue under advisement. Also, in determining if a trust or estate has taxable income that exceeds the threshold amount, distributions are no longer excluded. Instead, the entity’s taxable income is determined after taking into account any distribution deduction under Code Sec. 651 or Code Sec. 661.

The final regulations retain the presumption that an employee continues to be an employee while doing the same work for the same employer. However, the regulations provide a new three-year look back rule, and allow the worker to rebut the presumption by showing records (such as contracts or partnership agreements) that corroborate the individual’s status as a non-employee.

Other changes of note include:

• Disallowed, limited or suspended losses must be used in order from the oldest to the newest, on a FIFO (first in, first out) basis.
• A relevant passthrough entity (RPE) can aggregate businesses.
• If an RPE fails to report an item, only that item is presumed to be zero; the missing information may be reported on an amended return.
• The S portion and non-S portion of an electing small business trust (ESBT) are treated as a single trust for purposes of determining the threshold amounts.

Proposed Regs for QBI, RICs, Trusts, Estates

Taxpayers may rely on the proposed regulations in NPRM REG-134652-18, which cover three broad topics.

First, in calculating QBI, previously disallowed losses are treated as losses from a separate trade or business. If the losses relate to a publicly traded partnership (PTP), they must be treated as losses from a separate PTP. Attributes of the disallowed loss are determined in the year the loss is incurred.

Second, a RIC that receives qualified REIT dividends may pay Section 199A dividends. The IRS continues to consider permitting conduit treatment for qualified PTP income received by a RIC, and seeks public comment on this issue.

Finally, the proposed regulations also provide rules for charitable remainder unitrusts (and their beneficiaries), split-interest trusts, and separate shares.

Rental Real Estate Enterprise

The proposed revenue procedure set forth in Notice 2019-7 provides a safe harbor for a rental real estate enterprise to be treated as a trade or business for purposes of Section 199A. RPEs can also use the safe harbor.

A rental real estate enterprise must satisfy three conditions to qualify for the safe harbor:

• Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise.
• At least 250 or more hours of rental services must be performed per year with respect to the rental enterprise. For tax years beginning after December 31, 2022, this test can be satisfied in any three of the five consecutive tax years that end with the tax year.
• The taxpayer must maintain contemporaneous records of relevant items, including time reports, logs, or similar documents. (This requirement does not apply to tax years beginning in 2018.)

Relevant items include hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services.

W-2 Wages

Rev. Proc. 2019-11 allows taxpayers to use one of three methods to calculate W-2 wages for the passthrough deduction:

• the unmodified Box method;
• the modified Box 1 method; or
• the tracking wages method.

These methods were proposed in Notice 2018-64, I.R.B. 2018-35, 347. The unmodified Box method is simplest, but the other two methods are more accurate.

Comments Requested

The IRS requests comments on the proposed regulations and the proposed safe harbor. The IRS must receive the comments and any requests for public hearing within 60 days after the proposed regulations are published in the Federal Register.

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

Q&A on Section 4960

The current guidance is contained in a Question-and-Answer format. The interim guidance addresses:

• general application of Code Sec. 4960;
• applicable tax-exempt organizations and related organizations;
• covered employees;
• excess remuneration;
• medical and veterinary services;
• excess parachute payments;
• three-times-base-amount test for parachute payments;
• computation of excess parachute payments;
• reporting liability under Section 4960;
• miscellaneous issues; and
• the effective date.

Reliance

The IRS intends to issue proposed regulations under Code Sec. 4960 which will incorporate the interim guidance. Until future guidance is issued, taxpayers may rely on the rules in the interim guidance from December 22, 2017. Any future guidance will be prospective and will not apply to tax years beginning before the guidance is issued. Until additional guidance is issued, taxpayers may base their positions upon a good faith, reasonable interpretation of the statute and legislative history, where appropriate. Specifically, the positions reflected in the guidance constitute a good faith and reasonable interpretation.

Comments Requested

The IRS and Treasury Department request comments on the topics addressed in the interim guidance and any other issues arising under Code Sec. 4960. Comments should be submitted no later than April 2, 2019.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

Charitable Contributions and SALT Limit

An individual’s itemized deduction of SALT is limited to $10,000 ($5,000 if married filing separately). Some states and local governments have adopted or considered adopting laws that allowed individuals to receive a tax credit for contributions to funds controlled by the state and local government.

Under proposed regulations, however, an individual, estate, and trust generally must reduce the amount of any charitable contribution deduction by the amount of any SALT credit he or she receives or expects to receive for the transfer. A de minimis exception allows a taxpayer to disregard up to 15 percent of the payment or transfer to the charitable organization.

C Corporations

If a C corporation makes the charitable payment in exchange for a state and local tax credit, it may deduct the payment as an ordinary and necessary business expense to the extent of any SALT credit received or expected to receive.

Specified Pass-Through Entity

A specified pass-through entity may also deduct the payment as an ordinary and necessary business expense, but only if the SALT credit applies or is expected to apply to offset a SALT other than an income tax. A specified pass-through entity for this purpose is any business entity other than a C corporation that is regarded as separate from its owner for all federal income tax purposes (i.e., disregarded entity). The entity also must operate a trade or business within the meaning of Code Sec. 162 and be subject to SALT incurred in carrying on that trade or business that is imposed directly on the entity.

Effective Date

The safe harbors apply to any payments made to a charitable organization in exchange for a SALT credit paid on or after January 1, 2018.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The final regulations generally apply beginning the last tax year of the foreign corporation that begins before January 1, 2018, and with respect to a U.S. person, beginning the tax year in or with which such tax year of the foreign corporation ends.

Note: The final regulations were published without a T.D. number. According to the IRS, a T.D. number will be assigned after the IRS resumes normal operations.

Controlled Domestic Partnerships

Certain controlled domestic partnerships may be treated as foreign partnerships for determining the section 958(a) U.S. shareholders of a specified foreign corporation owned by the controlled domestic partnership and the section 958(a) stock owned by the shareholders. The definition of controlled domestic partnership is revised to not be defined only with respect to a U.S. shareholder, so that the controlled foreign partnership is clearly treated as a foreign partnership for all partners if the rule applies.

Pro Rata Share

The definitions of pro rata share and section 958(a) U.S. shareholder inclusion year are modified. The final regulations will require a section 965(a)inclusion by a section 958(a) U.S. shareholder if the specified foreign corporation, whether or not it is a CFC, ceases to be a specified foreign corporation during its inclusion year.

Downward Attribution Rule

A special rule applies when determining downward attribution from a partner to a partnership where the partner has a de minimis interest in the partnership. The threshold for applying the special attribution rule for partnerships is increased from five to 10 percent, and is extended to trusts.

Basis Election Rules

The final regulations allow a taxpayer elect to increase its basis in the stock of its deferred foreign income corporations (DFICs) by the lesser of its section 965(b) previously taxed earnings and profits or the amount it can reduce the stock basis of its E&P deficit foreign corporations without recognizing gain. Within limits, a taxpayer may designate which stock of a DFIC is increased and by how much.

