Tax Structure Matters

I was having coffee with a colleague a while back, shortly after we reprinted our business cards. This time, we included the phrase, "Tax Structure Matters."

He said, "OK, so is it 'tax structure matters' or 'tax structure matters'?"

I replied, as most CPAs do, with "It depends."  (In case you don't know, that's our answer for EVERYTHING you ask.)

We intentionally left out any emphasis because it could be read either way and be right. As experts in the field of advising business clients on the best tax structure for their new or existing businesses, we focus on the advantages and disadvantages of the many different tax structures.  The last thing we want to do is saddle a business owner with a less-than-advantageous manner of reporting taxes.  

Once we help the clients set up the foundation, then we continue working with them for the life of their business to advise and counsel on tax structure matters that arise along the way.  We offer planning services to all our business clients by monitoring their tax position all year rather than just in December or January.  Pro-active analysis reduces surprises, and who doesn't want less surprises when it comes to taxes?

What Is Up With Your Logo?

I was having a conversation with a friend of mine last week, when the question arose about our firm's logo. "Mmmm, I just realized it was an abacus, Jonathan."  It occurred to me, right then, that I have never told my clients about why this was important to me.

An abacus is one of the oldest methods known to man to calculate a series of numbers.  The earliest known written documentation of the familiar Chinese abacus dates back to the 2nd century BC.  That's a LONG TIME AGO!  I wanted to present ourselves to clients as standard-bearers; a reliable and tried-and-true resource for the services we offer clients.  

But this is the 21st century, and being a 21st century kind of guy, I wanted a modern, edgy look to the abacus.  As I recall, my conversation about the design went something like this:

"What do you want the logo to be?"

"I would like an abacus, I think."

"Really?  Aren't those really old?  Isn't your profession regarded as stodgy anyway?"

"I suppose that's true....but what can we do to blend reliable and modern?"

I'll admit, I wasn't completely sold on it at first.  I guess I am slightly stodgy. I used old letterhead and cards for six months after we agreed on the logo. Over time it began to stick.  For me, the message behind the logo began to take shape. I am a standard-bearer.  I am a tried-and-true resource.  And I look good doing it.

This service is just as relevant now as it was 100 years ago.

Can I Deduct My Travel Expenses?

It's the time of year when I'll get this question...numerous times.  My firm has found itself working with several individual tax return clients who work in sales positions, and these guys are responsible for paying for travel and entertainment expenses out of their own pocket with no reimbursement in most cases.  They also have to drive their personal autos to make sales calls, which could lead them to deduct mileage expenses each year.  This is a very important deduction to those clients, and I advise them (or harass them...that could be more like it) annually about record-keeping and what is and is not deductible.  The rules are tricky and bear repeating.  You're welcome....

First of all, what is "travel?"

You're traveling away from home if your job duties require you to be away from the general area of your tax home substantially longer than a day's work, and you need to sleep or rest to meet the demands of your work while away from home.  Overnight business trips are the common example I see, or trade shows which keep you away from home for several days.  There are no travel expenses while you're driving around town making deliveries (except for mileage).

Which expenses can you deduct?

The list goes something like this....transportation, taxi cab fees, baggage and shipping, car (mileage or actual expenses, depending on the client and the circumstance), lodging and meals, cleaning (dry cleaning and laundry), telephone, tips, and of course, "other."  Other is where we get into trouble sometimes, but the definition is "other similar ordinary and necessary expenses related to your business travel."

When can you deduct meals?

You can deduct meals when it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from  home, and/or the meal is business-related entertainment.  Remember that meals are 50% deductible in almost all cases.

Can you ever deduct a per diem instead of using actual expenses?

When your meals qualify for deduction as a business expense, you can either use the actual cost method (tallying up receipts) or the Standard Meal Allowance method.  The actual cost method is easy enough to understand, but the Standard Meal Allowance creates more questions.  Simply put, the Standard Meal Allowance option allows you to use a set amount for your daily meals and incidental expenses instead of keeping records of your actual costs.  The amount you deduct varies based on where and when you travel. IRS publishes M&IE rates (meals and incidental expense rates) and they change from year to year as they are indexed for inflation and such.  For example, in 2011, the M&IE rate for most small localities in the US was $46/day.

Do you need substantiation if you use the per diem?

You do not need receipts for the meals, but you MUST keep records to prove the time, place and business purpose of your travel where the meals occurred.

How do you keep track of your mileage?

