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Q.
Why does my business need the services of a CPA firm?
A. If you are like most business owners, you possess a great
deal of knowledge about your business: you know your service or product
inside and out, you are very well-versed in your industry. But every
business is in existence to be profitable, and every business requires
profits to keep it afloat. Keeping track of the money your business is
earning, spending, and saving is critical to your success. Do you have as
much knowledge about financial record-keeping and reporting as you do
about your company’s operations? Most business owners don’t and for them,
the cost of having a professional handle their financial needs is a good
investment. Even if you employ a competent bookkeeper or use financial
software, do you know what the numbers actually mean? Are you up-to-date
on sales and payroll tax regulations and filings? Do you understand the
pros and cons of operating as a sole proprietor, partnership, corporation,
or limited liability company? Every businessperson is required to deal
with these issues and many more.
Our firm deals with these issues every day,
because they are our business. These details don’t have to be a burden or
headache to you, or a distraction from what you enjoy most and do best:
building and managing your business.
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Q. What is the difference between a compilation, a review, and an
audit?
A. Almost every organization - whether a privately-held
business, a publicly owned corporation, or a nonprofit organization –
prepares reports on its financial performance. Such reports help owners
and managers make operating decisions, enable creditors to evaluate loan
applications, and provide individuals with information to make investment
decisions.
CPA’s provide clients
with three distinct services involving financial statements: compilation,
review, or audit. Each one offers progressively more assurance about the
accuracy and reliability of the information contained in the financial
statements.
A compilation is
useful to small, privately held entities that need help in preparing their
financial statements. During a compilation, the CPA takes client-supplied
information and arranges it into conventional financial statement format.
Little probing is conducted beneath the surface unless the CPA becomes
aware that the data provided is in error or is incomplete; accordingly, a
compilation report does not give any assurance to the reader as to the
reliability of the financial statement amounts.
A review may be
adequate for entities that must report their financial positions to third
parties, such as creditors or regulatory agencies. Reviewed financial
statements may also be useful to business owners who are not actively
involved in managing their companies. The review function includes making
appropriate inquiries of personnel about changes in the business
environment, recording of transactions, and the accounting principles
underlying the financial statements. Another requirement of a review is a
comparison of ratios with both industry averages and prior operational
results to identify trends. We may then question appropriate personnel to
determine the reasons for unexpected differences. This requires a good
knowledge of the industry in which the client operates. While short of an
audit, review procedures are quite thorough and upon their completion,
allow us to make the statement that nothing came to our attention that
would cause us to believe that the financial statements are misleading.
An audit is the
third and most extensive service, and is appropriate for entities that
must offer a higher level of assurance to outside parties. Typically, an
audit includes confirming significant financial statement balances with
third parties, reviewing the control systems in place, and testing whether
selected transactions are properly recorded. An audit can uncover
problems in many different areas of a business, such as credit policies
and inventory procedures. It expresses an impartial opinion on the
records, transactions, and financial statements and serves as the
foundation for decision-making by management, potential investors or
buyers, customers, and bankers. An unqualified opinion from a CPA after an
audit provides reasonable assurance to outside parties that the financial
statements fairly present its financial position and results of operation
in accordance with certain accounting principles.
The requirements of
performing an audit give us the opportunity to offer clients a valuable
source of outside advice. Because we are required to gain an
understanding of how the client’s systems work, we also have a unique
opportunity to make recommendations to enhance our clients’ profitability;
this is the true value of an audit.
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Q.
How long should I keep my financial and tax records?
A. Records that affect your tax return should be kept at least 3
years after the required filing date. Records for improvements of
property and investment purchases should be kept at least 3 years after
their sale. Your tax cost information for gifts of property received or
given should be kept indefinitely. Most business records also fall within
the 3-year statute of limitations. Payroll records must be kept for a
minimum of 4 years. Taxpayers who use farm income averaging should keep
all their records for the current and 3 prior years at least 3 years after
filing the return. We recommend tax returns be saved indefinitely.
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Q. What are some key tax planning opportunities for my 2009 return (to be filed in 2010)?
A.
- Health Savings
Accounts (HSAs) may save on healthcare premiums as well as tax dollars.
- The self-employed
health insurance deduction remains at 100%.
- Capital gains rates
remain very favorable.
- Qualifying dividends
are currently taxed at capital gain rates.
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Section 179 expensing limit remains at $250,000 for the 2009 tax year.
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A 50% special depreciation allowance applies for new property acquired and placed in service during 2009. This means you may be able to take an additional first year special depreciation allowance for certain qualified property equal to 50% of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).