Exception from Anti-Abuse Rules

The final regulations provide an exception from the anti-abuse rules for certain incorporation transactions. The rules will not apply to disregard a transfer of stock of a specified foreign corporation by U.S. shareholder of a domestic corporation, if certain requirements are met. The section 965(a) inclusion amount with respect to the transferred stock of the specified foreign corporation must not be reduced, and the aggregate foreign cash position of both the transferor and the transferee is determined as if each had held the transferred stock of the specified foreign corporation owned by the other on each of the cash measurement dates.

Cash Position

Code Sec. 965 taxes foreign earnings of a domestic corporate U.S. shareholder at a 15.5-percent rate if held in cash, but only an 8-percent rate if held otherwise. Cash includes cash and cash equivalents. The final regulations provide a narrow exception from the definition of cash position for certain commodities held by a specified foreign corporation in the ordinary course of its trade or business, as well as for certain privately negotiated contracts to buy and sell these assets.

Election and Payment Rules

Under the final regulations, the signature requirement on an election statement is satisfied if the unsigned copy is attached to a timely-filed return of the person making the election, provided that the person retains the signed original in the manner specified.

Transition rules for filing transfer agreements have also been updated. If a triggering event or acceleration event occurs on or before December 31, 2018, the transfer agreement must be filed by January 31, 2019. Rules are added to address the death of an S corporation shareholder transferor. The final regulations also include modifications to certain requirements for the terms of a transfer agreement.

The final regulations provide that in the case of an additional liability reported on a return or amended return, any amount that is prorated to an installment, the due date of which has already passed, will be due with the return reporting the additional amount. The rule on deficiencies remains the same, and payment for a deficiency prorated to an installment, the due date of which has already passed, is due on notice and demand.

Total Net Tax Liability

A taxpayer may elect to defer the payment of its total net tax liability under Code Sec. 965(h) and (i). Total net tax liability under Code Sec. 965, which defines the portion of a taxpayer’s income tax eligible for deferral, is equal to the difference between a taxpayer’s net income tax with and without the application of Code Sec. 965. The final regulations will disregard effective repatriations taxed similarly to dividends under Code Sec. 951(a)(1)(B) resulting from investments in U.S. property under Code Sec. 956 when determining net income tax liability without the application of Code Sec. 965.

Consolidated Groups

The consolidated group aggregate foreign cash position is determined under the final regulations as if all members of the consolidated group that are section 958(a) U.S. shareholders of a specified foreign corporation are a single section 958(a) U.S. shareholder.

Obsolete Guidance

The following previous guidance is obsolete:

• Notice 2018-7, I.R.B. 2018-4, 317;
• Notice 2018-13, I.R.B. 2018-6 341, Secs. 1-4, 6;
• Notice 2018-26, I.R.B. 2018-16, 480, Secs. 1-5, 7; and
• Notice 2018-78, I.R.B. 2018-42, 604, Secs. 1-3, 5.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

Rev. Proc. 2019-1

This procedure explains how the IRS provides advice to taxpayers in the form of letter rulings, closing agreements, determination letters and information letters, and orally on issues under the jurisdiction of the various Associate Chief Counsel offices. It supersedes Rev. Proc. 2018-1, I.R.B. 2018-1, 1. In addition to changes made throughout the guidance, significant changes in the new procedure include:

• Sections 1, 1.01, 3.07, 5.12, 5.14, 5.15, 6.08, 9.23, 10.07, 15.11, Appendix A, Appendix B, Appendix C, Appendix D, and Appendix E have been amended to reflect the name change from "Associate Chief Counsel (Tax Exempt and Government Entities)" to "Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes)."
• Section 5.15(3) has been removed to reflect the transfer of authority to waive excise tax under Code Sec. 4980F to the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements.
• Section 8.02 has been amended to remove the exception for changes in accounting methods or accounting periods from the 21-day notification rule.
  Appendix A (Schedule of User Fees) has been amended with increased user fees to match the increase in costs incurred by the IRS. The new user fee schedule is effective February 2, 2019.
• Appendix E (Church Plan Checklist) has been amended to add a new item 11 to reflect the requirement that an applicant include a representation as to whether an election under Reg. §1.410(d)-1 to apply certain provisions of the Code and the Employee Retirement Income Security Act of 1974 (ERISA) to the plan has ever been made.

Rev. Proc. 2019-2

This procedure explains when and how an Associate Office provides technical advice conveyed in a technical advice memorandum (TAM), as well as a taxpayer’s rights when a field office requests a TAM regarding a tax matter. It supersedes Rev. Proc. 2018-2, I.R.B. 2018-1, 106. Significant changes in the new procedure include:

• All references to Associate Chief Counsel (Tax Exempt and Government Entities) have been revised to read “Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes).” All references to “Appeals Policy” have been revised to read “Appeals Policy Planning Quality & Analysis.”
• Section 3.04 has been amended to delete the mandatory TAM requirement in qualified retirement plan matters in cases concerning proposed adverse letters or proposed revocation letters on collectively bargained plans.
• Section 14.02 has been amended to clarify that requests for relief under Code Sec. 7805(b) on the revocation or modification of determination letters and letter rulings issued by TE/GE are handled under the procedures in sections 23 and 29 of Rev. Proc. 2019-4, and section 12 of Rev. Proc. 2019-5.

Rev. Proc. 2019-3

This procedure provides a revised list of areas under the jurisdiction of certain Associate Chief Counsel offices for which letter rulings or determination letters will not be issued. (Lists of areas of nonissuance under the jurisdiction of the Associate Chief Counsel (International) and the Commissioner, Tax Exempt and Government Entities Division (relating to plans or plan amendments) are presented in separate revenue procedures.) It supersedes Rev. Proc. 2018-3, I.R.B. 2019-1, 130.

The following have been added to the list of issues for which advance rulings will not be issued:

• Gross Income. Whether an amount is not included in a taxpayer’s gross income under Code Sec. 61 because the taxpayer receives the amount subject to an unconditional obligation to repay the amount.
• Trade or Business Expenses. Whether a taxpayer is engaged in a trade or business. This area does not include a request for a ruling that relies on a representation from a taxpayer that the taxpayer is or is not engaged in a trade or business, or a request for a ruling that relies on factual information provided by the taxpayer evidencing the active conduct of a trade or business.
• Losses; Carryovers in Certain Corporate Acquisitions; Regulations. In determining whether a loss for worthless securities is subject to Code Sec. 165(g)(3), (i) whether the source of any gross receipts may be determined by reference to the source of gross receipts of a counter party to an intercompany transaction, as defined in Reg. §1.1502-13(b)(1) (e.g., an intercompany distribution to which Reg. §1.1502-13(f)(2) applies), other than an intercompany transaction to which Code Sec. 381(a) applies, and (ii) in an intercompany transaction to which Code Sec. 381(a) applies, whether the acquiring corporation takes into account historic gross receipts of the distributor or transferor corporation, if the intercompany transaction is part of a plan to claim a deduction for worthless securities under Code Sec. 165(g)(3).
• Treatment of multiple trusts. Whether two or more trusts shall be treated as one trust for purposes of subchapter J of chapter 1.
• Returns Relating to the Cancellation of Indebtedness by Certain Entities. Requests for a ruling that the creditor is not required to report a discharge that include as grounds for the request a dispute regarding the underlying liability.

