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  • 1. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:15 AM Page 2 Ready to Contents 14 BUILD YOUR PRACTICE? TAX PROFESSIONAL TAX PRO GAME PLAN Tax pros or any service industry, these 7 four fundamentals are necessary for growing your business. THE INSIDIOUS NATURE OF THE AMT Managing the 8 tedious, complexity of the alternative minimum tax. OIC–OH, I SEE Helping clients get rid of tax debt, not as 10 easy as we would like. FEATURE MAKE MORE MONEY RECESSION OR NOT Put more 12 money in your clients’ pockets and your pockets grow too! BUSINESS OWNER TAX PLANNING TIPS FOR THE BUSINESS OWNER 16 What you don’t know can hurt you. Make sure you read these valuable tax saving tips. S CORP WHY & HOW Understanding the entity that can 17 save you thousands of dollars in taxes. SCOOPING UP ROCK-BOTTOMS The real estate investor 17 rally is around the corner. Learn how the Cost Segregation method helps you keep even more of your money. CONSUMER THE SUBTLE EROSION OF WEALTH Wealth Series Part 1 of 4. 19 Upcoming issues include Wealth Accumulation (Part 2), Wealth Preservation (Part 3), and Wealth Transfer (Part 4). DREAM BIG PLAN SMART Thinking of starting your own 21 business? Make sure you keep these things in mind. IF YOU ARE . . . committed to providing exceptional service dedicated to the highest degree of knowledge 11 determined to increase your business client base EDITOR’S NOTE 4 WEBCLIPS 5 Join the Leader in Creating a New and Higher Standard for the Tax Industry TAX BULLETIN 6 Join TAXSMART AMERICA® BUSINESS CENTERS as We Raise the Bar SPOTLIGHT On Jay Chimayan 11 SPOTLIGHT On Diane Jara 14 PARSE WITH THE PRO Q&A 20 TAXSMART AMERICA 22 BUSINESS CENTER DIRECTORY 12 For An Alternative to Franchising CONTACT OUR LICENSING DEPARTMENTTODAY ● 858 277-0775 www.TSABusinessCenters.com Issue 1 I TaxSmartMag.com I Page 3
  • 2. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:16 AM Page 4 Editor’s Note Webclips EDITOR IN CHIEF: Susan Harnsberger CONTRIBUTING EDITOR: James Harnsberger EDITORIAL ASSISTANT: Teri Sampson CHIEF WRITER: James Harnsberger “Of all the different types of tax we have, the only one I really like would have to be thumb tacks.” ONLINE CONTRIBUTING WRITERS: Nick Angello, – Susan Harnsberger Susan Harnsberger Tax preparation: Art or Skill? Actually, it’s both. The skill comes from understanding the tax code and keeping up with a plethora of weekly changes; the art is in being able to utilize the knowledge to the greatest advantage of the taxpayer. THE ART OF DEDUCTION Photo: Nick Angello MARKETING AND PUBLIC RELATIONS: Missing deductions and credits could cost the taxpayer thousands of dollars in overpaid taxes. This is a lot more common Gabi Barbarena than most people realize. Here are a few you might be missing: primary and secondary home mortgage (with some caveats), points, discount fees, prorated property tax, investment management and advisory fees, keeping meals and EDITORIAL DIRECTOR ONLINE: RAISING THE BAR entertainment separate, hobby expense if you earned hobby income, mileage for commuting between two jobs, Susan Harnsberger professional publication subscriptions (like this one), professional association dues, FMV deduction on donating art owned for more than a year, possibly foregoing claiming your college students as dependents (high income taxpayers), AMT LAYOUT, DESIGN, AND ART DIRECTOR: One day about a year ago my husband and I were at the bookstore browsing for credits frequently left on the table, AMT rules approved in the Emergency Economic Stabilization Act of 2008 which may Ric Jara a couple of magazines to take over to the coffee place a few stores over. We enjoy be retroactive. This is a small sampling. To gain a better understanding of each of these and to see the full article for a lot more ASSISTANT LAYOUT AND DESIGN: having coffee and reading outside, so it’s something we do as often as we can. I don’t deductions and credits for personal and business returns, please visit TaxSmartMag.com. Susan Harnsberger know what it was about that particular day, but wandering through the magazine PHOTO EDITOR: Ric Jara aisles, I had an epiphany that would alter and add to my role in our companies in a very rewarding way. CONTRIBUTING PHOTOGRAPHER: Looking through a plethora of business and finance magazines, I noticed that In a series of government studies published by the Government Accounting Office (GAO), it was found that many Nick Angello AMEND AND SEND although several boasted an article or two on taxation, there was not a single taxpayers don’t realize the extent by which they may have overpaid their taxes. Overpayment of taxes can be a result of magazine dedicated to taxes. Now you might think, well, yeah, who wants to read DIRECTOR OF AD SALES: Teri Sampson errors, (deductions calculated incorrectly), or omissions (information not included on the return). Choosing to use the about taxes? When I first met my husband, I wondered the same thing. I love him dearly, so I just assumed that on the other side of his exceptional brilliance was maybe simplicity of the standard deduction rather than itemizing can also lead to significant overpayment. It is worth noting that THE ADVISORY BOARD a mild mental disorder that makes him enjoy reading tax code and tax law. many taxpayers, including small business owners, do not know that the IRS will allow for the filing of an amended tax James Harnsberger But after seeing the passion he has for this industry, after watching him pour over return to correct these mistakes. An amended return also serves as a claim for refund of taxes that may have been overpaid, Founder of TaxSmart America® Business Centers and his research, after listening to him provide in-depth, continued education lectures and in most cases the IRS will also pay interest to the taxpayer on refunds from overpaid taxes. Refund recovery can go back TaxSmart America® University; 23 years in the tax and workshops to thousands of tax professionals in Southern California, I realized three years and sometimes more. To read this article in its entirety, please visit TaxSmartMag.com. industry as a business owner and 10 years in the industry quite sometime ago that taxes and our tax system are anything but boring. as an educator; holds a degree in paralegal studies. Between the pages of this Magazine, we intend to inspire and educate the tax Susan Harnsberger professional, bring awareness and knowledge to the business owner, and encourage Founder of TaxSmart America® Business Centers and and empower the consumer. Ultimately our desire is to help all taxpayers keep as TaxSmart America® University; Bachelor of Science Now more than ever a tax-planning strategy should be one of the top items on your after-tax-season “to do” list. If you are much of their money as the tax code allows. We do this both through the Magazine Degree in Physics; business owner since 2002. and through our Business Centers. a tax professional, you should be opening your files, determining who would benefit from your help, and letting them know Ric Jara TaxSmart America®Business Centers interviews and screens tax professionals during their tax season appointment that you’ll be calling them in after April 15 for a free consultation. Your client’s job is Through custom design, Mr. Jara brands companies for to build their wealth, your job is to help preserve it through effective tax planning. We are in the middle of a very tough (most have been in the business at least 5 years), throughout Southern California who TAX DIET growth in the market. Degree in Graphic Design & Visual are interested in licensing with us. Those we license we feel are the crème de la crème recession. Many business owners are struggling to stay afloat and the idea of paying taxes when they are having trouble Communication. already, but they then go through a rigorous 18-month professional development making payroll leaves them in a state of ice cold fear. Knowing they have someone willing to put in hours of research to Gabi Barbarena program along with 12 months of CTEC and IRS approved advanced education on Ms. Barbarena works with numerous business entities to help them keep more of their money at least minimizes their worries. By the same token, if you are a taxpayer and have not taxes and business services. In October we licensed our first 22 offices in Southern received word from your tax professional, you should be asking him/her for a free consultation for a tax planning strategy. strategically grow their business and broaden their market reach. Masters Degree in Executive Management, California with another 30 scheduled for October 2009. We hope you’ll take a look at If he/she does not specialize in this, and it is a specialty, a list of professionals who do it everyday can be found on the Bachelor of Science Degree in Organizational Behavior. our directory on page 22. This is a talented group of very special people. directory on page 22. For more details on a healthy tax diet and research links go to TaxSmartMag.com. Through the Magazine, our goal is to become an exceptional resource for you. We TaxSmart America® Magazine is published quarterly by TaxSmart hope the articles in this first issue are of great interest and benefit to you. We always America® Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123. welcome your comments and any suggestions you have for upcoming issues. Copyright© 2008 by Universal Abundance