Real Tips and Financial Updates

Buy the House You Have Always Wanted Using an IRA

More people qualify to use an IRA for funding than is commonly believed. In general, first-time homebuyers are partially exempt from the 10% penalty applying to withdrawals from IRAs before age 59 1/2. Distributions are exempt from the penalty if the IRA is used to buy a first home for the IRA owner, spouse, or any child, grandchild or ancestor of the IRA owner or spouse. Anyone who owned his principal residence for less than the prior two years is considered a first-time homebuyer. Note: there is a lifetime limit of $10,000.

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5 Qualities to Look for in a Tax Professional – and 3 Red Flags

Getting the right tax advice can make the difference between healthy income and mere survival. Too many small business owners continue to stick with the wrong tax pro. Here are five qualities to look for when choosing a tax advisor.

Experience in your industry. Every industry has its own complexities – its twists and turns. Find out what percentage of the accountant’s clients are in your industry and whether she specializes in your fields. If you are a multi-state business, make sure that the tax pro knows the laws of those other states. Find out how long the average client has been with her, and then ask for names of current and past clients.

Style: aggressive or conservative? The best tax pro balances a good mix of aggressive tax strategies with audit-preventing caution. Ask where your tax pro stands on the conservative/aggressive scale – and make sure that it fits your style. You should ask any potential tax pro about the goals for your tax plan. The most important goal is “to pay the lowest tax legally obligated to pay.” Above all, find someone who shows an interest in your overall tax picture, not just in preparing a tax return with the pile of documents you drop on his or her desk.

Good credentials/continuing education. Does this person have a tax or financial degree? Find someone who specializes in taxes, not just in general accounting. Remember that the tax law changes constantly. Ask how the tax pro keeps current with all the changes. The more continuing education, the better. And find out how much audit experience the firm has.

Availability and Support. Look for someone who is available year-round and who will come to you with tax strategies. Equally important, find someone who has a team behind him/her. No one can be an expert in all areas, a team approach assures you access to resources beyond a single individual.

Cost. A good tax advisor will find enough ways and methods – legal ones – to pay for his or her fee and more. You should never automatically hire the advisor with the lowest fee. And ask whether the return will be corrected with no charge if mistakes are made – and pay any penalties related to those mistakes.

3 red flags. When interviewing a new tax preparer, there are key “red flag” statements that should tell you to steer clear of this person. Here are three of the biggest:

• If preparers try to set their fee depending on the amount of your refund. That’s a no-no. They can charge based on the complexity of your return. But in that case, they should be able to give you at least a rough estimate of the charges in advance. Don’t be afraid to ask how their fees are determined.
• If they guarantee you a refund before even learning of your specific tax situation.
• If they refuse to sign your return, as they are required to do so by law.

Reasons Terry, Lockridge & Dunn should be that advisor

1. We are your tax advisor, not just your tax preparer.
2. Our staff has more than 100 years of combined experience.
3. Our tax planning emphasizes lower taxes.
4. We do not go away after April 15th.
5. We help with taxes as well as financial and estate planning.
6. We represent you before the IRS.
7. Our staff is accessible all year. We invite your questions.
8. We promptly return phone calls.
9. We answer simple questions quickly at no charge.
10. We accommodate you. We schedule at your convenience, not ours.
11. You have your own accountant who will also be here next year to assist you.
12. You can save tax dollars.
13. You will receive assistance with retirement planning.
14. You will have a capable advisor working to achieve your financial goals.
15. Your taxes and finances are important to us.

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Are you still looking for a New Year’s resolution you can keep? Here is one that we can keep for you: this year, hire a tax advisor, not just a tax preparer.
Think about how your taxes have been prepared in the past and ask yourself these five questions:

1. Do I have the time to keep up on all the changes in the tax laws?
2. Is my preparer really taking the time to keep on top of the changes?
3. Am I getting the best possible service and personal attention from my preparer?
4. Am I taking all the legitimate deductions for which I am entitled?
5. Is my preparer offering me good tax planning ideas?

We invite you to schedule a meeting with one of our tax and financial experts.

Through a one-on-one planning session, our experienced tax advisors will review your specific tax and financial planning needs. You will also be apprized of the most important new changes in the tax laws and how they will affect you.

For almost 30 years, Terry, Lockridge & Dunn has specialized in providing tax, accounting and financial services to individuals and small businesses. It is our mission to maximize the wealth of our clients through sound advice and access to timely and accurate information. Our commitment is to exceed your expectations.

We are confident Terry, Lockridge & Dunn can help you avoid paying unnecessary taxes.

