Charlotte CPA – Accounting Firm in Charlotte

HOW LONG DO YOU NEED TO KEEP FINANCIAL RECORDS?

June 3, 2013 by mrice

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

How Long Do You Need to Keep Financial Records?

We all know that keeping a copy of receipts, tax returns, and other financial records is a good idea, but how long should we hold on to them? Of course, it is better to keep them for too long then to get rid of them only to find that you need a copy shortly thereafter; however, holding on to records indefinitely can lead to a room full of boxes that do nothing but gather dust.
Try using the following guidelines to decide how long to hold on to your records:

Tax returns – Of course, it depends. Tax returns should be kept for a minimum of three years which is the statute of limitations. However, if your return somehow understated your income by 25% or more (the exact definition of 25% or more is the subject of litigation) the IRS can go back 6 years. And if you did not file, or filed a fraudulent return, the IRS has forever. So the answer here depends on the accuracy of the return and the honesty of the taxpayer.
Major purchase receipts — receipts and warranty information for major purchases such as a vehicle or major appliance should be kept until one year after you sell, or otherwise dispose of, the item.
Personal records — everyday receipts, budgets, and financial planning documents can typically be thrown out after you have compiled your tax return for the year in question; however, if the receipt was used to claim a tax deduction for the year then either the original or a copy should be kept with your actual return.
Legal records — legal documents can be anything from a small claims judgment to estate planning documents. Some of these should be kept until the corresponding statute of limitations runs out while others should be kept indefinitely. Check with your attorney before you discard any legal documents.

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TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.

RETIREMENT INCOME A CHALLENGE? THE BASICS

June 3, 2013 by mrice

Retirement Income a Challenge: The Basics

Thinking of offering a retirement plan to your employees? Here’s some of what you need to know.
If you were employed during the 1980s, you probably remember what a benefits bonanza that period was. Inexpensive health and life insurance. Short and long-term disability. And pensions.
The defined benefit pension was beginning to fade as the defined contribution pension – created when Congress established 401(k)s – took hold. The onus of retirement income began its slow shift from the employer to the employee, though many employers continue to contribute.
Today’s retirement accounts have tax advantages for both employer and employee, but there are many IRS regulations you’ll need to follow. Here’s a basic overview of what’s available. We’ll work closely with you when you decide to get started.

A Trio of Options
Most retirement plans fall into one of three categories:
1. Simplified Employee Pension (SEP). This is the simplest method; you contribute on an ongoing basis to a retirement plan for yourself and your employees. Your contributions are deposited directly into a traditional individual retirement account or individual retirement annuity (SEP-IRA).
The maximum contribution is $49,000 or 25 percent of employee’s salary, whichever is smaller. Maximum deduction is 25 percent of all participants’ compensation (a cap of $245,000 in compensation was – “generally” – in place for the 2011 tax years).
2. Savings Incentive Match Plan for Employees of Small Employers (SIMPLE). These can be either IRAs or 401(k)s. To be eligible, you must have 100 or fewer employees who earned at least $5,000 during the last year. Employees can opt to have a portion of their paychecks deducted regularly for this purpose, and you would contribute matching or nonelective contributions.
Employees can defer up to $11,500 ($14,000 if age 50 or older), and there are two options for the employer contribution:
Dollar-for-dollar matching contributions, up to 3 percent of employee salary (up to $245,000 in 2011)
Fixed, non-elective contributions of 2 percent of compensation (same salary limit)
The maximum deduction here is the same as the maximum contribution.
3. Qualified Plans. These are more complicated than SEPs and SIMPLEs. Still, they offer advantages like more flexibility in creating plans and – sometimes – higher contribution and deduction limits. The contribution and deduction limits vary greatly.
Numerous Tax Implications

Keep in mind, too, that you may be able to claim a tax credit for, “…part of the ordinary and necessary costs of starting a SEP, SIMPLE or Qualified Plan.”
Obviously, your taxes are about to get a whole lot more complicated. We’d like to work with you early in the process, before you’ve even determined what kind of plan to offer. We applaud you for your efforts to help your employees build income for their retirement.