Enterprises, LLC. All When my husband and I got over to the coffee place that life-changing day, I rights reserved. No part of this issue may be reproduced or trans- mitted in any form or by any means, electronic or casually mentioned that there are no tax magazines and maybe we should start one. The IRS has recently announced it is stepping up the examination and auditing of tax returns in an effort to increase mechanical, including photocopying without permission. The idea immediately resonated with him. I am eternally grateful for all his hard work, compliance as well as tighten the multi-billion dollar “tax gap”. High on the list of growing IRS audits will be self-employed ON THE UP AND UP Requests for permission may be sent to TaxSmart America® Inc., his support, and his belief in me in bringing our Magazine to life. taxpayers who file a Schedule C with their tax return. Estimates range from a 50% to a 74% increase in these taxpayer 8825 Aero Drive, Suite 103, San Diego, CA, 92123. Subscription rates: one year $27.90. Reprints available: write Reprint audits. Some of the examination issues include unreported income, particularly for small businesses with large cash Department, TaxSmart America®, Inc., 8825 Aero Drive, Suite 103, volume, issues surrounding expense deductions, payments for independent contractors (possible employee issues), mileage San Diego, CA, or call 858 277-0775. deductions, or expenses that may be personal in nature versus legitimate business expenses. Another target for TaxSmart America® Magazine is published quarterly by TaxSmart America® examination and audit is the S corporation. Issues include reasonable salary, losses in excess of the basis in stock, Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123, (858) 277-0775. Opinions expressed herein are solely those of the editors and contributors. accountable reimbursements paid under a plan and corporate compliance. The IRS will be paying special attention to the Readers are advised to take special care in relying upon opinions or Susan Harnsberger business record-keeping practices for sole proprietors and all entities. To read this article in its entirety and find out what you recommendations. The reader is responsible for verification of any information provided herein. Editor in Chief can do to prepare yourself, be sure and visit TaxSmartMag.com. Page 4 I TaxSmartMag.com I Issue 1 Issue 1 I TaxSmartMag.com I Page 5
  • 3. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:16 AM Page 6 Tax Professional TAX BULLETIN The Tax Pro Game Plan By Nick Angello IRS Imposes New Taxpayer It happens in every industry. Youve been working hard and putting in long hours, but you havent been able to break through to the & Preparer Fines and Penalties next level. Sometimes, however, hard work needs to be coupled with established fundamentals before success can be realized. Pro ath- letes obviously spend a lot of time practicing, but they dont just practice hard, they practice smart. With the help of a coach, they work toward a single goal by focusing on sound, proven techniques. For tax professionals, and really any service industry, there are four fun- damentals that should be kept in mind to help you not only work hard, but work smart as you go about building your business. By James Harnsberger RELATIONSHIP learn the business of running a The IRS has introduced a series of new penalties related on the issue of new penalties is advised as follows: FIRST business. Not only will your fi- to the preparation of tax returns. With passage of “The Small As simple as it sounds, nances improve, but you will have Business Work Opportunity Act of 2007” (The Act), a tax a) Adopt a procedure that ensures every client is clients are people first. Even if a deeper understanding of the preparer may now face a myriad of penalties related to the interviewed in the appointment. youre the best tax pro in town, challenges your business clients preparation of a tax return: accuracy, understatement, and b) Adopt a procedure to review all tax returns before people feel most comfortable face. Good or bad, word travels negligent acts. providing them the client using a checklist. when you foster a solid work- sdradnatS pihsnoitaleR fast. When people mention your ing relationship to accompany name, you want it to be for a Section 6694 Penalties – The Act amended Section 6694(a) Provisions of these new penalty assessments are your skills. This means provide referral. to now include a penalty if: retroactive back to May 26, 2007, for any such return. Finally, value, communicate that value, FEES a) the tax return preparer knew or reasonably should the IRS also ushered in a host of new penalties for taxpayers regarding the following: and educate your client. For example, if your client is a sole deeN Most tax offices are greatly un- dervalued! Know your office. have known of the position; proprietor that could benefit Based on your financial numbers, b) there was not a reasonable belief that the position Taxpayer Requirements from forming an S-Corporation, figure out what you need to make would more likely than not be sustained on its merits; then your job is to communi- a profit (and a salary) and charge c) the position was not disclosed (to the IRS) as • RECORD KEEPING cate the value while educating fees accordingly. Its tempting, provided in the section. • SUBSTANTIATION the client on entities and com- but DO NOT set fees based on • PROPER REPORTING pliance and the tax conse- what you think your client will pay The Act increased penalties under this section from $250 • FILING REQUIREMENTS quences involved. Your client or what you think the guy down to $1,000 or 50% of the fee, whichever is higher. This • UNDERPAYMENT OF TAX can now make an informed de- the street is charging. Base your penalty relates to reporting any item on an • UNDERSTATEMENT OF TAX cision. Also if you are preparing fees on business acumen. If you information return (including any Form 1040) where the • FAILURE TO COMPLY WITH REPORTING AND FILING a return with the client sitting are truly practicing the above return preparer knew, or should have known, that the item REQUIREMENTS across from you, stop it. You three fundamentals, your fees for reported would more than likely not be sustained on its are doing little more than the most clients will be secondary. merits. In addition a failure to disclose such an item to the Tax professionals are advised to provide the client with a client could do with a software program quence. If you are in touch with them, Many tax professionals have no idea IRS using IRS Form 8275 or 8275-R will result in the FULL DISCLOSURE of the possible penalties they now face at home. This does nothing to build a re- you have the potential to help them with what they are actually trying to accom- imposition of the penalty. Also, a second tier of penalties and advise the client of the requirements including lationship or justify the fees you are these decisions. As the professional, you plish, and even if they do, they dont can be imposed if the IRS determines in any case that the interviewing the client, reviewing client records, worth. No matter how simple the return, actually have a better understanding of know where to start. Take some time and conduct of such reporting is willful, or reckless in substantiation of items reported on any return, and a part of your value is preparing good their tax needs than they do. The ultimate decide where you want to be in three disregarding the rules. The penalties in such a case will now the DISCLOSURE TO THE IRS in accordance with FORM 8275 work papers and substantiation in case goal is to become a trusted member of years. Reread everything above and be $5,000 for each case or 50% of the fee, whichever is and 8275-R. there is an audit. See your clients periodi- their team. layout a timeline, recognizing that Rela- higher. cally throughout the year for tax planning STANDARDS tionship, Needs, Standards and Fees are in- In another example, the IRS will now impose penalties in Conclusion and updates. Start today building strong Set them high and don’t waver. Tax terrelated with multiple components that any case where the return preparer fails or refuses to sign a The IRS announced that over the course of the next fiscal client relationships. professionals are required to receive 20 can be accomplished simultaneously. return they have prepared. Under the old law the penalty year, starting October 1, 2008, it anticipates it will generate FILL A NEED hours of continuing education each year, Next work backward and set goals that was $50 for each violation. Under the new law the penalty between $80 Million and $180 Million in new fines and As you build client relationships, you but that should be the bare minimum. will move you closer to your dreams. has been increased to a maximum of $25,000 where a penalties. As an added problem the E&O insurance and will begin to discern their needs. There You should get at least 100 hours CE Think positively. Good luck! preparer has failed or refused to sign the return. The new bond may not cover the preparer or their client in these are plenty of opportunities in your client through a quality CE program and by penalty assessments are retroactive back to May 26, 2007 cases of the more serious penalties now imposed. base if you take the time to look and listen doing research on your own. With in- for any such return. for them. An opportunity for both of you creased knowledge and a burgeoning Nick Angello holds a Bachelor’s Degree from to benefit strengthens your symbiotic re- skill set, you build not only confidence Vanderbilt University. He is an accomplished writer Tax preparers are advised to adopt a series of steps in living in San Diego. lationship. Also, throughout the year but new services to provide your clients. their practice to assist the client in understanding the new nearly every one of your clients is going to Make a commitment to your education. requirements, as well as providing disclosure to the client of make a decision that has a tax conse- You should also set aside some time to Comments: Please visit TaxSmartMag.com/2cents. these requirements. Adopting a Client Acknowledgement Comments: Please visit TaxSmartMag.com/2cents. Issue 1 I TaxSmartMag.com I Page 7