I asked an IRS agent about this once....you need a mileage log.  Plain and simple.  You need a record of where you went, why you went there, and how far it was.  You need to keep your mileage even if you don't claim a mileage deduction on your tax return (you may claim actual expenses such as gas, maintenance, and depreciation).  The mileage deduction, when used properly, is a valuable deduction for those who qualify for it.  But, the bottom line is that without a mileage log, you'll lose the deduction under examination.  No questions.  And remember, traveling from home to your office is NEVER deductible as business travel.  The common mileage events take place in visiting clients or customers, or traveling to a business meeting away from your regular workplace.  We have mileage logs in our office, so if you ever need one, just say the word.

Lastly, when can you deduct entertainment expenses?

Entertainment is another of those fuzzy zones....when does entertainment actually occur?  Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.  My sales clients use this one a lot.  For the entertainment expenses to qualify, the entertainment must have taken place in a business setting or else the main purpose of the entertainment was the active conduct of business, you actually did engage in business with the person during the entertainment period and you had a general expectation of getting income or some other business benefit.   This is the question I get....can I deduct a golf game with my biggest client?  If you discussed business and you expect something to come of it, then it would appear to qualify as entertainment expense.  BUT, entertainment expenses are 50% deductible, just like meals.

Those are the high points...I can tell you're excited.  But, not everything can be funny.  Sometimes we have to educate a little bit.  Seriously, though....there are so many scenarios and what-if's here just like in any other area of tax law, so each case should be assessed separately.  If you get bored, look at IRS Publication 463 (where I got most of this information) and see if you can find anything I didn't address here.  Or ask me and I'll do it for you.  Either way, make sure you keep records and pardon me if I ask a lot of questions when I prepare your taxes.  We need to get this right....

In defense of price

I recently read an article in the Wall Street Journal about Home Depot and how they planned to close all seven of their remaining big box stores in China after years and years of losses.  The article went on to quote that Mattel, Inc. was shutting down its Barbie flagship store and Best Buy closed its nine China outlets.  Why?

All three companies failed to grasp the fact that the Chinese culture wasn't the same as the American culture when it came to accepting a "do-it-yourself" home improvement store, dolls for its children, and high-tech electronics.  The Chinese culture, respectively, wants "do-it-for-me" home improvement, books for its children and washing machines for its homes.  The Chinese population is more apartment based, so Home Depot wasn't selling a lot of lumber; Chinese parents want their kids reading books and learning, rather than playing with toys like dolls; and household appliances by and large are more important to them than MP3 players.  What one person values isn't necessarily what the other person values...

Where can we learn from this as service providers?  We have to ACTIVELY listen to our customers/clients and find out what they want and what they value.  Do you remember one of my first blog posts about value, and how the client determines the value?  Value is determined at the client-level, not ours.  So, it would stand to reason that we must listen to the client to determine WHAT THEY VALUE.  I read a quote in Inc. Magazine the other day which stated "People don't want to buy a quarter-inch drill.  They want a quarter-inch hole." This leads to the real point of my blog....

When we assess prices for our engagements, we do a strong analysis of the value proposition.  We want to offer more value to you, our clients, but this increase in value will cost more money as you receive it.  How do we do this?

• We are constantly learning new technologies, new ways of doing things, which will make your lives easier and in the end make us more effective for you. Can we speed up your cash flow by introducing you to Bill.com?  You bet, because we have tried it and it works when implemented correctly. More efficiency is a bonus, but not our end-game.
• We stay in touch with you...we don't want you to be "data rich and meaning poor."  Therefore, we try very hard to make sure you know what's going on and why.  We inform you of changes to the tax law, as we should, but we also introduce new ideas to those of you that engage us to do so...ideas about running your business better, assessing your profitability, examining your cash flow, and looking at your business alongside others in our area of the country for bench-marking.  That's valuable stuff!  Telling a business owner what the business can and cannot deduct is nice (data), but telling you how to structure your business to get more benefit from that deduction, or increase your revenue based on our experiences and our insight is where the real value is delivered (meaning).
• We push ourselves to refine our systems internally so that working with us is the easiest thing you do all day. It is our goal to produce a predictable result for you.  When we fail, we assess what happened and make changes....constantly.
• We poll you and ask you what you want.  It's amazing how similar the answers are. Then we make a way to provide it.