The following issues have been modified:

• Special Rules for Exchanges Between Related Persons. Except in the case of (i) a transaction involving an exchange of undivided interests in different properties that results in each taxpayer holding either the entire interest in a single property or a larger undivided interest in any of the properties or (ii) a disposition of property in a nonrecognition transaction in which the taxpayer or the related party receives no cash or other property that results in gain recognition, whether a Code Sec. 1031(f) exchange involving related parties, or a subsequent disposition of property involved in the exchange, has as one of its principal purposes the avoidance of federal income tax, or is part of a transaction (or series of transactions) structured to avoid the purposes of Code Sec. 1031(f).

Rev. Proc. 2019-4

This procedure explains how the IRS provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division (TE/GE) Employee Plans Rulings and Agreements Office, and details the types of advice available to taxpayers, and the manner in which the advice is requested and provided. The new procedure supersedes Rev. Proc. 2018-4, I.R.B. 2018-1, 146. In addition to minor non-substantive changes, the following changes are made:

• Modifications to reflect Employee Plans Rulings and Agreement’s current practice of considering voluntary requests for closing agreements to resolve certain income or excise tax issues that are ineligible for resolution under the Employee Plans Compliance Resolution System (EPCRS).
• Letter ruling requests may not be submitted via facsimile transmission.
• A new category called "Other Circumstances" for which determination letters can be requested has been added.
• Code Secs. 414(b), (c) and (m) have been added to the list of sections for which a determination is not made when a determination letter is issued in accordance with the revenue procedure.
• For a plan to be reviewed for, and a determination letter relied upon with respect to, whether the terms of the plan satisfy one of the design-based safe harbors, the plan document must provide a definition of compensation that satisfies Reg. §1.414(s)-1(c).
• Employee Plans Rulings and Agreements will consider a request for an extension of time for making an election under Reg. §301.9100-3 to recharacterize annual contributions made to a Roth IRA. Employee Plans Rulings and Agreements will also consider recharacterization requests that relate to a conversion or rollover contribution to a Roth IRA but only if the rollover or conversion was made prior to January 1, 2018.
• SB/SE Exam will be notified if a request for an extension of time for making an election or other application for relief under Reg. §301.9100-3 is submitted when the return is under examination.
• Beginning April 1, 2019, VCP submissions and the applicable user fees must be made using www.pay.gov. Further, the payment of user fees for pre-approved plan submissions and letter ruling requests may not be made using www.pay.gov and such requests must still be accompanied by a check in the amount of the applicable user fee.
• Clarification has been provided regarding which forms must be submitted for VCP submissions made prior to April 1, 2019.
• User fee for Form 5310 will increase from $2,300 to $3,000 for submissions postmarked on or after July 1, 2019.

Rev. Proc. 2019-5

This procedure updates the procedures for organizations applying for, and the issuing of determination letters on, exempt status under Code Secs. 501and 521. These apply to exempt organizations other than those relating to pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans. The procedures also apply to revocation or modification of determination letters. In addition, the procedure provides guidance on the exhaustion of administrative remedies for declaratory judgment under Code Sec. 7428. Finally, new procedure provides guidance on applicable user fees for requesting determination letters. The new procedure supersedes Rev. Proc. 2018-5, I.R.B. 2018-1, 233. Notable changes include:

• "Tax Exempt and Government Entities" was changed to "Employee Benefits, Exempt Organizations, and Employment Taxes" throughout the document to reflect the office’s name change.
• Section 2.02 was amended to add (6), which discusses Rev. Proc. 2018-15, I.R.B. 2018-9, 379.
• Section 2.03(1) was amended to clarify that a Code Sec. 501(c)(4) organization must submit a user fee along with its completed Form 8976.
• Section 3.02(4) was amended to clarify that the section only applies to an organization seeking to qualify under Code Sec. 501(c)(6).
• Sections 4, 15, and 18 were amended to reflect the new Form 1024-A.
• Section 4.09 was amended to clarify that a request for expedited handling of a determination letter will not be forwarded to the appropriate group for action unless the application is complete.
• Section 13 was amended throughout because Rev. Proc. 2018-32, I.R.B. 2018-23, 739, superseded Rev. Proc. 81-7, 1981-1 CB 621.
• Appendix A was amended to reflect the single user fee for non-1023-EZ exemption applications, and to reflect a change in the user fee for submissions postmarked on or after July 1, 2019, for advance approval of Code Sec. 4942(g)(2) set asides, Code Sec. 4945 advance approval of an organization’s grant making procedures, and Code Sec. 4945(f) advance approval of voter registration activities.

Rev. Proc. 2019-7

This procedure provides an updated list of subject areas under the jurisdiction of the Associate Chief Counsel (International) for which it will not issue advance letter rulings or determination letters, or will issue letters only if justified by unique and compelling circumstances. Section 4.01(01) related to Code Sec. 367(a) has been removed as obsolete. There are no other changes except renumbering to reflect the foregoing and updates to cross references and citations. The new procedure supersedes Rev. Proc. 2018-7, I.R.B. 2018-1, 271

How much am I really worth? This is a question that has run through most of our minds at one time or another. However, if you aren't an accountant or mathematician, it may seem like an impossible number to figure out. The good news is that, using a simple step format, you can compute your net worth in no time at all.

How much am I really worth? This is a question that has run through most of our minds at one time or another. However, if you aren't an accountant or mathematician, it may seem like an impossible number to figure out. The good news is that, using a simple step format, you can compute your net worth in no time at all.

Step 1: Gather the necessary documents.

You will need to gather certain documents together in order to have all the ammunition you will need to tackle your net worth calculation. This information is not much different than the information that you would normally gather in anticipation of applying for a home loan, preparing your taxes or getting a property insurance policy. Here's what you'll need the most recent version of:

• Bank statements from all checking and savings accounts (including CDs);
• Statements from your securities broker for all securities owned including retirement accounts;
• Mortgage statements (including home equity loans & lines of credit);
• Credit card statements;
• Student loan statements;
• Loan statements for cars, boats and other personal property

In addition, you will need to have a pretty good idea of the current market value of the following assets you own: real estate, stocks and bonds, jewelry, art & other collectibles, cars, computers, furniture and other major household items, as well as any other substantial personal assets. Current market values can be obtained via a call to your local real estate agent, the stock market and classified ad pages in your newspaper, or qualified appraisers. If you own your own business or hold an interest in a partnership or trust, the current values of these will also need to be gathered.

Step 2: Add together all of your assets.

Your "assets" are items and property that you own or hold title to. They include:

• Current balances in your bank accounts;
• Current market value of any real estate you own;
• Current market value of stocks, bonds & other securities you own;
• Current market value of certain personal articles such as jewelry, art & other collectibles, cars, computers, furniture and other major household items, and any other miscellaneous personal items;
• Amounts owed to you by others (personal loans)
• Current cash value of life insurance policies;
• Current market value of IRAs and self-employed retirement plans;
• Current market value of vested equity in company retirement accounts;
• Current market value of business interests

Step 3: Add together all of your liabilities.