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Boost your business deductions and you lower your taxable profit – it’s that simple. So when you’re planning end-of-year business expenses, don’t forget to take advantage of the little things too often paid for from your own pocket:

1. Business supplies, everything from stationery to postage.
2. Legal and professional fees and licenses.
3. Home entertainment. If you invited clients to your home after a business discussion, you can deduct 50 percent of your entertainment costs.
4. Subscriptions to business publications, dues to professional groups and promotional and advertising costs.
5. Random travel expenses. Don’t overlook extra costs, such as the cost of luggage used exclusively for business travel and dry cleaning of business clothes.
6. Online services used for business e-mail and research.
7. Interest on credit cards. When you use plastic to pay for business expenses, the interest and carrying charges are fully deductible.
8. Telephone calls made away from your business.
9. Auto expenses.
10. Communication Devices (cell phones) if used for work.

If you deduct actual expenses, rather than the standard-per-mile write-off, don’t forget to include registration fees, repairs and even car washes. Increase your deduction by making some long-needed repairs by December 31.

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You may have heard that leasing a business auto is smarter than buying one because of the tax advantages. It’s true that leased vehicles receive better treatment under tax law. But you still have to crunch the numbers to make this decision. A good purchase will almost always beat a lousy leasing deal, and vice versa. When the deals are similar, you must calculate the “present value” (PV) of leasing and buying. The easiest way to figure the true cost of a lease is to take the PV of lease payments and costs, then subtract the PV of tax savings. The PV figure takes into account the applicable costs for each year discounted back to present value using an appropriate after-tax rate of return. For example, if you lease, you’ll probably have to pay upfront fees, and you should consider buying “gap protection” insurance as well. These costs must be included in your analysis and discounted back to present value, say using an 8 percent discount rate. In both the lease and buy cases, you’ll probably have to pay sales tax and vehicle license fees upfront. If you expect to keep the car after the lease expires, that amount should be included as a cost of the leasing alternative. The best way to run the numbers is by example. For a comprehensive look at how to make the lease-versus-buy analysis for a business vehicle, contact one of our tax professionals.

Rules of thumb: Business vehicles
When to Buy
Purchaser pays cash rather than financing
Purchaser plans to hold auto for more than four years
Auto weighs more than 6,000 pounds
Purchaser plans high mileage usage (more than 18,000 miles/year).

When to Lease
Lessee wants lower monthly payments.
Lessee plans frequent trade-ins.
Auto weighs less than 6,000 pounds and Costs more than $15,300.
Lessee plans low mileage usage (less than 15,000 miles/year).

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Many businesses leave valuable tax deductions on the table. Why? Because they overlook opportunities to take a 100% deduction for many business meals and entertainment expenses, mistakenly applying the “normal” 50% deduction limit to all meals and entertainment.

By becoming alert to this deduction opportunity now, these businesses may be able to:

• Get income tax refunds for past years by filing amended tax returns to deduct 100% of the cost of meals and entertainment that mistakenly were only 50% deducted.
• Obtain larger meal and entertainment deductions in the future by improving their planning and record keeping.

Categories of Meals
The Tax code’s 50% deduction limit for the cost of business meals taken while,

• Entertaining customers/clients.
• Traveling away from home for business.
• Attending a business convention or meeting, or a business luncheon at a club.

But many kinds of meals that do not fit into these categories actually qualify for 100% deduction as a business expense. When meals are paid for by the company do not involve clients or customers, look to see if they fit into one of the following expense categories that allow a 100% deduction.

Convenience of the Employer Meals
These are meals taken on the employer’s premises, and paid for by it, for a business reason that benefits the employer. Example: For security reasons, a casino required all its employees to remain on its premises during their full shift, and paid for the meals they ate while doing so.
The IRS challenged the casino’s full deduction of the meals. It argued that there is nothing inherent in the job of a casino worker that justifies the provision of free meals and that since the workers had to eat anyhow, their meals shouldn’t be tax favored.
But the court ruled that the IRS couldn’t second-guess the casino’s business judgment that it receives a business benefit from having its workers stay on the premises during working shifts. The court also ruled that because the casino did benefit, the workers’ consumed their meals on the premises for its “convenience”. The meals were 100% deductible.
Other reasons besides security concerns may also justify “convenience of the employer” meals that are 100% deductible. Such as:

Short meal periods.
If employees are required to eat meals in a short period, such as 30 or 45 minutes, and can’t be expected to go off premises, eat, and return within that time, fully deductible meals can be provided to them. Example: A bank is busiest during the lunch hour, so it limits its employees’ lunches to 30 minutes and provides lunches. The meals are fully deductible.