In the end, we strive to provide much more value in exchange for any price increase, and when we fail to do so, you hold our feet to the fire.  One of my best and worst days in the past year was the day I met with a long-time client and friend, and was informed that we hadn't performed as well in her eyes over the prior six months as we had done in the prior six years of her working with us.  She felt like a number and not a valued client.  I felt like dirt, but we learned from it.  I even sent her a thank-you note for having the conversation with me.  She could have just left, citing irreconcilable differences.  But she cared enough about our relationship to let me know that something was wrong and give me the chance to correct it.  Now, we are set to meet in late October to determine how we can deliver more value to her.

We LOVE providing value to you guys.  It's what gets us out of bed in the morning.  We have learned so much this past year, and we look forward to another year of working with you.  But, don't ever let the occasion pass by to let us know if we're not living up to what you expected.  There could have been a misunderstanding regarding what we were engaged to do (our fault for not well-defining the scope) or we could have just fallen down on the job (human error, but also our fault).  In the end, we need to know.  Thank you for being loyal clients and for letting us work alongside you.  Here's to a great 2013!

What's Your "By-When?"

"If Meghan sends me another *&^% e-mail asking me when I need the work I just left on her desk...."

How many times has this crossed my mind?  Mmmmm, lots.  But when prodded, what is the response I always get? "I didn't know when you expected it, so I did it when I got to it." How long do you think it has taken me to realize that I suck at providing a "by-when" date?  Too long, let me tell you.

I learned of this "by-when" date at a conference in Orlando that we recently attended.  I had never heard it described quite like this, but the presenter was talking about how effective communication could reduce conflict.  I live for reducing conflict. Meghan proceeded to pinch my arm when this particular concept came up...the "by-when" date.  Like the sensitive, in-touch-with-my-emotions guy that I am, I listened.

It's really simple, guys.  Let me share a secret with you so it won't take you as long as it did me to learn this valuable lesson. When you set up a project and hand it off to someone to complete/comment on/contribute to, make sure to tell them when you need it.  People have other things that they are working on, probably something that you gave them yesterday. Consequently, if you don't have a plan, someone else will plan for you. In other words, get in line.

When clients send me work, unless there is a specifically requested date, my first response is to get to it as quickly as I can and wrap it up as quickly as I can.  I also project how I would do things onto other people....smart, huh? When I would leave a folder on Meghan's desk, or send her a PDF with a project attached, I would always say "Can you please work on this for me?"  You can guess what comes a couple of hours later....

Jon - "Hey, did you get to the work I left on your desk?"
Meghan - "Not yet."
Jon - "Oh, but I set it on your desk this morning."
Meghan - "You didn't tell me when you wanted it done."
Jon - "Oh, I just figured you knew."
Meghan - "Because I read minds.  You are right, I'm out to single-handedly sabotage our livelihood."

And that is where the wheels came off the wagon....and Meghan stops talking to me.

But I have recently made a concerted effort to place those wheels back on the wagon.  I am working at my desk today, on a Sunday, organizing my work for the week. In order to streamline things I decided to do something a little different, involving a couple of post-it notes and dates. Thank you, 3M.

Do you use a by-when date for your team?  If you don't, I encourage you to track how many times this week you have someone ask you "When do you need this?" or how many times you sigh like an oppressed Russian when someone doesn't read your mind.  If you'd like to move past those wasted conversations and your own internal panic of things not being done, then put a little note on the work or send it via e-mail, and simply relay when you need it.  Nothing gets prioritized if everything is a priority.

As much as I love to talk to my wife, I don't want her to ever ask me when I need something done again.  And if I do my job correctly, she won't.

3.8% surtax... Real number scenarios (Part 2)

As promised, here are some real-world examples of when the new 3.8% surtax would apply to a tax return, and some examples of when it wouldn't apply at all.  I know I don't have to say this, but each tax situation is unique.  It will take some work to figure out if you are subject to the tax, so when we meet this summer during our mid-year planning sessions, we'll address the tax with you.  If you did not opt for a tax preparation package which offered mid-year meetings, you can always schedule an appointment for an advisory session.

Examples for your consideration:

1. A married couple filing jointly has $400,000 of adjusted gross income (or AGI):

• $240,000 of wages.  
• $160,000 of the income is composed of interest, dividends, and net gains from the sale of raw land.

Because they have $150,000 of investment income above the $250,000 threshold, they would owe an extra 3.8% on the $150,000 over the limit, or $5,700.