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Fiscal Cliff Tax Law Changes

January 10, 2013 by mrice

As you may have noticed, Congress managed to pass new tax legislation late in the day on January 1, 2013. I watched it live on MSNBC. Riveting, I know. Below, is a summary of the major points of the law, some other laws that were effective January 1, 2013.

1) Income Taxes: Income taxes will remain largely unchanged for individuals earning less than $400,000 and couples earning less than $450,000 per year (to be indexed to inflation in future years). For individuals and couples over that threshold, marginal rates will increase from 35% to 39.6%, and the tax rate on capital gains and dividends will increase from 15% to 20%. (Remember that the Affordable Care Act also imposes a 3.8% tax on investment income pushing taxable income above the $250,000 threshold.) Personal exemptions will begin to phase out at $250,000 for individuals and $300,000 for couples.
2) Estate and Gift Taxes: The estate tax exemption has been permanently (until Congress decides to change it) set at $5.12 million (indexed to inflation) and unified with the gift tax. The top tax rate will rise from 35% to 40%. Many clients will breathe a sigh of relief at this news. For business owners and others who will still be caught by the tax, there are still tax-saving opportunities available. Spousal portability has been continued.
3) Payroll Tax: The tax “holiday” has not been extended, as Congress has restored the employee portion of the payroll tax from 4.2% to 6.2% in 2013.
4) AMT: In another semi-permanent fix, the alternative minimum tax threshold has been set at $78,500 for married couples and $50,600 for individuals in 2012 and has been indexed for inflation in future years.
5) Medicare and Long-Term Care Costs: Of interest in the area of elder law, Congress included a one-year “doc-fix” to prevent cuts in Medicare payments to physicians. Congress has also officially repealed the CLASS Act, an effort to combat the costs to individuals of long-term care; the Secretary of Health and Human Services had previously found that the CLASS Act lacked adequate funding to make it revenue-neutral, as required by the law. In its place, Congress has established a Commission on Long-Term Care to study the problem.
6) The bill includes additional provisions regarding individual and business taxes and energy policy.

Tax Benefits on Points Peid for a Refinanced Loan

December 15, 2012 by mrice

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Tax Benefits on Points Paid for a Refinanced Loan

When you refinance an existing mortgage loan on your home, you often have to pay points as part of the refinance process. One point is equal to one percent of the loan amount. For example, if the loan is for $200,000, then one point is equal to $2,000. As you can see, the amount paid in points can add up fast. The borrower typically agrees to pay points in exchange for a lower interest rate. The good news is that you may be able to claim a tax deduction for the points you pay to refinance your loan. Let’s look at some of the basics of tax deductions for points paid on a refinance loan.Unlike a primary mortgage, you cannot claim the entire amount paid in points during the year in which the points were paid.

As a general rule, you must spread out the amount paid in points over the life of the loan. For example, if you paid $5000 in points on a 30 year refinance, you would be entitled to deduct $13.89 for each month ($5000/360) or $166.67 per year.You may be able to deduct more during the first year if you use some of the proceeds from the loan to make improvements to the property. In that case, you may deduct the amount associated with the percentage of the loan used for improvements in the first year. For example, if you refinanced a $200,000 loan but you used $20,000 of the proceeds to make improvements, you may deduct $200 in the first year which represents the amount you paid in points on the $20,000.

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Tax Credit for Veterans

December 7, 2012 by mrice

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Tax Credits for Veterans

As a small business owner, you are likely always looking for a way to minimize your tax obligation and maximize your productivity. Hiring a veteran may be a way to accomplish both of those goals at one time.