Your "liabilities" are the debts that you owe and are many times connected to the acquisition or leveraging of your assets. They can include:

• Amounts owed on real estate you own;
• Amount owed on credit cards, lines of credit, etc...;
• Amounts owed on student loans;
• Amounts owed to others (personal loans);
• Business loans that you have personally guaranteed;

Step 4: Subtract your liabilities from your assets.

Almost done -- this is the easy part. Take the total of all of your assets and subtract the total of all of your liabilities. The result is your net worth.

Hopefully, once you've done the calculation, you will arrive at a positive number, which means that your assets exceed your debts and you have a positive net worth. However, if you end up with a negative number, it may indicate that your debts exceed your assets and that you have a negative net worth. If the net worth you arrive at differs substantially from the "gut feeling" you have about your financial position, take the time to carefully review your calculation -- it may be that you simply made a calculation error or overlooked some assets that you hold.

Evaluating your outcome

If you ended up with a positive net worth, congratulations! You've probably made some good investment and/or money management decisions in your past. However, keep in mind that your net worth is an ever-changing number that reacts to economic conditions, as well as actions taken by you. It makes sense to periodically revisit this net worth calculation and make the necessary adjustments to ensure that you stay on the right financial track.

If you arrived at a negative net worth, now may be the time to evaluate your holdings and debts to decide what can be done to correct this situation. Are you holding assets that are worth less than you owe on them? Is your consumer debt a large portion of your liabilities? There are many different reasons why you may show a negative net worth, many of which can be corrected to get your financial health restored.

Calculating and understanding how your net worth reflects your current financial position can help you make decisions regarding the effectiveness of your investment and money management strategies. If you need additional assistance during the process of determining your net worth or deciding what actions you can take to improve it, please contact the office for additional guidance.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The Electronic Federal Tax Payment System (EFTPS) is a simple way for businesses to make their federal tax payments. It is easy to use, fast, convenient, secure and accurate. It also saves business owners time and money in making federal tax payments because there are no last minute trips to the bank, no waiting lines, no envelopes, stamps, couriers, etc. And best of all, tax payments are initiated right from your office!

What is the EFTPS?

EFTPS is an electronic tax payment system through which businesses can make all of their federal tax deposits or payments. The system is available 24 hours a day, seven days a week for businesses to make their tax payments either through the use of their own PC, by telephone, or through a program offered by a financial institution.

What federal tax payments are covered by EFTPS?

Some taxpayers mistakenly assume that EFTPS applies only to the deposit of employment taxes. EFTPS has much broader reach. It can be used to make tax payments electronically for a long list of payment obligations:

• Form 720, Quarterly Federal Excise Tax Return;
• Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return;
• Form 941, Employer's Quarterly Federal Tax Return;
• Form 943, Employer's Annual Tax Return For Agricultural Employees;
• Form 945, Annual Return of Withheld Federal Income Tax;
• Form 990-C, Farmer's Cooperative Association Income Tax Return;
• Form 990-PF, Return of Private Foundation;
• Form 990-T, Exempt Organization Business Income Tax Return Section 4947(a)(1) Charitable Trust Treated as Private Foundation;
• Form 1041, Fiduciary Income Tax Return;
• Form 1042, Annual Withholding Tax Return for U.S. Sources of Income for Foreign Persons;
• Form 1120, U.S. Corporation Income Tax Return; and
• Form CT-1, Employer's Annual Railroad Retirement Tax Return.

How can I get started using EFTPS?

To enroll in EFTPS, the taxpayer must complete IRS Form 9779, Business Enrollment Form, and mailing it to the EFTPS Enrollment Center. To obtain a copy of IRS Form 9779 a taxpayer or practitioner can call EFTPS Customer Service at 1-800-945-8400 or 1-800-555-4477. The enrollment form may also be requested from the IRS Forms Distribution Center at1-800-829-3676.

After you complete and mail the enrollment form, EFTPS processes the enrollment and sends you a Confirmation Packet, which includes a step-by-step Payment Instruction Booklet. You will also receive a PIN under separate cover. Once the Confirmation Packet and the PIN are received, you can begin to make tax payments electronically.

What flexibility is available within the EFTPS for payment options?

There are two primary ways to make payment under EFTPS - directly to EFTPS or through a financial institution. If you wish to make payments directly to EFTPS, the "ACH debit method" should be selected on the enrollment form. Deposits and payments are made using this method by instructing EFTPS to move funds from the business bank account to the Treasury's account on a date you designate. You can instruct EFTPS by either calling a toll-free number, and using the automated telephone system, or by using a PC to initiate the payment.

If you instead elect to make payments through a financial institution, the "ACH credit method" should be chosen on the enrollment form. This method works by using a payment system offered by the financial institution through which you instruct the institution to electronically move funds from your account to a Treasury account.

Although the ACH debit and the ACH credit methods are the primary payment methods for EFTPS, a taxpayer may also choose the Same Day Payment Method. You should contact your financial institution to determine if it can make a same day payment.

If I provide the IRS with access to my bank account, can it access my account for any other purposes?

It is important to note you retain total control of when a payment is made under EFTPS because you initiate the process in all instances. In addition, at no time does the government or any other party have access to your account from which the deposits are made. The only way to authorize deposits or payments from your account is through use of the PIN that is given to you upon enrollment.

Many businesses have recognized the convenience of voluntary participation in the IRS's EFTPS program. If you are interested in discussing whether your business would also benefit from this program, please contact the office for a consultation.

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

A. Unfortunately, you're not alone in your "seasonal" approach to considering your tax situation. Many people have a once-a-year relationship with their tax professional, which can result in the improper handling of important tax documents and sometimes-costly financial decisions. When it comes to handling your tax situation during the year, you will find that a little common sense will go a long way.

Here are some general common sense tips to handling all things tax-related pre- tax season and during the "off-season":

Don't assume all your tax paperwork is correct. Check Forms W-2s and 1099s for accuracy. Many W-2s and 1099s are prepared by data processing companies that merely process your tax information as raw data. Mistakes have been known to occur. Although your employer or financial institution should be checking these forms for accuracy, it's a good idea to double-check these forms against payroll stubs and monthly statements from the payer. If you find a discrepancy, notify your employer as soon as possible to the error corrected and reported to the appropriate taxing authorities.

Gather possible ALL relevant tax documents for your tax preparation. Don't avoid taking legitimate deductions out of fear of "raising red flags" that may cause your return to be audited. Filing a complete and accurate return is required and is your best defense against an audit.

Don't make decisions solely on potential "tax breaks". All good investment or business decisions should be able to stand on their own before tax breaks are considered. A change in the tax law can be disastrous (and costly) when you are stuck in an affected investment (can you say "abusive tax shelter"?).

Seek planning advice from a tax professional. Probably the best investment decision you can make is to seek out the services of your tax professional. In most cases, the amount you are charged for good tax advice is a fraction of the resulting tax savings.