  • 4. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:16 AM Page 8 Tax Professional THE INSIDIOUS NATURE OF THE AMT The road to Business Success By Susan Harnsberger The Alternative Minimum Tax (AMT) was introduced by the Tax Reform Act of 7 ITEMS THAT CAN CONTRIBUTE 1969, and by 1970 it was up and running. This tax was originally intended to TO AMT LIABILITY prevent a few wealthy families from paying little or no income tax using 1. Personal Exemptions preferential tax treatment under the tax code of the time. The more you claim on your regular tax re- turn, the likelier you will have AMT liability. Now almost 40 years later, the AMT has the regular income tax. Effectively, the 2. Credits Like personal exemptions, many of these are become an extremely complex and insidi- higher of the two gets paid. Most people not allowed when calculating AMT. ous tax. In years gone by the AMT was are unaware they are even paying AMT. 3. State and Local Taxes paid by the top 1% of taxpayers. However, Software does everything and many tax If your locale has high state and local tax, you since its inception, it has never been in- preparers simply provide the client their are likely to owe AMT. AMT does not allow dexed for inflation. Every year more and return and tell them how much they owe. these deductions. more people owe AMT. By 2010 the Con- It is not always obvious. 4. Mortgage Interest Mortgage interest to buy, build or improve gressional Budget Office estimates that Efforts have been made to reform or re- your home is allowed. Mortgage interest for about 20% of all taxpayers and about 40% peal the AMT, but Congress has dropped anything else is not AMT deductible. of married couples will pay AMT. Of those the ball time and again, year after year. 5. Incentive Stock Options numbers most are middle class not the Instead they have done nothing more This is a timing issue that may cause AMT lia- wealthy for whom this tax was originally than put forth yearly “patches”. The latest bility. (More details in the April Issue. ) created. Table 1 illustrates that within par- patch for 2008 was included in the first 6. Itemized Deductions Many deductions when itemizing are limited ticular income levels, some percentage of “bailout” measure last October, The Emer- or not allowed under AMT rules. taxpayers will likely pay AMT by 2010. gency Economic Stabilization Act of 2008. 7. Long-Term Cap Gain OWN A BUSINESS? Table 1. This Bill, passed by the Senate and the This comes into play with large cap gain % of Taxpayers Annual Income House and signed by President Bush on which pushes you over the AMT thresholds. STARTING A BUSINESS? October 3, increased the exemption for ~ 30% > $500,000 married filing jointly from $66,250 to See Issue 2 in April for ways to minimize and GROWING A BUSINESS? ~ 66% $50,000 to $100,000 $69,950, half that for married filing sepa- manage AMT liability. > 90% $100,000 to $500,000 rate, and filing single or head of house- Let our experts help you plan. TaxSmart America® Business Centers are Percentage of taxpayers in various income levels hold the exemption was increased from not been adjusted for inflation since it to pay AMT in 2010. Data obtained from the $44,350 to $46,200. was enacted in 1986, essentially means dedicated professionals who specialize in business tax planning. Each Congressional Budget Office. The AMT taxable income (AMTI) is, that any TMT over $150,000 will be taxed office is independently owned and operated and commited to more than The AMT is a tax that, for certain taxpay- however, still taxed at 26% up to another 25%. This effectively pushes the ers, for a combination of reasons, must be $175,000 and 28% for any AMTI above two tax rates, 26% and 28%, up to 32.5% 200 hours per year in small-business, tax-planning courses. We provide calculated under an alternative set of $175,000. This calculation is called the and 35%, respectively. Very simply, up to a free consultation and business evaluation to assess your business and rules. Any amount of AMT over the regu- Tentative Minimum Tax (TMT). The $150,000 AMTI, the rate is 26%; between lar income tax must be paid along with tax planning needs. Turn to page 22 to find the office located nearest you. $150,000 phase-out threshold, which has $150,000 and $175,000 AMTI the rate is 32.5%; and greater than $175,000 AMTI AMT TIMING◄►AMT MANAGING the rate is 35%. HOW AND WHEN IS VITAL in managing AMT liability. Here is a heads-up list of For capital gains the rates are effec- issues to be aware of and ask your tax professional to outline and manage tively 21.5% to 22% instead of just the during your tax planning session. 15% calculated under regular income tax 1. Large capital gain rules. This is because for every dollar of 2. Dual Basis Assets cap gain, 25 cents more of ordinary in- 3. Exercising ISOs and timing come is subject to the 26% or 28% rate. 4. Business expense on Schedule C So, for example, for a $100 cap gain, you 5. SEP, IRA, Simple IRA, 401(k) have $25 of the cap gain taxed at 26% or 6. Home office deduction 7. Some tax-exempt bonds 28% ($6.50 or $7.00 in tax) plus the $100 8. Timing real estate tax and state and local income tax cap gain taxed at 15% ($15 in tax). Adding the two is $21.50 or $22.00 in tax, which In Issue 2 in April, we really dig into timing, managing, and reducing AMT liability, addressing on a $100 cap gain is an effective rate of www.tsabusinesscenters.com each of these issues and more. 21.5% or 22%, respectively. TAX SERVICES | BUSINESS ENTITY | BUSINESS SUPPORT | REFUND RECOVERY | AUDIT PROTECTION Page 8 I TaxSmartMag.com I Issue 1
  • 5. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:16 AM Page 10 Spotlight Things get really heinous if the taxpayer happens to be OIC – OH, I SEE benefit from preferential tax By Susan Harnsberger ON TOP OF THE WORLD – My Accounting Center, Inc. treatment not recognized A Certified TaxSmart America® Business Center under AMT rules. Some of The Offer in Compromise (OIC) program is one They are required to submit $150 with the OIC these include deducting ac- of the most complex, time consuming services application which is non-refundable. If they Nestled in the heart of Glendale, California, is MAC, Inc., a successful celerated depreciation of a tax professional can offer with a very low cannot pay the $150, another slew of paperwork business advisory and consultation firm. The creative, business-savvy business assets, incurring net probability of success. Simply stated the OIC is must be submitted and approved. They are also entrepreneur behind it is 26 year- old Jay Chimayan. A few doors operating losses, receiving an IRS debt relief program for a very select required to determine if they will pay in full the down is Chimayan Financial Services, a business he and his brother incentive stock options, group of taxpayers in which the IRS may agree amount offered in the OIC or if they will make Jevan are poised to take over upon the retirement of the Founder and (ISO), etcetera. In addition to settle the taxpayer’s debt for less than what is payments throughout the IRS statutory President, Sirvard Chimayan. The two companies offer just about any there are timing issues that owed. It is a program that is misunderstood by collection period. If it is the former, 20% of this service a business owner could need from a team of professionals in need to be considered: when both taxpayer and tax professional alike. It is amount must be included with the submission many fields. This is what Jay has envisioned and produced. But he to earn income, when to pay also fodder for scammers who promise to settle and is non-refundable. If it is the latter, the first hasn’t done it alone. He is fortunate to have a tight-knit, talented for activities that may be de- the debt for “pennies on the dollar”. payment must be made and monthly payments family who support him and each other and specialize in their own ductible, when to exercise The first step in submitting an OIC is to must continue to be made throughout the areas of expertise. Below Jay shares his story with us, how TaxSmart ISOs, to name a few. These explore all other payment options. This is a two-year period the IRS has to decide. None of America® University and TaxSmart America® Business Centers have timing issues can have a sig- submission requirement by the IRS. Pay close this money is refundable regardless of the IRS’s helped expedite the path to success and his dreams for the future. Photo: Nick Angello nificant effect on AMT liabil- attention to the Partial Payment Installment final decision. BTW, the IRS must decide within ity, (see