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For those who do not itemize deductions, the standard deduction is increased by up to $500 of state and local real estate taxes paid, $1000 for married filing jointly.
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Sales and excise taxes on new vehicle purchases (up to $49,500) may be claimed as an itemized deduction for 2009 and also by non-itemizers as an increased standard deduction.
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The homebuyer credit was extended through the end of April 2010. The original credit was increased to a maximum of $8,000 and expanded beyond first-time homebuyers.
Taxpayers who have owned and lived in their old house for any five consecutive years within the preceding eight years will be treated for purposes of the credit as first-time homebuyers eligible for a maximum $6,500 credit.
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The residential energy incentives have been expanded.
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See “New
Tax Opportunities and Challenges” tab for more!
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Q. I purchased some business equipment in 2009; can I deduct the
cost this year or am I required to depreciate it over the life of the
asset?
A.
Under Code Section 179,
eligible small businesses may elect to deduct the cost of certain assets
in the year they are placed in service rather than taking depreciation.
For the 2008 tax year, the maximum annual Section 179 amount is $250,000
and the qualifying property threshold amount is $800,000. Qualifying
property must be used in the taxpayer’s trade or business; property
acquired for the production of income, such as investment property or
rental property, does not qualify.
For 2010, the maximum deduction will revert to $125,000 (with inflation adjustments).
A
taxpayer in a low tax bracket who expects to be in a higher income bracket
in later years should consider not taking Section 179 deductions, thus
reserving higher depreciation deductions to offset income generated in
later years.
The Economic Stimulus Act of 2008 also resurrected the bonus depreciation deduction originally authorized after the 9/11 attacks. The 50% bonus deduction generally applies to qualifying assets acquired and placed in service in 2008 and 2009, although there are exceptions [IRC Sec. 168(k)].
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Q. What is the domestic production activities (manufacturing)
deduction and will it affect me?
A.
Beginning in tax year
2005, Congress created a new deduction for manufacturers. This is a
wide-ranging benefit available to domestic business engaged in
“manufacturing” activities, whether operated by a corporation, individual,
or passthrough entity (such as a partnership or S corporation). The
definition of manufacturing is broad and encompasses the following
domestic businesses in addition to traditional manufacturing:
When fully phased in
by 2010, the deduction will be equal to nine percent of the lesser of:
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qualified production
activities income for the year, or
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taxable income for
the year.
The new deduction is six percent for the 2007- 2009 tax years and will increase to nine percent after 2009.
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Q.
Can you tell me more about health savings accounts?
A. Health savings accounts (HSAs) are designed to help eligible
individuals save for qualified medical and retiree health expenses, and
give individuals the chance to have greater choice in their healthcare
decisions.
HSAs enable eligible individuals to save and pay for medical expenses in a
tax-favored vehicle. Qualified contributions are tax deductible and
qualified withdrawals used for medical expenses are tax free. Unused
amounts can be rolled over for use in future years.
Employers, as well as employees, can contribute to HSA accounts. Employer
contributions to an employee’s HSA are exempt from Social Security and
Medicare taxes, and employers do not have to pay federal unemployment
insurance on the contributions. In order for these tax breaks to apply,
the contributions must be set up through a salary reduction plan with the
employer. Employee contributions can be deducted on the employee’s tax
return.
HSAs funds can be used to cover health insurance deductibles, co-payments
for medical services, prescriptions, as well as hearing, vision, and
dental care expenses. They can also be used to pay for over-the-counter
drugs and long-term care insurance premiums.
Only individuals
covered by a high-deductible health plan (HDHP) are eligible to establish
an HSA, with a few exceptions.
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Q. Is
sales tax deductible as an itemized deduction?
A.
Individuals are allowed to deduct state sales taxes instead of deducting state and local income taxes. Taxpayers electing to deduct state and local sales taxes paid have two options - determine the deductible amount by accumulating receipts or use the tables prepared by the Secretary of the Treasury based on average consumption and other factors. This sales tax deduction is available not only to taxpayers living in states without an income tax, but also to those in any state who find that sales taxes paid during the year (for example, for several major purchases) exceed their state income tax liability for the year. However, the deduction is available only for taxpayers who itemize their expenses. It is important to keep in mind that the alternative minimum tax (AMT) may eliminate any benefit provided by the sales tax deduction provision. Taxpayers are not allowed to deduct state and local taxes when computing the AMT.
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Q.