The Internal Revenue Service, or IRS, offers employers a credit when they hire an unemployed veteran under the Work Opportunity Tax Credit, or WOTC, program. A for-profit company can earn up to a $9,600 credit while a not-for-profit can earn up to a $6,240 credit. The amount of the credit depends on a number of factors including the length of time that the veteran was unemployed prior to being hired, the number of hours the veteran works during the first year of employment and the wages paid to the veteran during the first year of employment. An employer that hires a veteran who has a service-related disability may qualify for the maximum credit amount.

The credit is applied when the employer files taxes at the end of the year; however, an employer must request certification for the credit within a short time after hiring the veteran. Certification must be requested by completing IRS Form 8850 with the state workforce agency.

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5 Ways Life Insurance Benefits Small Business Owners

November 25, 2012 by mrice

5 Ways Life Insurance Benefits Small Business Owners

The primary purpose of life insurance is to pay a death benefit – almost always tax free – when the insured dies. We’re all familiar with the need to insure the life of a breadwinner to protect a spouse and children from financial catastrophe. But business owners have some special needs to address, too, over and above their role as breadwinners for their families. Let’s take a closer look at the use of life insurance in a business context.

Life Insurance as an Employee Benefit

You can buy life insurance for your employees as an employee benefit, similar to any other benefit, under Section 7702 of the Internal Revenue Code. Generally, the law lets business owners deduct the premiums for up to $50,000 of term life insurance for their employees. This is important in a society where employees are more and more used to getting insurance coverage from work. In some cases, this coverage may be the only life insurance a worker has.

Funding Buy Sell Agreements

If you have a business with one or more partners or other shareholders who are active in managing or running your business, you should have a buy-sell agreement in place. In a nutshell, this is a written agreement that the survivor will purchase the deceased partner’s interest in the business for cash from the deceased’s estate – and that the deceased’s estate will sell.
If you fail to create a buy-sell agreement, you may find yourself in business with your partner’s spouse. Or worse, your partners’ spouse’s lawyers. Your partner’s heirs may have no expertise in or interest in running your business, which could create big problems down the road. They will still be entitled to your ex-partner’s share of any dividends or distributions from the business, and will demand their fair share of cash even though they may contribute little or nothing to the business’s operation. A buy-sell agreement protects both sides by ensuring the heirs get the cash they need, while you get to continue running the business.
And where does the cash to fund the agreement come from? Life insurance. Each partner can own a policy on each of the other partners, or the business itself can own the policy.

Key Person Insurance

Does your business have a key salesperson, manager or technician who is so productive, or so crucial to your operation, that it would severely damage your business if this person were to unexpectedly pass away? If so, you have an insurable interest in that individual, and you may want to consider owning a policy on him or her. If the worst happens, the policy will provide your business with enough cash to keep functioning while you search for, hire and train a replacement. This could cost tens or even hundreds of thousands of dollars.

Bonus Plans

Some life insurance policies – specifically ‘permanent’ insurance policies such as whole life or universal life policies, build cash value. The policy owner can use this cash value for any purpose. In some cases, you can structure a plan to award the cash value to a key employee as a bonus after a certain number of years of service. This so-called “golden handcuffs” plan gives your top employees a powerful incentive to stay with your company, and as time goes by, it gets very difficult for competitors to “poach” your key people.

Supplemental Retirement Planning

Cash value plans can also be a great way for you to supplement your retirement income, without all the many restrictions that come with standard retirement plans such as 401(k)s and IRAs. You can restrict life insurance-based retirement plans to owners and executives, for example, to supplement your other retirement savings. By purchasing a modest-sized death benefit, and funding the policy with substantial premiums, you can build significant cash value over time. You can use this for retirement or even as a source of reserve capital for your business. You don’t have to wait until you are age 59 1/2 to use the money. Or you can simply keep the policy in force and use it for the purpose for which it was designed: Life insurance.

There are nearly as many ways to use a life insurance policy to benefit a business or business owner as there are businesses. Every business is different.