Consult with a tax professional before responding to IRS notices. If you receive a notice from the IRS (or any taxing authority) do not automatically assume that it is accurate and mail them a check. Many notices are inaccurate or merely require additional explanation. Tax professionals have the knowledge and experience to recognize areas where additional explanation or documentation may reduce or eliminate the assessment stated on the notice.

If audited, consider your appeal rights. Although the IRS auditor may not bring it to your attention, the end of an audit is be no means the end of the road for your tax case. Appealing an audit decision can many times put your case in front of a more experienced agent who may better understand the issues and your position on them.

Taking a little time during the year to consider your tax situation and invoke a little common sense can pay off with substantial tax savings and the avoidance of unnecessary expenditures. If you need any additional assistance throughout the year, please do not hesitate to contact the office for guidance.

Q. Since our children are grown and now out on their own, my husband and I are considering selling our large home and purchasing a small townhouse. We have owned our home for years and have quite a lot of equity built up. How do we figure out how much our potential capital gain would be? Will we pay more in taxes because we are moving to a less expensive home?

If you are considering selling a home you've owned for years and have a lot of equity in - for example, you would like to move to a smaller place - you will want to figure out how much your potential capital gain will be on the sale. Moreover, perhaps you'd also like to know if you'll pay more taxes because you are moving to a less expensive home.

The homesale exclusion

First, you will not be penalized (in the form of recognizable capital gains) for buying a less expensive home that doesn't require that you reinvest all of your gain. Under Code Sec. 121, $500,000($250,000 for single individuals and married taxpayers filing separately) in gain from the sale of a principal residence is generally excluded from income. Remember, however, that under the Economic Recovery Act of 2008, periods of "nonqualifying use" will reduce the amount of gain you can exclude from income.

Determining basis

In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence. The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

Original cost

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:

• Attorney's fees,
• Abstract fees,
• Charges for installing utility service,
• Transfer and stamp taxes,
• Title search fees,
• Surveys,
• Owner's title insurance, and
• Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

Improvements

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be added to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Other basis adjustments

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

Recordkeeping

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)

If you are considering selling your home, it pays to know in advance what the tax ramifications may be. If you need assistance determining the basis of your personal residence, please contact the office for more guidance.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

Manage your cash before it manages you

Why do you need to manage your cash flow? Is it needed to help manage the day-to-day operations, obtain financing for a new project, or to acquire new equipment? Do you plan on presenting it to your banker to secure better financing terms or provide for future solvency? Are you seeking additional investors to help you expand into new markets? While all of these can be valid reasons for keeping on top of your cash flow situation, one of the main reasons to manage it is so it does not manage you. You should know when your business would be cash poor so you can better plan for short term operating loans. Similarly, when it has excess cash, it can be invested temporarily to maximize your return. If you do not do this, your cash flow situation will dictate when you can afford to advertise, when you can expand your business, when you can take on more sales, etc. as opposed to you making those timing decisions.

Once you have determined why cash flow management is important to your business, the next step is to get into action. In order to effectively manage your cash flow situation, you need to forecast your cash flows and once done, develop and implement a cash flow plan.

Forecasting your cash flow is the first step in the process of effectively managing your cash flow. How often you will need to prepare cash flow projections and what intervals to use (i.e. annually with monthly intervals or monthly with daily intervals) will depend on the nature of your business.

Be realistic. A realistic approach to forecasting your cash flows will produce more dependable and effective results. Analyze your operations to know your historical results as well as your projected assumptions. All cash flow from operations, investing activities and financing activities should be considered.

Consider your cash inflows and outflows. Your business' cash inflows would include such items as accounts receivable collection, along with unusual and nonrecurring items such as tax refunds, proceeds from a sale of equipment, etc.… Normal cash outflows include recurring items such as purchasing and accounts payable, payroll, loan payments, etc. along with nonrecurring items such as estimated tax payments, bonuses, equipment purchases and others.

Project your cash flow. Once you have determined the appropriate interval for your business (let's assume monthly), you would take the cash at the beginning of the month, add the cash inflows and subtract the cash outflows. This will give you a projected end of month cash balance. Now repeat this for the next 11 months (if your forecast was based on an annual cycle). You now have a cash flow forecast. When you study this, you may notice some months with large cash balances and other months with little, or even negative, cash balances.

The goal here is to alter the forecasted cash flows into planned cash flows. By doing this, you can smooth out the peaks and valleys and turn your forecast into a manageable plan.

Invest excess cash. For those months with excess cash, you should have automatic investment alternatives set up with your financial institution. Depending on the length of time you have an excess cash situation, you can have a nightly sweep whereby your funds are invested in government bonds or repurchase agreements. Longer periods of excess cash will require more sophisticated alternatives, such as certificates of deposit. The size of the business, along with its cycle, will determine the investment alternatives to choose.

Plan for cash shortages. For the months with little or negative cash, you can first try to adjust these shortages by reviewing your collection policies to find ways to accelerate cash inflows. You can also look at your vendors' terms to consider possible ways to defer your payables. You should always err on the side of conservatism when making these changes. After this exercise, if you are still in a cash poor situation, determine sources of additional financing. You will appear more organized to lending institutions if this can be arranged before the problem arises.

By first forecasting, and then planning your cash flows, you can take advantage of many unique business opportunities, and avoid the pitfalls of unplanned cash shortages. Taking a step towards controlling your cash flow will keep you from having your cash flow take control of you.

If you have any questions about how you can better manage your business' cash flow, please contact the office for a consultation.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

Incentive stock options (ISOs) give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

ISOs give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

How are ISOs taxed?

An incentive stock option is an option granted to you as an employee which gives you the right to purchase the stock of your employer without realizing income either when the option is granted or when it is exercised. You are first taxed when you sell or otherwise dispose of the option stock. You then have capital gain equal to the sale proceeds minus the option price, provided that the holding period requirement is met.

Note. The IRS has temporarily suspended collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

How long do I need to hold ISOs to get capital gain treatment?

To obtain favorable tax treatment, the stock acquired under an incentive stock option qualifies for favorable long-term capital gain tax treatment only if it is not disposed of before the later of two years from the date of the grant of the option, or one year from the date of the exercise of the option. If this holding period is not satisfied, the portion of the gain equal to the difference between the fair market value (FMV) of the stock at the time of exercise and the option price is taxed as compensation income rather than capital gain. In this case, you may be subject to the higher rate of income imposed on ordinary income.

For example, your employer granted you an incentive stock option on April 1, 2006, and you exercised the option on October 1, 2006, you must not sell the stock until April 1, 2008, to obtain favorable tax treatment (the later of two years from the date of the grant or one year from the date of exercise).

What key dates should I remember?

Because of the importance of receiving capital gain treatment, it is important that you keep in mind key dates such as the date of grant of the ISO and its date of exercise. These periods are measured from the date on which all acts necessary to grant the option or exercise the option have been completed. Therefore, the date of grant is treated as the date on which the board of directors or the stock option committee completes the corporate action which constitutes an offer of stock, rather than the date on which the option agreement is prepared. The date of exercise is the date on which the corporation receives notice of the exercise of the option and payment for the stock, rather than the date the shares of stock are actually transferred.