2.  A retired couple filing jointly has no wages, but does have taxable IRA payouts of $100,000; pension and social security payments totaling $60,000; dividends and taxable interest of $40,000; and $40,000 from the sale of two investments.  Total income = $240,000.

They owe nothing, because their income is below that $250,000 threshold.

3.  A single tax payer earns $60,000 of wages and nets a $180,000 windfall from the sale of a long-held investment. Total income = $240,000.

Because she has $40,000 of investment income above the $200,000 threshold she will owe $1,520 in tax ($40,000 x 3.8%).

4.  A single taxpayer has an income of $220,000, but it all comes from Social Security benefits and pension and regular IRA payouts.  

None of this income is subject to the 3.8% tax.

How would this 3.8% tax apply to the sale of a principal residence?

1.  It would apply if the net gain on the sale exceeds the $500,000 exclusion for joint filers (250,000 for single) and their income exceeds the adjusted gross income threshold.

So, if I have an adjusted gross income above the threshold that is then reduced by a large itemized deduction like medical expense or a charitable gift, what happens?

The tax applies.  AGI is calculated BEFORE itemized deductions.

What about trusts and estates?

Yep.

This tax applies to net investment income of more than $12,000 that isn't paid out to beneficiaries.

I hope this has been helpful.  Please let us know if you have specific questions on anything indicated here.  As we find more insightful analysis of the new law, we'll make sure to pass it along to you via our newsletter, this blog, our website and our Facebook page.

(These examples were adapted from The Wall Street Journal... for the education and good of all humanity.)

3.8% Tax on Investment Income, Say What?! (Part 1)

It's here, and the Supreme Court just made it official....get ready for two new taxes set to impact some of you beginning on Jan 1, 2013.  I am referring to the newly enacted 3.8% surtax on investment income and the 0.9% increase in the Medicare tax on wages and self-employment income.  In this blog, I will discuss the 3.8% surtax.


You hadn't heard about these?  Well, you're not alone.  Stay with me...


Are you a joint filer with an adjusted gross income above $250,000?
Are you a single filer with an adjusted gross income above $200,000?


What is your adjusted gross income (otherwise known as AGI)?
To find this out, look at the first page of your 1040.

This adusted gross income number includes interest, dividends, capital gains, wages and retirement income plus results from partnerships and small businesses.
**THIS NUMBER DOES NOT INCLUDE: Subtractions for itemized deductions like mortgage interest, charitable gifts, and personal exemptions.


Are you married, filing a joint return with your spouse, and do you see $250,000 or more on line 37 (or $200,000 or more if you're single)?  Listen up.


Starting January 1, 2013 (that is 5 and1/2 months, FYI) tax rates on long-term capital gains and dividends for these earners will jump from 15% to 18.8%... assuming Congress extends the current law.  If the current tax rates, also known as the Bush-Era Tax Rates, don't remain in place for next year, that number jumps substantially (the top rates would be 23.8% for long term capital gains and 43.4% for dividends....and that's not a typo).

This 3.8% tax applies only to investment income above the $250,000/$200,000 AGI threshold.  Things like wages and social security can raise your adjusted gross income, making the investment income more vulnerable to the tax.  In our next blog, we will cite examples to show you how you may be subject to the tax. 


So, your adjusted gross income is above the threshold...do you have any of this investment income on your tax return? 


Let's define "investment income"...

• Dividends
• Rents
• Royalties
• Interest (except municipal bond interest)
• Short and long term capital gains
• The taxable portion of annuity payments
• Taxable gain from the sale of a principal home above the $250,000/$500,000 exclusion
• A net gain from the sale of a second home
• Passive income from real estate 
• Investments in which a taxpayer doesn't materially participate, such as a partnership.

Income not subject to the 3.8% tax...

• Payouts from a regular or Roth IRA, 401K plan, or pension
• Social Security income
• Annuities that are part of a retirement plan.
• Life insurance proceeds
• Municipal bond interest
• Veteran's benefits
• Schedule C income from businesses
• Income from a business on which you are paying self-employment tax, such as a Subchapter S firm or a partnership.

This new tax is a game-changer for taxpayers with investment income and AGI in the "red zone."  I had a meeting with a client today who will be subject to an additional $1,000 in tax in 2013 because of this.  I am sure I'll see more of this as the year moves forward.  Now is the time to re-evaluate your investment allocation with your financial planner, in case your were wondering....

Examples to come in the next blog....stay tuned.