the box on the Agreement (PPIA). This may be a good the two-year period or your client is TSA MAG: Jay, you have two offices here. Chimayan Financial Services and My the four tests (at the time of this interview). I expect to hang my license in late ‘09. previous page for a summary alternative to the OIC. However, if your client is automatically approved for the OIC. The client is Accounting Center, Inc. (MAC). Tell us about the two and how they tie together. of AMT timing issues). There still intent on submitting the OIC, the next step required to be on time and pay the full amount Jay: Chimayan Financial was started in 1996 by my Mom, Sirvard Chimayan. She TSA MAG: You were a student last year with TaxSmart University for professional devel- are AMT rules specific to is to determine which type of OIC. There are of subsequent tax liability for the next five years does tax preparation, bookkeeping, and payroll for mostly start-up businesses up to opment and continued education. What is your impression of this school? carry-forward losses, carry- three: or the agreement can be cancelled with the full three years. My Accounting Center started in 2006. It mostly deals with businesses Jay: Really impressive. We’re learning a lot of new things that we didn’t know before. forward cost basis, carry-for- Doubt as to Collectibility – There is doubt amount owed and may include interest and after they’ve been in business for more than three years. Chimayan Financial Other programs talk about the laws, but they don’t explain the laws, how it affects ward tax credits, and carry- the taxpayer could ever pay in full the amount penalties. All money paid to that point is specializes in tax returns. MAC is a business advisory and consultation. I’m the clients. TSU actually explains in full detail how to apply it to the client and how a forward passive losses. Fur- of tax within the statutory period for collection. non-refundable. President of My Accounting Center. Sirvard Chimayan is the President of Chimayan client will benefit or be affected by it. We have also learned a great deal about ther the portion of the tax Doubt as to Liability – Legitimate doubt At the end of the day there are five and only Financial Services. When she retires, my brother and I will take over. successfully managing a tax practice. The support we receive from TaxSmart is considered AMT may be exists that the calculated tax liability is accurate five strategies for getting out of tax debt: invaluable. used in future years as a min- due to examiner error; the examiner did not 1. Installment Agreement (IA) – IRS agrees TSA MAG: How many employees do you have? imum tax credit. This is consider evidence submitted; or the taxpayer to a monthly payment plan Jay: Currently we have nine employees. TSA MAG: Most tax professionals take about 20 hours a year of continued money all too often left on has new evidence. 2. Partial Payment IA – IRS agrees to education which is all that is required. Whatever possesses you to take 150 to 200 hours the table. Effective Tax Administration – There is no long-term plan at a reduced $ amount TSA MAG: How long have you been in this business? per year? “The tax professional who doubt as to liability or collectibility. Instead the 3. Offer in Compromise – debt relief Jay: I started in 1999 with my Mom, doing clerical work, a little bookkeeping, and Jay: It’s needed. Just reading the tax law and going to the lectures and workshops, can successfully maneuver in taxpayer must prove that full pay would lead to program; see IRS form 656 then moved up to payroll. Then I started doing consultations and entity formations. it’s going to be over a hundred hours. the quagmire of the AMT is in- economic hardship or be unfair and inequitable. 4. Not Currently Collectible – IRS agrees valuable. Our knowledge can One example is that the taxpayer is responsible not to collect for a year or so TSA MAG: Tell us what services you offer. TSA MAG: At the rapid pace you’re moving in the development of your business, and as a mean thousands of dollars to for long-term care for a dependent child and 5. Bankruptcy – discharges tax debt Jay: Year ‘round we offer bookkeeping services, payroll services, amended returns, licensed TaxSmart America® Business Center, where do you see yourself in five years? our clients.” will need to use the equity in assets to provide under the rules of chapter 7 and/or 13 and audit representation. We do tax planning, consultations and financial advisory, Jay: On top of the world (laughing)! Basically, running a successful practice, buying – TaxSmart America for basic living expenses and medical care for Any one of these is likely to be more effective entity formation and compliance for corporations and LLCs, and living trusts. We also new practices, and continuing to grow with TaxSmart. Business Centers the child. than the OIC for most people, including offer financial services, IRAs and such. All three types of OIC require the taxpayer to bankruptcy, and should be thoroughly fill out and submit extensive amounts of researched. TSA MAG: Where did you go to university, and what was your major? paperwork. This should be thoroughly Jay: I went to California State University at Northridge, majored in accountancy, researched in IRS form 656. For info on PPIA or Comments: Please visit bankruptcy strategies go graduated in 2005. TaxSmartMag.com/2cents. Next your client needs to to TaxSmartMag.com. understand how the Comments: Please visit TSA MAG: What do you enjoy most in your business? TaxSmartMag.com/2cents. payments work. Jay: Helping clients get educated in the tax field and providing consultation and TaxSmart America®Magazine is published m c ya quarterly by TaxSmart America® Inc., 8825 advisory for their businesses. It’s great because when we help out a client, we’re cco r in unting cente Aero Drive, Suite 103, San Diego, CA, giving them value and it makes us feel good. 92123. Opinions expressed herein are solely those of the editors and contributors. Readers are advised to take TSA MAG: What’s the biggest challenge for you? My Accounting Center is Located at: special care in relying upon opinions or Jay: Most businesses think they have to have a CPA to do their bookkeeping, payroll, 460 S. Central Avenue recommendations. The reader is responsible for verification of any or taxes. We have to explain to them that most clients don’t need CPAs and that we Glendale, CA 91204 information provided herein. can still help them out. I am currently pursuing my CPA license. I have passed two of (818) 500-0714 Page 10 I TaxSmartMag.com Issue 1 I TaxSmartMag.com I Page 11
  • 6. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:16 AM Page 12 Feature Story planning for small businesses that help reduce their taxes by im- Since a majority of the revenue is derived during tax season, plementing fringe benefit plans, medical reimbursement plans perhaps you might consider expanding your services to offer or accountable reimbursement plans that shift otherwise tax- mid-year and end-year tax planning and records-review serv- able profits to deductible benefits tax free. In this manner you ices to your existing clients using FREE consultations. First, it Make More help the client reduce taxable profits and at the same time pro- vide a value-based added service for which the client is more costs you no more rent since you are already paying rent and not using the office as much as might be possible. As for your Money than willing to pay a reasonable fee. In the Service section below time, well you already have time where you are making no value-based service enhancements are discussed. money, so perhaps you can use that time by creating opportu- In summary, you need to guard revenue nity where you might be able to make money to avoid losing ground and hopefully find a “If you desire to operate at a if a client has an additional need you can fill. method to add to revenue by expanding 50% gross profit margin, As mentioned previously, you might offer Recession or Not service and value at little or no additional then every dollar you spend cost to your firm. Revenue is the life-blood of any business, and if you lose income, it tax planning tips or records review services must produce two dollars in or perhaps a service that aims at tracking more deductions using more efficient record income in order to support keeping. In each of these areas you have a takes a significant amount of time and By James Harnsberger money to replace the lost revenue with new that one dollar in spending. value-based additional service that is in line clients. Conversely, if you save one with the core service of your firm, tax prepa- Expenses - Now we move to the second dollar in expense, it has the ration. level of effort and focus during a recession: economic effect of producing In this article we have looked into a few the expenses you pay to operate your busi- areas where you might consider a more ef- ness. First and foremost, a clearly defined two dollars in income. “ fective method to shield against adverse im- and detailed list of the total monthly business expenses is re- pacts that often come in any recession—increasing revenue, quired. On this first round of analysis you are simply looking at cutting expense, and adding services. Think of how much more the nature and amount of each expense to determine what they valuable and financially sound your firm will be using these and are and then determine