Van Bruggen & Vande Vegte, P.C.

   Certified Public Accountants & Advisors

Your Financial Solutions Firm Since 1977    

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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 2007 return?
A. 

• Health Savings Accounts (HSAs) may save on healthcare premiums as well as tax dollars.
• The self-employed health insurance deduction remains at 100%.
• Retirement contribution limits have increased.
• Capital gains rates remain very favorable.
• Qualifying dividends are currently taxed at capital gain rates.
• Section 179 expensing limits were raised to $125,000 for the 2007 tax year

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Q.  I purchased some business equipment in 2007; 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 tax years beginning after 2006, the maximum annual Section 179 amount is $125,000 and the qualifying property threshold amount is $500,000. The $125,000 and $500,000 amounts will be indexed for inflation after 2007 and before 2011. These increased Section 179 amounts are effective through years beginning before 2011.

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.

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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:

• Construction;

• Engineering;

• Energy production;

• Computer software;

• Films and videotape; and

• Processing of agricultural products

When fully phased in by 2010, the deduction will be equal to nine percent of the lesser of:

1. qualified production activities income for the year, or

2. taxable income for the year.

The new deduction is six percent for the 2007- 2009 tax years and will rise 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. This deduction is scheduled to expire after 2007.

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Q.  Can I deduct my son or daughter’s college tuition?
A.  The following credits and deductions are based on postsecondary education and vocational training tuition and other qualifying expense of either taxpayers or their dependents, and may be reduced for taxpayers who have modified adjusted gross income above certain amounts:

• Hope scholarship credit – Taxpayers paying for the first two years of college may be eligible to receive a maximum nonrefundable credit of $1,650 per student.
• Lifetime learning credit – This credit is nonrefundable and is not limited to the first two years of higher education.  The credit is 20% of allowable expenses up to a maximum of $2,000 per year per taxpayer.
• Tuition deduction – There may be a deduction of up to $4,000 for qualifying education expenses. 

The same expenses may not be used for both the credits and the deduction.

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Q.  How much may I contribute to an IRA this year?
A.  You have until April 15, 2008 to contribute up to $4,000 per person to a regular or Roth IRA for 2007, subject to income limitations.  If you are 50 years old or older, you may contribute an additional $500.   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:

                                                      2007
                                                      Per mile

      Business                                        48.5˘
Charitable                                       14˘   
Medical                                          20˘
Moving                                           20˘
Depreciation                                   19 ˘

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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.

• W-2’s

• 1099’s:  interest, dividends, retirement/pension distributions, state tax refunds, unemployment income, sale of securities, etc

• 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)

• Social Security statement if you receive benefits (we don’t need the annual update of wages earned)

• Closing statements for all real estate transactions, including refinancing

• Amounts and dates for quarterly estimated federal and state payments

• Social Security numbers for new dependents

• Basis of securities sold

• Investment account statements

• Mortgage interest statements (talk to us about second-home deductibility for boats, RV’s, etc)

• Real estate taxes

• Personal property taxes paid on your personal vehicles

• Charitable contributions:  remember to include cash, check, and credit card payments, as well as non-cash items and volunteer work mileage

• Child care costs, including amount, name and social security number or taxpayer identification number of provider, and address

• Educational loan interest

• 529 plan contributions (eligible for state deduction)

• Tuition payments for private school K-12

• 1098T’s for any college-aged students

• Health insurance premiums paid (other than pre-tax)

• Contributions to HSAs, IRAs, SEPs, SIMPLEs KEOGHs

• Installment sales: payments received

• Moving expenses, if job related

• Medical expenses:  don’t overlook mileage, lodging, glasses, braces, etc.

• Family changes:  changes in marital status, additional children, children who are no longer dependents

• New Address, New Phone Number, New E-Mail Address, New Bank

• 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 2007 returns is 153 pages long, and that is 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.