Meals aren’t otherwise available.
When nearby eating facilities are insufficient for employees to get meals at lunch and return within the lunch hour, the employer can provide fully deductible meals.

Need to answer emergency calls.
When employees must stay on the businesses’ premises to be available to answer emergency calls, meals provided to them are fully deductible.

Restaurant and food service employees.
Meals furnished to restaurant or food service employees during and immediately before or after working hours are for “ the employer’s convenience.” Example: A waitress works the day shift. Her employer can provide breakfast to her just before she starts work and lunch during her workday, and deduct the full cost of both meals.

After-work meals.
Meals provided to employees immediately after work are for the employer’s convenience if it would have furnished the meals during working hours, for a business reason, except that work duties prevented employees from eating during work hours.

Meals justified for more than half justifies meals for all.
If more than half of the employees who are furnished meals on a business premises receive them for the employer’s convenience, then the employer can treat all meals it provides to employees on its premises as being for its convenience, and claim a 100% deduction for them all. Bonus benefits: Meals provided for the convenience of an employer are 100% deductible by the employer and tax free to employees. Such tax-free meals may serve as a valuable benefit that may help attract and retain quality employees-with the IRS subsidizing the cost.

“De minimis” fringe benefit meals.
These are meals that cost so little or are eaten so infrequently that it is not worth the administrative effort to fully account for them. This deduction is not limited to the cost of coffee and doughnuts. It also applies to occasional meals or meal money provided to employees who work late or perform similar tasks outside the regular workday. Meals provided to “promote goodwill, boost morale, or attract prospective employees” may qualify for 100% deduction under the de minimis rule as well.

The cost of employee activity meals and entertainment.
Meals are fully deductible when provided in relation to a social or recreational activity for employees. Example: Holiday parties, retirement dinners, meals and entertainment celebrating business accomplishments, etc. Requirement: The costs must be primarily for the benefit of a nondiscriminatory class of employees, not limited to top executives.

Planning Strategies
The keys to maximizing meal and entertainment deductions are to know the deduction categories that these expenses may qualify for, and keeping adequate records to support deductions. Meals and entertainment for which the company has until now taken only a 50% deduction may in fact fit into one of the above fully deductible categories. Examples: Buffets provided to employees at training sessions, mentoring meals. Teach employees to recognize in advance the deduction categories a meal or entertainment expense may fit into, and to keep appropriate records. This is more cost effective than determining after the fact whether an expense was fully deductible. Of course, records for meal and entertainment deductions are critical-business meal deductions are an audit target because the IRS knows many firms fail to keep adequate records. Rules: Receipts generally are required for all meal expenses of $75 or more. Whatever the cost of the meal, a business diary or other document should record the amount, date, place, people entertained, type of entertainment, business purpose, and business relationship. If an expense fits into a category that justifies 100% deduction, be sure to document how that is so. Payoff: fixing an inadequate record-keeping and planning system for business meals and entertainment may lift the company’s deduction for many expenses from 0%-after they are disallowed on audit-to a full 100%.

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The tax code gives precious little guidance on writing off Internet related costs. Here’s how to handle various costs to maximize your tax savings:

Software to develop your site. In general, you can currently deduct expenses for internal software development to create your website. In some cases, these costs can be eligible for the R & D tax credit. Consult one of our tax professionals about whether the credit can be claimed.

Hardware and software. You can depreciate the cost of purchased computer hardware over five years. Hardware costs also qualify for Section 179 instant write-off. This tax break allows you to deduct immediately up to $24,000 of business equipment in 2001. You can deduct payments to lease computer hardware in the tax year that the payments were made. The cost of purchased software can generally be amortized over three years. The same rule applies to costs to install purchased software or fees paid to outside consultants for this work. These expenses are considered part of your software acquisition costs and must be amortized over three years, rather than deducted currently. If your software is “bundled” with purchased hardware, the entire cost is generally depreciated over five years. However, you can immediately write-off the entire cost to the extent you qualify for Section 179.

Other development costs. To get your Internet operation running, you might incur other costs. For example, you might pay for concept meetings, feasibility studies, market research and graphic design work. When it comes to these expenses, the IRS has attempted to force taxpayers to capitalize them permanently. Most tax professionals don’t agree with this. They believe miscellaneous development costs should either be deducted immediately if the website is an expansion of an existing business, or amortized over five years if the site is viewed as a new line of business.