if in fact they are within a range that al- hundreds of other ideas after the tide turns again and we move lows a safe operation of your business in order to generate a rea- out of the recession. You will benefit greatly in that you have not sonable profit. only survived and perhaps even grown in a recessionary period, Many items on the expense side of your business can be im- but you are stronger than ever financially for the good economic proved if you take some time and evaluate your business and times that always follow a recession and down turn. DURING TIMES WHEN OUR ECONOMY heads toward recession, it is important to know there are the expenses involved in the operations. By reviewing what you Also consider the importance of assisting clients in doing the spend money on and how much you spend, you can begin to same for their financial concerns. By always adding value to the some things we can do to help the financial pinch. There are three areas that should be relationship, you can be certain that in most cases the client will see your performance. Using this information you can next considered for review especially during an economic recession: begin looking to see if there are some types of expense where appreciate your expertise and dedication even if your fees are in fact you can trim your spending. slightly higher. Never approach the relationship by simply ad- • Income (these are revenues) Once you analyze the data and begin drafting a budget, you justing your fees for the sake of generating additional revenue. • Expense (what can be done) can then apply discipline in your spending habits in order to pre- If the value is not present first, last, and always, the client will serve your hard-earned capital. If you desire to operate at a 50% not be there for long either. At the end of the day your most • Services (building opportunity) valuable asset is your client, and you want to do all that is pos- gross profit margin, then every dollar you spend must produce two dollars in income in order to support that one dollar in sible to safeguard that important relationship. Income – Many are tempted to begin slashing prices in the hope of attracting new clients or out spending. Conversely, if you save one dollar in expense, it has Small business owners are the life-blood of our economy. Our of fear of losing existing clients. Don’t panic. Slashing fees will only accelerate your demise. Here the economic effect of producing two dollars in income. So ex- free-market system has many cycles, and it may be the reces- are some IMPORTANT TIPS regarding your fees. First, communicate value, never sell price. penses are very important, and budgeting your spending be- sion we are in will worsen. Those who thrive and grow are those comes critical. who plan and prepare and execute well-defined plans. These When you sell the price for a service, you communicate to a client that there is little or no value, plans should insulate and protect the business in downturns Services – One of the most important things that can be and the client then moves to find a competitive price lower than yours. Worse yet, you also com- done in a recession is to add value-based services to your prac- and position it to grow in the upturns of each cycle. municate that your previous prices were over-stated and that these new lower prices really are tice. what your service is worth. Instead you can communicate to your client that you will provide “ad- What are value-based services? They are services that en- Finally, remember the three rules in any recession. ditional” value-based service for the same or slightly higher fee, and invite them to take advan- hance the firm’s offering to clients and thereby increase the value of the firm. Important in this process is to look at the core 1. Don’t panic. tage of cost-cutting tax tips by offering free consultations after tax season. 2. Don’t panic. services you might now offer and review these services to de- Another strategy during a recessionary period is adding new value-based services to your office termine what additional value-based add-ons can be imple- 3. DON’T PANIC! that compliment your tax preparation core business. For example, you may wish to offer small mented at little or no cost to the firm but that communicate business clients record keeping/organizing or bookkeeping services. Or perhaps offer tax value to the client. This in turn opens up opportunities for the James Harnsberger has been in the tax industry for over 23 years. client to use the firm in new or improved ways. He is the Founder of TaxSmart America® Business Centers and TaxSmart America® Let’s examine how you might use this approach if yours is a University where he has taught almost 5000 tax professionals. 1998. firm that offers tax preparation for individuals and perhaps has Comments: Please visit TaxSmartMag.com/2cents. some number of small business clients. Page 12 I TaxSmartMag.com I Issue 1 Issue 1 I TaxSmartMag.com I Page 13
  • 7. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:16 AM Page 14 Spotlight BEST OF THE BEST – TAX-411 A Certified TaxSmart America® Business Center Business owner, entrepreneur, wife, and mother: Diane Jara of Downey, California, somehow manages to do it all and do it success- fully. From the vibrant decor to the innovative branding, Diane’s business, Tax-411, a Certified TaxSmart America® Business Center, is an office that exudes professionalism and expertise. But while the marketing and branding bring clients into Tax-411, it’s Diane’s warmth, knowledge, and honesty that keep her clients returning for the high quality tax and business services she provides. Here Diane shares a bit about herself, her success, and her vision for Tax-411. Photo: Nick Angello TSA MAG: Tax-411 is a great name. How did you come up with it? TSA MAG: What do you think about the TaxSmart America Business Centers concept and Diane: Since my husband is in the marketing business, he came up with the name the professional development? TAX-411. He wanted a name that would be understandable by all people of any Diane: I have learned so much from them. I believe in the concept of TaxSmart. It is a language. Everyone understands what 411 means. My goal is to educate my clients well-put-together organization, and I am so excited to be a part of it. about their taxes. I do my best to provide extraordinary service, honesty, and integrity in all I do. TSA MAG: You mentioned you worked for the IRS. How has that helped you in your business? TSA MAG: I know you’re a full-service, year-round practice. What services do your offer? Diane: When I worked at the IRS, it gave me valuable experience and knowledge to Diane: My office offers a variety of business services, such as tax returns, corporate better understand my clients’ needs. This has been a great asset when representing returns, business returns, estimated payments, bookkeeping, refund recovery, them in audits. property tax, sales tax, entity formation and compliance and audit representation. TSA MAG: What made you finally say, I’m going to start my own practice? TSA MAG: Is there any one service that you feel is your specialty? Diane: I wanted to make a change in people’s experiences when dealing with a tax Diane: Audits are my specialty. I have a great deal of knowledge and experience with professional. Also it is my desire to educate and provide a unique service. them. Having worked for the IRS for a number of years, I have the advantage of understanding the process and successfully helping my clients save money. TSA MAG: How do you juggle family and business? Diane: I understand how to use time management and prioritize my life. Also my TSA MAG: What is most rewarding in your work? husband and I raised our children to be flexible because it is what life requires. As a Diane: Saving my clients money and educating them about their taxes. Also result, I have the support of my family. This makes my family and business life more providing a solution to their problems and helping them succeed. I love that. successful. One minute I am a soccer mom, the next minute I am an IRS tax professional with an audit. Life is good. TSA MAG: What is the biggest challenge? Diane: It was finding the right place to continue my education in tax law. There was TSA MAG: What are some of your plans over the next several years? really nothing out there to assist me in growing my practice until I found TaxSmart Diane: I am excited to make the transition from a tax preparation office to a practice. America University. As a professional, I want to continue expanding my knowledge That is going to be one of my greatest accomplishments for 2009. My success comes and being up to date with the many tax law changes. Knowledge is value. from being dedicated to my clients and helping them succeed in their financial future. TSA MAG: Most tax preparers spend only the required 20 hours per year in continued education. Last year you will have spent between 150 to 200 hours through TaxSmart University’s lectures, workshops and coaching. For the next 18 months as a licensed TaxSmart America Business Center you will have spent that much time if not more in education. That’s dedication. Diane: Twenty hours is not enough to allocate to this business. My commitment to clients is why I continue my education, which allows me to master my profession and deliver extraordinary results. TAX-411 is Located at: 11455 Paramount Blvd. Suite A Downey, CA 90241 (562) 869-4000 • www.tax-411.com Page 14 I TaxSmartMag.com I Issue 1