Will I be subject to alternative minimum tax?

The effect of the alternative minimum tax (AMT) on ISOs can amount to a potential trap for the unwary. This is because under the regular tax there is no tax until the stock is sold or otherwise disposed of. Under the AMT, however, the trap takes place when the ISO is exercised, since alternative minimum taxable income includes the difference between the FMV of the stock on the date the ISO is exercised and the price paid for the stock (the "ISO spread").

If you pay AMT, you are given a credit against regular income tax for the portion of the AMT attributable to ISOs and other tax preference items that result in deferral of income tax. The credit is taken in later years when no AMT is due, and may be taken to the extent that regular tax liability exceeds tentative minimum tax liability. The effect of this is that the AMT is a prepayment of tax, rather than an additional tax.

Since the AMT only applies if it is higher than your regular income tax, one strategy is to time the exercise of ISOs each year to come under the AMT exemption levels. Purely from a tax standpoint, the ideal situation is to exercise ISOs each year that would result in AMT equal to your regular tax. Of course, other factors, such as market conditions, financial needs, etc. may play a greater role in deciding when to exercise an option. If you pay high property tax or state income tax, you may find it more challenging to calculate the optimum exercise of ISOs in relation to the AMT, since both of these deductions are counted against their annual AMT exemption.

ISOs can be a nice additional employee benefit when considering a job offer. However, because the tax implications surrounding certain key trigger events related to ISOs can have a significant impact on your tax liability, we suggest that you contact the office for additional guidance.

Starting your own small business can be hectic - yet fun and personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront and a promise to "keep it simple", you can get an effective system up and running in no time.

Starting your own small business can be hectic - but also personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront, you can get an effective system up and running quickly.

The IRS requires all businesses to keep adequate books and records but accurate financial records can be used by the small business owner in many other ways. Good records can help you monitor the progress of your business, prepare financial statements, prepare your tax returns, and support items on your tax returns. The key to accurate and useful records is to implement a good bookkeeping system.

The most important thing that you as a busy business owner should remember when planning your bookkeeping system is that simple is better. Bookkeeping should not interfere with the daily operations of your business or impede the progress of your business' goals in any way.

Decisions, decisions....

Probably the hardest part about bookkeeping for any small business is getting started. There are so many decisions to make that the business owner may seem overwhelmed. Single or double entry? Manual or computerized system? Should I try to do it myself or hire a bookkeeper?

Here are some good questions to ask yourself as you are making some very important upfront decisions:

• Single or double entry (manual bookkeeping systems). While a single entry system can be simple and straightforward (especially when you are just starting out a small business), a double entry system has built-in checks and balances that can help assure accuracy and control.

• Manual or computerized. Will a manual system quickly become overwhelmed with the expected volume of transactions from your business? Will your efforts be less if a certain element of your transactions were automated? If you plan on doing your books yourself, do you have the time/patience to learn a new software program?

• Self-prepare or outsource. How much time will you or your employees have to allocate to recordkeeping activities each day? Do you have any accounting experience or at least a good head for numbers? Does your budget allow for the additional expense of an outside bookkeeper? If outsourcing was an option, would it make sense to outsource some of it and do some yourself (e.g. use a payroll processing service but do your own daily transaction input and bank reconciliation)?

As you sit down to make these fundamental decisions regarding your bookkeeping system, here are a few things to keep in mind:

Be realistic. Be honest with yourself and realistic about the amount of time and energy you will be able to devote to the bookkeeping task. As a new small business owner, you will be pulled in a hundred different directions - make sure that you take on only as much of the bookkeeping task as you feel you can do without making yourself crazy.

Do your homework. Before you commit to any bookkeeping decision, it makes sense to find out what resources are available and at what cost. For example, you may find out that having your payroll processed by an outside company costs much less than you imagined or that a bookkeeping software package you thought was difficult is actually very straightforward. An informed decision is a good decision.

Ask for references and recommendations. Other successful small business owners have a wealth of knowledge surrounding all aspects of running a business, including bookkeeping. Ask them about their experiences with recordkeeping and find out what has (and what has not) worked for their companies. If they know of a good, reasonably priced bookkeeper or they've had a good experience with a software package, take notes.

See the forest for the trees. Translation: Give the minutia only as much attention as it needs and concentrate on the big picture of your business' finances. Implementing a bookkeeping system - on your own or with outside help - that is simple and reliable will give you the opportunity to step back and evaluate how effectively your business is operating.

There are many important decisions to make when you start your own business, including ones that seem mundane - such as recordkeeping - but that can have a significant impact on your ability to successfully operate your business. Before you make any of these decisions, we encourage you to contact the office for a consultation.

Once you have decided on the type of bookkeeping system to use for your new business, you will also be faced with several other accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be carefully considered by the new business owner.

Generally, there are two methods of accounting used by small businesses - cash and accrual. The basic difference between the two methods is the timing of how income and expenses are recorded. Your method of accounting is chosen when you file your first tax return. If you ever wish to change your accounting method after that, you'll need to file for IRS approval, which can be a time-consuming process.

While no single accounting method is required of all taxpayers, you must use a system that clearly shows your income and expenses, and maintain records that will enable you to file a correct return. If you do not consistently use an accounting method that clearly shows your income, your income will be figured under the method that, in the opinion of the IRS, clearly shows your income.

Cash method

Most small businesses use the cash basis method of accounting, which is based on real time cash flow. Under the cash method, income is recorded when it is received, and expenses are reported when they are paid. For example, if you receive a check in the mail, it becomes a cash receipt (and is recorded as income). Likewise, when you pay a bill, you record the payment as an expense. The word "cash" is not meant literally - it also covers payments by check, credit card, etc.

Accrual method

Under the accrual method, you record income when it is earned, not necessarily when it is received. Likewise, you record your expenses when the obligation arises, not necessarily when you pay the bills. In short, the accrual method of accounting matches revenue and expenses when they occur whether or not any cash changes hands. For example, suppose you're hired as a consultant and complete a job on December 29^th, but you haven't been paid for it. You would still recognize all expenses you incurred in relation to that engagement regardless of whether you've been paid yet or not. Both the income and the expenses are recorded for that year, even if payment is received and bills are paid the following January.

Businesses are required to use the accrual method of accounting in several instances, including:

• If the business has inventory.
• If the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

If you operate two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. The businesses are considered separate and distinct if books and records are maintained for each business. If you use the accounting methods to create or shift profits or losses between the businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct.

Other methods of accounting

In addition to the cash and accrual methods of accounting, there are other ways that your business can account for your income and expenses (e.g., hybrid, long-term contract). These methods are beyond the scope of this article but may be available for your business.

As stated previously, you choose your method of accounting when you file your first tax return. Because there are advantages and disadvantages to each of the accounting methods, it is important that you make the right decision. If you need assistance in determining the best accounting method for your business, please contact the office.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

• You do not itemize your deductions;
• Your adjusted gross income (AGI) is over a certain amount;
• Part of your home is not a "qualified home"
• Your home is secured by a mortgage that was acquired (and/or subsequently refinanced) prior to October 14, 1987
• You used any part of the loan proceeds to invest in tax-exempt securities.