Can I deduct my son or daughter’s college tuition?
A. The Hope scholarship has been reconfigured for 2009 and 2010 and renamed the American Opportunity tax credit. Besides a significant increase in the amount of the credit (up to $2,500) and phaseout range (starts at $160,000 for joint filers), a welcome new feature is that course textbooks are included in qualified tuition and related expenses covered by the credit. Best of all, it now covers up to four years of post-secondary education, up from two years previously.
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Q. How
much may I contribute to an IRA this year?
A. You have until April 15, 2010 to contribute up to $5,000 per
person to a regular or Roth IRA for 2009, subject to income limitations.
If you are 50 years old or older, you may contribute an additional $1000.
Contributions to a Roth IRA are not deductible.
Contributions to a regular IRA may be
deductible, depending on your situation. If you are not an active
participant in an employer maintained retirement plan, you are generally
allowed to deduct your full contribution. If you are an active
participant, your contribution is subject to phase-out rules based on your
income.
In addition, a nonworking spouse may be
eligible to make a deductible IRA contribution based on the other spouse’s
earned income.
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Q.
How much are the standard mileage rates this year?
A. The standard mileage rates are as follows:
| |
2009 |
2010 |
| |
Per Mile |
|
Business |
55¢ |
50˘ |
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Charitable |
14¢ |
14˘ |
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Medical |
24¢ |
16.5˘ |
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Moving |
24¢ |
16.5˘ |
|
Depreciation |
21¢ |
23˘ |
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Q. What documents should I bring with me to my tax appointment?
A. For
individuals, the following list may be helpful. If we prepared your
return previously, most of this information can be detailed in the tax
organizer we mail to you in December.
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W-2’s
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1099’s: interest,
dividends, retirement/pension distributions, state tax refunds,
unemployment income, sale of securities, etc
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K-1’s:
partnerships, S corporations, LLCs, LLPs, estates, trusts (for some of
you, we will generate the K-1 when we do your business tax returns)
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Social Security
statement if you receive benefits (we don’t need the annual update of
wages earned)
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Closing statements
for all real estate transactions, including refinancing
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Amounts and dates
for quarterly estimated federal and state payments
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Social Security
numbers for new dependents
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Basis of securities
sold
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Investment account
statements
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Mortgage interest
statements (talk to us about second-home deductibility for boats, RV’s,
etc)
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Real estate taxes
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Personal property
taxes paid on your personal vehicles
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Charitable
contributions: remember to include cash, check, and credit card
payments, as well as non-cash items and volunteer work mileage
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Child care costs,
including amount, name and social security number or taxpayer
identification number of provider, and address
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Educational loan
interest
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529 plan
contributions (eligible for state deduction)
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Tuition payments for
private school K-12
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1098T’s for any
college-aged students
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Health insurance
premiums paid (other than pre-tax)
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Contributions to
HSAs, IRAs, SEPs, SIMPLEs KEOGHs
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Installment
sales: payments received
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Moving expenses, if
job related
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Medical expenses:
don’t overlook mileage, lodging, glasses, braces, etc.
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Family changes:
changes in marital status, additional children, children who are no
longer dependents
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New address, new phone number, new e-mail address, new bank account routing information
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List of business assets purchased/sold/disposed of during the year –
include applicable paperwork for any items that were financed
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Q. Should I
prepare my own tax return?
A. If you own a home, a business, other real estate, or
investments; if you have college-aged children; if you have had life
changes, a relocation, income fluctuations, or other outside sources of
income, the tax deduction and credit options available to you are
numerous, and many times, very confusing.
Ten years ago, the IRS estimated that it took the average taxpayer 9.5 hours to complete the 1040; this year you can expect to spend 13.5 hours. The instruction booklet for 2008 returns was 161 pages long, and that was just for the federal return. A bigger drawback to doing your own taxes is that you may make errors; according to the IRS, self-prepared returns are twice as likely to contain errors as those filed by a professional. In addition, you may overlook legitimate deductions and miss out on valuable tax-planning advice. Do-it-yourself software is better than ever, but it is no substitute for wisdom, judgment, and experience.
Our firm has
extensive experience with tax preparation and we strive to consider every
detail so that you receive every possible deduction and credit to which
you are entitled.
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Q. How are you
paid? What will it cost me?
A. Our fees are based on the professional assigned,
complexity of the issue, skill required and time involved. Our first
consultation meeting is to understand your needs and our ability to serve
you. This is done at no cost. Also at that meeting, we are able to gather
information to give you cost estimates for our services.
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