  • 8. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:17 AM Page 16 Business Owner Business Owner not subject to corporate taxes, termine all tax benefits (see page 22). “The leading feature of an S and more importantly the • Compare the forecasted tax savings. TAX PLANNING TIPS FOR THE BUSINESS OWNER corp is that the profits of the business are not subject to profits pass through to the owner-shareholders and are • Consider the time and expense in- volved in operating as an S corp. By James Harnsberger corporate taxes . . . and the not subject to self-employ- • Consider the long term benefits for profits pass-through to the ment taxes. potential exit from the business. If you are a business owner looking for cost cutting ideas here are eight tax planning tips that may result in substantial tax savings for this owner-shareholders and are As with every benefit pro- • Consider the use of retirement plans year and next. These tax planning ideas are sometimes missed by business owners. You should, however, consult a qualified tax advisor not subject to self-employ- vided by the code, there and any impact the S corp may have. to determine which of these are appropriate for you and your business. ment taxes.” comes with it a cost. In this By far the use of an S corporation can case the cost here is that the owner- provide significant tax benefits both in 1. S Corporation: Set up an S corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a S CORP WHY AND HOW shareholders must receive a “reasonable” short as well as long term business plan- partnership, or a limited liability company the first $102,000 of 2008* profits are subject to a self-employment tax rate of 15.3%. The Many businesses begin their life as a salary in the form of taxable wages. In ad- ning. As with any business objective, profits in excess of $102,000 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying “Sole Proprietorship” in terms of the tax dition, the corporation must maintain a careful planning is always advised to re- income tax on the profits. An S corporation is not subject to self-employment tax on the profits earned. However, you must take structure of the business. Defining the tax more strict manner of conducting busi- view both short term as well as long term "reasonable" compensation as salary subject to F.I.C.A. structure can be as important as the busi- ness in that it must adhere to the formal- business objectives. 2. Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they ness itself because each form of business ity requirements and conduct its affairs as Educate yourself by reading articles or become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end. If you used a collection structure has with it specific tax require- a corporation accordingly. self-help books. Meet with your advisor agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that ments, as well as benefits. Items such as using corporate funds for or find a qualified advisor within our di- amount at the time you turn over the receivable to the agency. First, let’s define the term “S” corpora- personal expenses, not maintaining cor- rectory to assist you in making an evalua- 3. Equipment Expense: For 2008*, Section 179 of the Tax Code lets companies deduct up to $250,000 of new equipment, subject tion. “S” refers to sub-chapter S of the tax porate minutes, not conducting regular tion. You should avoid the use of to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year code. In short, an S corporation is consid- monthly meetings, or not maintaining do-it-yourself services in this area due to exceeds $800,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded ered a pass-through entity in which the formal books and records can be a prob- the complex nature of tax issues that re- gross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining value income and certain tax items pass- lem that could result in loss of the special quire careful consideration and planning. of that equipment – it’s faster than the straight-line method of depreciation. through to the shareholders of the corpo- S status of the corporation. 4. Home Office Expense: You can take this deduction even if you use the space for administrative purposes, as long as there is ration. When considering the use of an S cor- – James Harnsberger nowhere else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for The leading feature and consideration poration, here are some important con- utilities, security, homeowner’s insurance, etc., as well as all costs for the room such as carpeting. Although you can also claim the for selecting an S corporation is that in siderations to review: depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the most cases the profits of the business are • Use a qualified tax professional to de- Comments: TaxSmartMag.com/2cents. impact it will have on the exclusion of gain when you sell your residence. (If you need a qualified tax advisor, please see page 22.) 5. Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on SCOOPING UP ROCK-BOTTOMS the payroll in 2008* will also double the amount of Social Security tax owed up to the first $102,000 of income. How the Cost Segregation Method Helps You Keep Even More of Your Money 6. Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2008* you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break too. Have your children put $4,000 into a Roth IRA where it will compound tax-free over time. If the With the downturn in the housing market, sub-prime industry scandals, and could allocate the property based upon a study to reflect the price of $450,000 and money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that record-level foreclosures, many savvy investors are sitting on the sidelines wait- $100,000 for land of which $40,000 in the land represents improvements in and money or its earnings. If your business is not incorporated, and the children are under age 18, neither you, ing for the economic bottom before jumping into the real estate market again. upon the land (sidewalks, sewer lines, plants, trees and shrubs) leaving you with as employer, nor your children will owe Social Security or Medicare tax on their wages. There are, however, other considerations important in the $60,000 in land value and no depreciation. Then on the build- 7. Claiming Business Losses: Make the most of business losses. If your company has a net purchase of that next property, be it residential rental, com- ing you would allocate, based upon the same study, $30,000 operating loss in 2008*, it can be carried back two years or carried forward up to mercial rental, new development, or even rehab property, for fixtures, and $40,000 for equipment and finishing, leaving 20 years to offset future profits. To get a refund, file an application on Form and that is Cost Segregation. you with $280,000 in structure. These “segregated” amounts 1139 for corporations and Form 1045 for sole proprietorships. Most refunds One of the feature benefits of investing in real property is have far lower class-life than the 27.5 years, thus increasing are sent out by the IRS within two months. the depreciation of the property. Typically, depreciation does your deduction in the first 5 to 7 or 10 years of ownership. 8. Education: Set up a company tuition-reimbursement plan to pay a child’s not include an allocation toward the land cost of the property. When the property is later sold, the amount on these lower school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually, each employed child, parent or other qualified Instead the price is adjusted to exclude the value of the land, allocated assets would generally not be subject to recapture employee. The business owner’s children must work for the company, be and depreciation is spread out over a life-period of 27.5 years since you would claim the straight-line method of deprecia- older than age 21, own no company stock, and cannot be claimed as a for residential rental and 39 years for commercial. tion versus accelerated. If the rental activity is passive, of dependent on the business owner’s tax returns. The benefit is that the However, the IRS has another option that could spell significant tax savings course the losses would remain suspended; however, you would have far greater amounts paid under the tuition plan are a business deduction, thus reduc- on future capital gains when the property is later resold. The cost segregation suspended losses to offset future gains when you sold, thus providing significant ing taxes for the business owner, and the amounts paid to the child are not method allocates various components of the property into alternative economic tax savings on the total investment. taxable income. class groups with shorter life periods, thus increasing the deduction today and NOTE: Before using cost segregation, review the rules with a qualified tax pro- perhaps saving on capital gains tax in the future. This is possible because recap- fessional (see page 22), and obtain a cost segregation study to support the claim. ture is not required for some components. Attach IRS Form 8275 to your return to disclose any contrary positions to the IRS. As an example, let’s assume you purchase a rental home for $450,000 which * Updates and changes for 2009 visit TaxSmartMag.com. has a land value allocated at $100,000. You would have a basis of $350,000 for – James Harnsberger Comments: Please visit TaxSmartMag.com/2cents. depreciation, and a useful life of 27.5 years resulting in an annual deduction of $6,364 the first year and $12,727 each year thereafter. With cost segregation you Comments: Please visit TaxSmartMag.com/2cents. Page 16 I TaxSmartMag.com I Issue 1 Issue 1 I TaxSmartMag.com I Page 17