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

Q. A couple of years ago, a friend of mine borrowed some money from me to start a small business. The business didn't survive and has left my friend without the ability to pay me back. Since I'm sure I'll never see any of the money again, can I at least get a tax write-off?

Q. A couple of years ago, a friend of mine borrowed some money from me to start a small business. The business didn't survive and has left my friend without the ability to pay me back. Since I'm sure I'll never see any of the money again, can I at least get a tax write-off?

A. Perhaps. When you loan money to someone and that person doesn't pay you back, the Internal Revenue Service may classify the loss as a "bad debt", in this case, a nonbusiness bad debt. Nonbusiness bad debts are deductible in the year they become worthless as short-term capital losses on Schedule D of your Form 1040. However, in order to be deductible on your personal tax return, the following conditions must exist:

There must be a bona fide creditor-debtor relationship. In order for a loan to be considered a true loan, there must be an understanding that the money will be repaid. If this cannot be established, the loan may be reclassified as a gift, which is not deductible.

You must have basis in the debt. You can only take a bad debt deduction for something that you either previously claimed as income on your tax return or that you paid cash for out of your pocket. For example, if you get a court judgment against someone for punitive damages and they never pay you, you cannot take a deduction for the amount you should have received, since it was never claimed on your return as income and you didn't pay out any cash.

The debt must be totally worthless. Nonbusiness bad debt deductions are not allowed for partially worthless debts. In order to be deductible, it must be determined that the loan is totally worthless. Although it is not necessary to go to court to get a judgement against a debtor if it can be shown that the debt is uncollectible, it is important that some collection efforts on the part of the creditor have been attempted.

Because loaning money to family or friends can turn out badly, it is wise to lay a little groundwork first in order to protect yourself later. Here are a few things you may want to consider before you loan your money:

Get it in writing. A signed loan document can go a long way to establish that a true creditor-debtor relationship exists. While the contract or note does not have to be very formal, make sure that it contains the following info: description of the debt, the name and address of the debtor, and the terms of the loan, such as the date it will become due and details of how interest will be charged.

Charge interest. All true loans have an interest element to them. In order to establish your loan as bona fide, consider adding language regarding interest into the loan document.

Document collection efforts. When you deduct your bad debt on your return, you are required to attach a statement that details the attempts that you made to collect this debt prior to making the determination that it was worthless. While copies of letters sent to the debtor demanding repayment may suffice if the IRS questions the loss, legal documentation in the form of a judgment against or a bankruptcy filing by the debtor will give you a stronger case.

Helping a friend or family member with a short-term loan is something most of us will face at some point in our lives. In the event that such loans are not repaid, following the above simple guidelines can make it easier to recover some of your loss on your tax return. If you find yourself in a similar situation, please contact the office for assistance.

In addition to decisions that affect the day to day operations of the company, the new business owner will also be faced with accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be considered carefully.

In addition to decisions that affect the day to day operations of the company, the new business owner will also be faced with accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be considered carefully.

Generally, there are two methods of accounting used by small businesses - cash and accrual. The basic difference between the two methods is the timing of how income and expenses are recorded. You choose your method of accounting when you file your first tax return. If you ever wish to change your accounting method after that, you'll need to file for IRS approval, which can be a time-consuming process.

While no single accounting method is required of all taxpayers, you must use a system that clearly shows your income and expenses, and maintain records that will enable you to file a correct return. If you do not consistently use an accounting method that clearly shows your income, your income will be figured under the method that, in the opinion of the IRS, clearly shows your income.

Most small businesses use the cash basis method of accounting, which is based on real time cash flow. Under the cash method, income is recorded when it is received, and expenses are reported when they are paid. For example, if you receive a check in the mail, it becomes a cash receipt (and is recorded as income). Likewise, when you pay a bill, you record the payment as an expense. The word "cash" is not meant literally - it also covers payments by check, credit card, etc.

Under the accrual method, you record income when it is earned, not necessarily when it is received. Likewise, you record your expenses when the obligation arises, not necessarily when you pay the bills. In short, the accrual method of accounting matches revenue and expenses when they occur whether or not any cash changes hands. For example, suppose you're hired as a consultant and complete a job on December 29^th, but you haven't been paid for it. You would still recognize all expenses you incurred in relation to that engagement regardless of whether you've been paid yet or not. Both the income and the expenses are recorded for that year, even if payment is received and bills are paid the following January.

Businesses are required to use the accrual method of accounting in several instances, including:

• If the business has inventory.

• If the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

If you operate two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. The businesses are considered separate and distinct if books and records are maintained for each business. If you use the accounting methods to create or shift profits or losses between the businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct.

As stated previously, you choose your method of accounting when you file your first tax return. Because there are advantages and disadvantages to each of the accounting methods, it is important that you make the right decision. If you need assistance in determining the best accounting method for your business, please do not hesitate to call.

Q. I've just started my own business and am having a hard time deciding whether I should buy or lease the equipment I need before I open my doors. What are some of the things I should consider when making this decision?

Q. I've just started my own business and am having a hard time deciding whether I should buy or lease the equipment I need before I open my doors. What are some of the things I should consider when making this decision?

A. Deciding whether to buy or lease business property is just one of the many tough decisions facing the small business owner. Unfortunately, there's not a quick answer and, since every business has different fact patterns, each business owner will need to assess every type of business property separately and consider many different factors to make a decision that is right for his or her particular circumstances.

While there are advantages and disadvantages to both buying and leasing business property, the business owner should carefully consider the following questions before making a final decision either way:

How's your cash flow? If you are just starting a business, cash may be tight and a hefty down payment on a piece of equipment may bust your budget. In that case, since equipment leases rarely require down payments, leasing may be a good choice for you. One of the biggest advantages of leasing is that you generally gain the use of the asset with a much smaller initial cash expenditure than would be required if you purchased it.

How's your credit? Loans to new small businesses are hard to come by so if you're a fairly new business, leasing may be your only option outside of getting a personal loan. As a new business, you will definitely have an easier time getting a company to lease equipment to you than finding someone to extend you credit to make the purchase. However, if you have time to search for credit well in advance of needing the equipment, you may want to purchase the equipment to begin establishing a credit history for your company.

How long will you use it? A general rule of thumb is that leasing is very cost-effective for items like autos, computers and other equipment that decrease in value over time and will be used for about five years or less. On the other hand, if you are considering business property that you intend to use more than five years or that will appreciate over time, the overall cost of leasing will usually exceed the cost of buying it outright in the first place.

What's your tax situation? Don't forget that your tax return will be affected by your decision to lease or buy. If you purchase an asset, it is depreciated over its useful life. If you lease an asset, the tax treatment will depend on what type of lease is involved. There are two basic types of leases: finance and true. Finance leases are handled similarly to a purchase and work best for companies that intend to keep the property at the end of the lease. Payments on true leases, on the other hand, are deductible in full in the year paid.

The answers to each question above need to be considered not individually, but as a group, since many factors must be weighed before a decision is made. Buying or leasing equipment can have a significant effect on your tax situation and the rules related to accounting for leases are very technical. Please contact our office before you make any decisions regarding your business equipment.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:

Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.

Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.

Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.

For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.

Specific Computerized Systems Requirements

If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.

If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.

Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:

Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.

Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:

• Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
• You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.

• You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.

Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:

• Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.

• Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
• Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.

Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.

Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.

Owning property (real or tangible) and leasing it to your business can give you very favorable tax results, not to mention good long-term benefits. There are some drawbacks, however, and you should consider all factors before structuring such an arrangement.

BENEFITS

• Since you own the property personally, it is protected from the creditors of the Company should it be sued or run into financial difficulty.

• Real estate leasing outside of the corporation will offer better tax and financial advantages compared to the rental of personal property such as equipment. These advantages can include the avoidance of corporate double tax on the appreciation of the real estate, along with estate planning advantages from the step up in basis if the property is owned by the individual or partnership.
• Allows the individual taxpayer to remove earnings from the company without payment of employment taxes or increasing the possibility of unreasonable compensation issues.

DRAWBACKS

• If you are a non-corporate lessor and leasing personal property (machinery, equipment, etc.), you will have to comply with special rules in order to claim the Sec. 179 expense deduction.
• You need to charge a fair rental for your real estate or equipment. Inflated rental rates may be recharacterized as dividends if coming from a corporation.
• Leasing property to your own C Corporation cannot generate passive income. Income will be reclassified as "active" while losses will remain "passive", removing the ability to use this transaction to offset other "passive" losses.

Proper planning and knowledge of the various tax issues is important when considering this type of arrangement. Feel free to contact us for a better understanding of how these situations would effect you before you proceed.

Biweekly mortgage prepayment plans are popular in the mortgage lending industry. These plans tout substantial interest savings and shortened loan terms by making two smaller mortgage payments each month instead of one large payment. Is this type of program right for you? Is a formal plan necessary?

How does it work? Once the plan has been established, a person makes biweekly payments (equal to half of their usual monthly mortgage payment) to the plan operator. This means that a person would make 26 payments instead of the usual 12, effectively making one additional mortgage payment for the year. At the end of the year, the plan operator sends the extra money paid in during the year to the borrower's lender to be applied towards principal.

How much does it cost? Formal prepayment plans typically charge a one-time membership fee of between $300-400. In addition, the plan operator will charge you a service fee of between $1-4 on each payment.

Will it really save me money? Definitely. For example, if you are currently making 12 monthly payments of $665, or $7,980 a year, on your 30-year mortgage, with a formal prepayment plan, you would make 26 biweekly payments of $332.50, or pay $8,645 annually. As a result, total interest paid over the life of the loan would shrink by $34,130 and the loan term would shorten to less than 24 years. But don't forget the annual membership fees and biweekly service charges: these could cost you up to $2,000 over the term of your loan (even after taking into consideration the shortened loan term).

Are there other options? Do it yourself. You can devise your own prepayment plan. This plan does not have to be complicated: take your current monthly payment, divide it by 12 and send the extra amount in with your regular monthly payment. Or just send in one extra payment at the end of the year. You will still reap the benefits without paying any extra administrative fees or getting stuck in a plan you can't commit to for the long term. For example, with a 30-year fixed mortgage for $100,000 at a 7 percent interest rate, a borrower would have monthly principal and interest payments of about $665, and pay $139,508 in interest over the life of the loan. By adding $25 a month, the same borrower could shorten the term by just over three years and save about $18,214 in interest. Sending in even more, say an extra $200 every month, would save $72,695 in interest, and the loan would be paid off in about 16 years. And you've avoided paying the extra fees of almost $2,000.

A couple things to consider before starting any prepayment plan:

• Make sure that you follow your lender's procedures for making additional principal payments. You may need to send two checks and write "Principal Only" on one of them or indicate the additional principal payment on your payment voucher.

• Watch out for prepayment penalties. These penalties usually only apply when a borrower refinances, but some can be activated if a borrower pays more than 20 percent of the loan's principal during any one year early in the loan. The penalty can be as much as six month's interest on the amount paid that exceeds the lender's allowed prepayment.

The decision to start your own business comes with many other important decisions. One of the first tasks you will encounter is choosing the legal form of your new business. There are quite a few choices of legal entities, each with their own advantages and disadvantages that must be taken into consideration along with your own personal tax situation.

The decision to start your own business comes with many other important decisions. One of the first tasks you will encounter is choosing the legal form of your new business. There are quite a few choices of legal entities, each with their own advantages and disadvantages that must be taken into consideration along with your own personal tax situation.

Sole proprietorships. By far the simplest and least expensive business form to set up, a sole proprietorship can be maintained with few formalities. However, this type of entity offers no personal liability protection and doesn't allow you to take advantage of many of the tax benefits that are available to corporate employees. Income and expenses from the business are reported on Schedule C of the owner's individual income tax return. Net income is subject to both social security and income taxes.

Partnerships. Similar to a sole proprietorship, a partnership is owned and operated by more than one person. A partnership can resolve the personal liability issue to a certain extent by operating as a limited partnership, but partners whose liability is limited cannot be involved in actively managing the business. In addition, the passive activity loss rules may apply and can reduce the amount of loss deductible from these partnerships. Partners receive a Schedule K-1 with their share of the partnership's income or loss, which is then reported on the partner's individual income tax return.

S corporations. This type of legal entity is somewhat of a hybrid between a partnership and a C corporation. Owners of an S corporation have the same liability protection that is available from a C corporation but business income and expenses are passed through to the owner's (as with a partnership). Like partners and sole proprietors, however, more-than 2% S corporation shareholders are ineligible for tax-favored fringe benefits. Another disadvantage of S corporations is the limitations on the number and kind of permissible shareholders, which can limit an S corporation's growth potential and access to capital. As with a partnership, shareholders receive a Schedule K-1 with their share of the S corporation's income or loss, which is then reported on the shareholder's individual income tax return.

C corporations. Although they do not have the shareholder restrictions that apply to S corporations, the biggest disadvantage of a C corporation is double taxation. Double taxation means that the profits are subject to income tax at the corporate level, and are also taxed to the shareholders when distributed as dividends. This negative tax effect can be minimized, however, by investing the profits back into the business to support the company's growth. An advantage to this form of operation is that shareholder-employees are entitled to tax-advantaged corporate-type fringe benefits, such as medical coverage, disability insurance, and group-term life.

Limited liability company. A relatively new form of legal entity, a limited liability company can be set up to be taxed as a partnership, avoiding the corporate income tax, while limiting the personal liability of the managing members to their investment in the company. A LLC is not subject to tax at the corporate level. However, some states may impose a fee. Like a partnership, the business income and expenses flow through to the owners for inclusion on their individual returns.

Limited liability partnership. An LLP is similar to an LLC, except that an LLP does not offer all of the liability limitations that are available in an LLC structure. Generally, partners are liable for their own actions; however, individual partners are not completely liable for the actions of other partners.

There are more detailed differences and reasons for your choice of an entity, however, these discussions are beyond the scope of this article. Please contact the office for more information.

Please contact the office for more information on this subject and how it pertains to your specific tax or financial situation.