  • 9. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:17 AM Page 18 Consumer The Subtle Part 1of 4 in a series of articles that deals with the three stages of wealth—Wealth Accumulation (Part 2), Wealth Erosion Preservation (Part 3), and Wealth Transfer (Part 4). This first article serves to educate us about how individual wealth can quickly erode if we are not paying attention. of Wealth By Susan Harnsberger inflation. I’m going to show you how your tax bracket of, say, 34% can become 183% if you’re not watching the heat. At the time of this writing inflation was 5.7% over last year according to the Bureau of Labor Statistics. So suppose you put $10,000 in a one-year investment instrument in October of 2007. Suppose you earned 7% interest or $700 at maturity in October of 2008. That means that you now have $10,700, prin- cipal plus interest. So tax season comes, and here you are, handing over your 1099 to your tax profes- sional who then reports this $700 income. Now let’s suppose you are in the 28% fed- you drop a frog eral tax bracket and 6% state. Your combined into a pot of boiling tax on this income will be 34%. So 34% of water, he’s going to leap out. $700 is $238 in taxes. Again you may not be But if you put him in a pot of tepid water and ever so happy about this, but you knew it was com- slowly turn up the heat, he’ll be cooked before he knows it. ing. The problem is with a 5.7% rise in Old story, but perfect analogy. For the past nearly 100 years prices (inflation) over the course of the the tax and economic systems of our government have been year, it turns out you would need turning the heat up ever so slowly on our proverbial pot. If we $10,570 in October of 2008 to have really want to build our wealth and someday pass something the same purchasing power as you on to our heirs, we had better have an understanding of what had with your $10,000 back in we are up against so we can generate a viable plan before we October of 2007. So before truly are cooked. you even pay the $238 in This is not another article about wealth redistribution, al- taxes, it turns out your though it could be. Instead it is addressing a subtle wealth- real income generated eroding mechanism we never really acknowledge in a from your $10,000 one-year investment instrument is $130. meaningful way. Never mind for now all the “hidden” That is, $10,700 (what we hold in our hand on date of maturity) taxes—the excise taxes, the use taxes, import, transport, utili- minus $10,570, our principal adjusted for inflation. ties taxes. Never mind the tax charged to insurance companies It’s bad enough to find out effectively you only earned $130 on gross premiums—for California the rate is 2.35%. Never income instead of $700, but would you like to guess your tax mind the excise taxes on tires, countless taxes on a gallon of bracket? It’s tax paid divided by income made times 100. Pay- gas, taxes on vaccines, prescriptions, airline tickets, hotel ing $238 in tax on inflation adjusted income of $130 means you rooms. I could go on and on and every single one of these paid 183% on this particular income. hundreds if not thousands of taxes gets passed on to the con- This is important. It’s important because now you under- sumer ever so slowly eroding our wealth. This we get. We stand how subtle the erosion of your wealth can be if you’re don’t like it, but we get it and for the most part try to plan for not paying attention. Something needs to be done. And that’s it—maybe not as effectively as we could, but we do under- the good news—there is a solution. In our next issue I’m going stand. So for now, let’s just never mind those. Instead I’m to show you how to build your wealth regardless of taxes and going bring the pot to a boil and hope to get your attention. inflation and taking into consideration any tax changes under Let me show you a subtle erosion of your wealth that will our new administration. never ever be called a tax, yet it has the same effect. We call it Comments: Please visit TaxSmartMag.com/2cents. Issue 1 I TaxSmartMag.com I Page 19
  • 10. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:17 AM Page 20 Q&A Consumer Parse with the Pro—James Harnsberger DREAM BIG, PLAN SMART By Susan Harnsberger NEARLY EVERYONE AT SOME TIME in their life has CHOOSING AN ENTITY – There are tax and legal sional does not provide insurance services, (and had the dream of starting their own business. considerations regardless which you entity you many do not), ask for a referral or choose an James Harnsberger has been in the tax industry for over 23 years, during which time he has owned five tax offices, obtained his paralegal But when it comes down to it, the people who fi- choose. Choosing the correct one under which agent yourself. Make sure the insurance agent license, and worked as a paralegal researching tax law. He is the Founder and CEO of TaxSmart America® Business Centers and TaxSmart is experienced in advising small businesses on nally take the leap are the most daring among you do business does not guarantee success, but America® University where he has taught almost 5000 tax professionals since 1998. us. They are the most independent, the most going with the wrong one or none at all, can the correct deductibles and limits. Then discuss passionate, and possess the greatest drive. We contribute to your failure. Most new businesses with your tax professional which policy premi- can, however, divide this group of entrepreneurs start out as sole proprietors and move to entity ums are deductible that you are considering pur- into two categories: those whose businesses suc- status when tax and legal considerations dic- chasing. If our child was born on the last day of the year, can we claim My client has a Limited Liability Company and he is the sole TAX YEAR CONSIDERATIONS – There are two types ceed and those that fail. tate. Your tax professional will educate you and her as a dependent and can we also get the Child Tax Credit? owner with no employees. Does he still need a Federal Tax ID No one starting a new business goes out and help you make a decision. Some of the consid- of tax year: calendar and fiscal. Within fiscal - David O’Brien, Irvine Number? becomes an expert in all areas, but it is a good erations to compare among the entities are there are a couple of options on which day to - Jane Meyer, Oceanside idea to get enough background so that you are state and federal tax considerations, limited li- end. There are circumstances in which a calen- If the exemption tests are met and the child was born alive A sole owner of an LLC with no employees does not need a qualified to hire the right person to help you ability considerations, method of management, dar year is required for a business. In addition anytime during the year, you may take the full exemption. You also may be entitled to the Child Tax Credit (CTC). See separate Federal Tax ID number. He needs one if he hires through. method of capitalization, and method of own- for each type of entity there are restrictions. IRS.gov: Pub 501, TT 354. Also read the instructions on an employee and elects to report and pay employment If you find your entrepreneurial desire heat- ership transition. Further you may be on a calendar year for fi- Form 1040 (CTC). taxes through the LLC. An LLC with more than one owner ing up, and you have a great idea for a business, Once you have made your decision, your tax nancial reporting and a fiscal tax year. There are will always need a separate Federal Tax ID number (Appli- here are a few not so common things you need professional will form your entity and keep you both tax and non-tax considerations which af- Can I deduct alimony I paid to my former wife? cation: Form SS-4). LLC’s are one of the more complicated to know that can save you hundreds of thou- in compliance. There may be occasion you will fect your year-end choice. An example of a non- - Chris Sheldon, Pacific Beach of the various entities, and I strongly advise that your client sands of dollars in taxes and give you legal piece need legal advice, and again your tax profes- tax consideration is business cycle. You may see a tax attorney to help navigate through the legal mine- of mind. sional will tell you when and what for. wish to choose your year-end during your slow Yes, you may be able to deduct alimony that you have been fields. You can visit TaxSmartMag.com if you need an attor- ► The Tax Professional Entity compliance is extremely important period. Taxation considerations vary with the ordered to pay. You may also be able to deduct separate ney referral. See IRS.gov: Pub 1635. ► Choosing an Entity and frequently neglected. Many small business type of entity. This is something your tax pro- maintenance payments that you are required to make to ► Federal/State/Local Requirements owners go online and quickly and cheaply form fessional can help you with. your spouse if you are separated. See IRS.gov: Pub 504 (di- I have a California corporation that had no income for the year. ► Avoid Hobby Status an entity only to find during an audit or in court TAX ACCOUNTING METHOD – There are three tax vorced or separated) and TT 452 (alimony after 1984 and Must the corporation still file a tax return? ► Implement Risk Management that formation, compliance or both have been accounting methods: cash, accrual, and hybrid. requirements). -Mia Ng, Tustin ► Tax Year Considerations done incorrectly and the entity will, therefore, The hybrid is a combination of both cash and ac- ► Tax Accounting Method be disregarded for tax and legal liability pur- crual and should only be used if you can prove I purchased some land that I would like to build my dream Yes. Even if it has no taxable income, a domestic corpora- ► Exit Strategies that it is a more accurate reflection of income poses. The message here is when an entity can home on. Is this interest deductible? tion must file an income tax return. A domestic partner- than either cash or accrual alone. Most small THE TAX PROFESSIONAL – The most important save your business thousands if not hundreds of - Nancy Simpson, Hemet ship is a bit different. If there is no gross income and no person beside you is your Tax Professional, pro- thousands of dollars and afford you legal liabil- businesses use the cash method. Your tax pro- paid or incurred amount used as a deduction or credit for vided you choose the right one. He/she needs to ity protection, don’t take costly shortcuts. fessional can help you decide. You need to have begun construction on the home and be federal tax purposes, then no income tax return needs to be a business tax and business services specialist. FEDERAL/STATE/LOCAL REQUIREMENTS– Infor- EXIT STRATEGY – Believe it or not, you should able to occupy it within 24 months to have the mortgage be filed. As always you are advised to visit a qualified tax professional who specializes in entity formation and com- This is a person whose expertise and talent will mation on each of these can be obtained by call- plan how you are going exit your business be- interest you paid qualify as deductible. See IRS.gov: Pub 936. pliance. save you countless hours and potentially hun- ing your county office or visiting their website. fore you begin. Will you gift it, bequeath it, do dreds of thousands of dollars over the life of your Your tax professional can also help you expe- an installment sale? Each entity has a tax con- What are the rules to be able to deduct the mortgage interest Can I deduct the excise taxes for a vehicle? business. Tax planning, audit protection, entity dite these obligations. sideration depending upon your exit choice. on my second home if I intend to rent it out in the summer? - Rob Garcia, Long Beach formation and compliance when the time is HOBBY STATUS – The Safe Harbor Rule and For Your tax professional can explain the tax conse- - Jerry Lopez, Northridge right, and a multitude of other business needs Profit Motive – For tax purposes you do not want quences so you can make an informed decision. Yes. Excise taxes that are the ordinary and necessary ex- are frequently neglected by new business own- your business deemed a hobby. The code pro- A second home is any residence that you treat as a second penses of doing business can be deducted. See IRS.gov: ers. Take the time to interview a few tax profes- vides for safe harbor if you have been profitable The bottom line is, the more tools and knowl- home, and there is no rule that you have to use it during Pub 535. sionals when you are in the planning process. for 3 of 5 years. If you meet the safe harbor, the edge you have as you move closer to pursuing the year unless you rent it out. You must then use it as a Ask for a free consultation and use that time to burden is on the IRS to prove “lack of profit mo- the American Dream, the better your chances of home during the year for 14 days or 10% of the number of discern his/her qualifications (please see the tive”. If you do not meet safe harbor, you must success. Please visit our website TaxSmart- days you rent it, whichever is greater, in order to have it TaxSmart America® Business Center Directory on establish a profit motive. For more detail, ask Mag.com for some great reference links to help qualify for the home mortgage interest deduction. See We welcome your questions. page 22). In the next issue we will discuss how to your tax professional. you in your research for starting a new business. IRS.gov: Pub 936. Please email them to Pro@TaxSmartMag.com. conduct an effective interview with a tax pro- RISK MANAGEMENT – Managing risk means get- fessional. ting the proper insurance. If your tax profes- Comments: Please visit TaxSmartMag.com/2cents. Page 20 I TaxSmartMag.com I Issue 1 Issue 1 I TaxSmartMag.com I Page 21
  • 11. TaxSmartMag Issue 1 Final:Layout 1 12/30/2008 11:17 AM Page 22 TaxSmart America Business Centers ® Dedicated to Your Tax and Business Needs Full Service, Year-Round Practices Independently Owned and Operated RIVERSIDE COUNTY ORANGE COUNTY TEMECULA PLACENTIA Reyes Financial Business Corp. MBR Tax Services, Inc. Elvira “Bobbie” Reyes NORTHRIDGE EAST 27780 Jefferson Avenue, Suite B Myrnah Basallo Ramos MTX Accounting 414 N. Placentia Avenue Temecula, CA 92590 Thomas Urquilla, EA (951) 699-7181 Office Placentia, CA 92870-4916 GLENDALE 8707 Lindley Avenue, Suite D (714) 577-9400 Office (951) 676-3833 Fax Chimayan Financial Services, Inc. Northridge, CA 91325 Email: bobbie@reyesfbc.com (714)496-6528 Cell Sirvard Chimayan (800) 866-0922 Toll Free SAN DIEGO Email: mramos1234@att.net Jevan Chimayan (818) 772-2277 Office TaxPro 432 S. Central Avenue www.mtxaccounting.com SAN DIEGO COUNTY Terry Smith SANTA ANA (Also See La Mirada) Glendale, CA 91204 SAN BERNARDINO CO. Richard Smith Bravo Tax & Financial Services, Inc. (818)-553-1815 Office NORTHRIDGE WEST 3511 Camino Del Rio South, Suite 102 Flavio R. Bravo Email: contact@chimayanservices.com New Era Tax & Accounting LOMA LINDA CHULA VISTA Warren D. Bravo, Leopoldo D. Bravo Tax & Financial, Inc. San Diego CA 92108 Enzo Paredes Tax & More Inc. (619) 283-8055 Office 517 N. Main Street, Suite 300 GLENDALE 8363 Reseda Blvd., Suite 203B Mike Chia Oscar A. Almada S anta Ana, CA 92701 Carmen K. Aceves Email: Realtaxes@aol.com My Accounting Center, Inc. Northridge, CA 91324 Choo Chia (714) 571-0178 Office Oganes “Jay” Chimayan (818) 435-2321 Office 25655 Redlands Boulevard, Suite D 2535 Windward Way www.bravotaxandfinancialservices.com Chula Vista, CA. 91914 SAN DIEGO 460 S. Central Avenue Email: newerataxaccounting@gmail.com Loma Linda, CA 92354 (619) 422-1044 Office Aalpha Oomega Enterprizes, Inc. Glendale, CA 91204 www.newerataxaccounting.com (909) 478 1919 Office Email: oscar@taxnfinancial.biz KimR. Luna-Miller (818) 500-0714 Office 3320 Kemper Street, Suite 202 Email: contact@myaccountingcenter.com PANORAMA CITY San Diego, CA 92110 LOS ANGELES COUNTY MTV Tax Services, Inc. CHULA VISTA Mercado Tax & Business Service (619) 222-7551 Office GLENDORA Ma. Teresita Viray Email: aalpha.oomega@sbcglobal.net COVINA Michelle Mercado 1 Tax Pro, Inc. Garnett and Garnett Tax Service 14650 Roscoe Blvd, Suite 5 44 Third Avenue, Suite C www.aalphaoomega.com Jacqueline E. Ahlen, Ph.D., EA Panorama City ,CA 91402 Tony Nevarez Chula Vista, CA 91910 1393 N. Citrus Avenue 1148 E. Route 66 (818) 294-0058 Office TAXSMART AMERICA SOUTHERN CALIFORNIA (619) 427-6380 Phone SAN DIEGO Glendora, CA 91740 Email : mariatviray@yahoo.com Regional Offices TaxSmart America of San Diego Covina, CA 91722 (619) 427-6387 Fax (626) 332-5900 Office (626) 914-1622 Office Email: mercadotax@gmail.com Daniel Love (626) 375-4733 Cell WHITTIER San Diego 4686 Mercury Street, Suite B Email: info@1taxpro.com TaxSmart America® Corporate www.1taxpro.com Beachcomber Tax and Planning LA MESA San Diego CA 92111 HAWAIIAN GARDENS Jaime Aguayo James Harnsberger, CEO 1-800-TAX-LAWS (858) 614-1831 Office Farfan Tax Consultants 6713 Bright Avenue Susan Harnsberger, Sr. V.P. Email: info@tsasd.com DOWNEY R. Patrick Michael, EA TAX-411 Frank D. Farfan Whittier, CA 90601 8825 Aero Drive, Ste. 103 7800 University Avenue, Suite A2 www.tsasd.com 21528 Norwalk Blvd., (562) 696-5778 Office San Diego, CA 92123 Diane Jara La Mesa, CA 91941 11455 Paramount Blvd., Suite A Hawaiian Gardens, CA 90716 Email: beachcombertax@yahoo.com (858) 277-0775 (619) 589-8680 Office SAN MARCOS (562) 865-8868 Office Paulino Olguin Income Tax Service Downey, CA 90241 (619) 698-8500 Fax (562) 869-4000 Office (562) 865-8583 Fax WOODLAND HILLS Email: pat@1-800taxlaws.com Paulino Olguin Email: farfan@earthlink.net SCG Financial Services, APC Antonia Olguin (562) 869-4122 Fax Los Angeles Email: Diane@Tax-411.com Stephen C. Gilbert 1551 W. Mission Road, Suite D LA MIRADA (Also See Santa Ana) 6303 Owensmouth Avenue, 10th Floor TaxSmart America® LA OCEANSIDE www.tax-411.com San Marcos, CA 92069 Bravo Tax & Financial Services, Inc. Woodland Hills, CA 91367 James Harnsberger, CEO Jes Taxes Kasey Ortiz (760) 471-8774 Office Warren D. Bravo (818) 936-3533 Office Susan Harnsberger, Sr. V.P. 909 S. Coast Blvd., Suite A Email: olgimmtax@hotmail.com Flavio R. Bravo, Leopoldo D. Bravo (818) 936-3065 Fax 14111 Freeway Drive, Ste. 411 Oceanside, CA 92054 14242 E. Imperial Hwy Email: SCGFS@Earthlink.net Santa Fe Springs, CA 90670 (760) 529-9825 Office La Mirada, CA 90638 (760) 529-9837 Fax (562) 777-8213 Office Email: jestaxes@yahoo.com www.bravotaxandfinancialservices.com TAX PLANNING | BUSINESS SUPPORT | TAX SERVICES | AMENDED RETURNS | BUSINESS ENTITY REFUND RECOVERY | BOOKKEEPING | PAYROLL | AUDIT PROTECTION www.tsabusinesscenters.com