Year End Business Tax Tune-Up

As the year draws to a close, it’s important that we review your business’s income for 2013 to project the estimated tax liability for the year and see if there are steps we can take to minimize that liability.

There are a number of tax breaks that are set to expire this year unless Congress works together to extend these tax breaks, which seems unlikely at this time. However, the focus should not be entirely on tax savings, but rather on whether or not an action otherwise makes good financial sense for your business.

In addition, new rules have come out with respect to the acquisition and disposition of business property that are quite favorable to businesses, but may require some revisions to your fixed asset policies. Depending on your current policies, it may be possible to recoup refunds by filing amended returns for prior years.

Section 179 Expensing Deduction

One of the biggest deductions available to all businesses, and one that will be dramatically reduced in 2014, is the Section 179 expensing election. This is the last year for expensing up to $500,000 of Section 179 property. It is also the last year in which the maximum amount that may be expensed is reduced where the taxpayer places into service more than $2 million of Section 179 property.

For tax years beginning after 2013, the maximum amount that may be expensed drops to $25,000, and this amount is reduced where the taxpayer place into service more than $200,000 of Section 179 property. Thus, if you are anticipating any large purchases in the next several months, it may be advantageous to accelerate such purchases into the current year to take advantage of this deduction. (Note: despite the higher overall expensing limit in 2013, a $25,000 limitation applies to purchases of sport utility vehicles (SUVs) and certain other vehicles.)

Bonus Depreciation

Another deduction that generally expires at the end of 2013 is the bonus depreciation deduction. Under the bonus depreciation provisions, taxpayers can elect to claim a special additional depreciation allowance to recover part of the cost of certain qualified property placed in service during the tax year. The allowance applies only for the first year the property is placed in service and is an additional deduction taken after any Code Sec. 179 deduction and before calculating regular depreciation for the year. There is no cap on the total bonus depreciation that may be deducted during the year.

Although the bonus depreciation deduction is generally scheduled to disappear after 2013, it will continue through 2014 for certain long-lived property and transportation property.

Shorter Recovery Period for Certain Leasehold Improvements, Restaurant Buildings and Improvements, and Qualified Retail Improvements Ends

Special provisions in the law allow qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property to be depreciated over a 15-year recovery period rather than the normal 39-year recovery period used for nonresidential real property. Those provisions expire at the end of 2013. Thus, if your business is contemplating any such purchases or improvements, placing such buildings or improvements in service in 2013 would significantly increase your depreciation deductions.

Special S Corporation Basis Rules for Charitable Contributions of Property

For 2013, the decrease in an S shareholder’s stock basis by reason of a charitable contribution of property is equal to the shareholder's pro rata share of the adjusted basis of such property. This favorable rule expires for contributions made in tax years beginning after 2013. As a result, for contributions made in tax years beginning after 2013, the amount of the basis reduction is the shareholder's pro rata share of the fair market value of the contributed property.

Expiration of Reduced Recognition Period for S Corporation Built-in Gains

An S corporation may owe the tax if it has net recognized built-in gain during the applicable recognition period. Generally, the applicable recognition period is 10 years. However, for purposes of determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period was reduced from 10 to five years. Thus, no tax is imposed on the net recognized built-in gain of an S corporation if the fifth tax year in the recognition period preceded 2012 or 2013. This favorable rule applies separately with respect to any C corporation asset transferred in a carryover basis transaction to the S corporation.

After 2013, the recognition period returns to 10 years. Thus, to escape gain recognition on property with built-in gain, you will have to hold the property for more than 10 years.

New Rules Apply to Property Purchased by Businesses

The IRS recently issued new rules that affect all businesses that acquire, produce, or improve tangible property. Thus, few businesses are unaffected by these rules. While these new rules apply to tax years beginning after 2013, businesses can adopt them for certain earlier years. Because these rules are quite taxpayer-friendly, retroactive adoption of these rules could result in significant refunds to your business. A new de minimis rule allows items to be expensed without question, up to a certain amount. However, taxpayers must have, at a minimum, a written capitalization policy that they follow for book purposes in order to take advantage of this rule. If this is something your business does not currently have, I can help you establish a policy. However, we need to get such a policy in place before the beginning of your next tax year. The new rules also contain several taxpayer-friendly elections that we need to discuss to see if they would be a good fit with your business.

New Rules Apply to Dispositions of Business Property

The IRS also recently issued rules dealing with dispositions of property, which apply to tax years beginning after 2013. Like the rules discussed above, these rules also affect almost all taxpayers and can be retroactively adopted. One benefit of these rules is that taxpayers can now claim a loss upon the disposition of a structural component (or a portion thereof) of a building or upon the disposition of a component (or a portion thereof) of any other asset without identifying the component as an asset before the disposition event. However, to the extent your business is currently using procedures that are inconsistent with these new rules, we will need to make some changes to your fixed asset policy, revise the procedures for property dispositions, and file for a change in accounting method.

Gain or Loss on Dispositions of Partnership and S Corporation Interests Are Subject to the Net Investment Income Tax

A new 3.8 percent tax on net investment income above a threshold amount took effect in 2013. The threshold amount is $200,000 ($250,000 if married filing jointly or $125,000 for married filing separately). Income taken into consideration in calculating net investment income includes most rental income and net gain attributable to the disposition of property other than property held in a trade or business. Thus, this generally covers sales of interests in a partnership or S corporation. If you had such dispositions this year, or expect to, we need to determine the impact it will have on your tax liability to ensure that your tax withholdings and estimated tax payments will cover the resulting additional tax liability.

Potential Increases in Tax Rate and Tax on Dividend Distributions to Business Owners

The tax rates in effect before 2013 for dividend distributions to business owners were generally made permanent by the American Taxpayer Relief Act of 2012, except that, beginning in 2013, a new 20-percent rate applies to amounts that would otherwise be taxed at a 39.6-percent rate (i.e., the highest individual tax rate). Thus, tax rates of 0, 15, and 20 percent apply to dividend income, depending on your tax bracket. Dividend distributions may also be subject to the 3.8 percent net investment income tax if certain thresholds are exceeded.

Work Opportunity Credit

For 2013, a business is eligible for a 40 percent credit for qualified first-year wages paid or incurred during the tax year to individuals who are members of a targeted group of employees. This credit is not available after 2013.

Generally, this credit is equal to 40 percent of the qualified first-year wages of members of a targeted group of employees who worked 400 or more hours during the year for the employer. The credit is reduced to 25 percent of the qualified first-year wages for employees who worked between 120 and 400 hours for the employer. No credit is available for the qualified first-year wages for employees who worked less than 120 hours.

Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act (PPACA) includes several provisions that may affect you as an employer, including the so-called shared responsibility provisions, also known as the “employer mandate.” Originally, this employer mandate was suppose to take effect on January 1, 2014. However, this has been delayed and the shared responsibility provisions will not take effect until January 1, 2015. Under the employer mandate, a penalty is imposed on certain large employers that do not offer health insurance coverage, offer health insurance coverage that is unaffordable, or offer health insurance coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60 percent. The penalty is assessed for any month in which a full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee.

For these purposes, a large employer is an employer (including a predecessor employer) that employed an average of at least 50 full-time employees during the preceding calendar year. An employer is not treated as employing more than 50 full-time employees if the employer's workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year and the employees that cause the employer's workforce to exceed 50 full-time employees are seasonal workers. A seasonal worker is a worker who performs labor or services on a seasonal basis, including retail workers employed exclusively during the holiday season and workers whose employment is, ordinarily, the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year.

A qualified small employer may be eligible for a credit for contributions to purchase health insurance for its employees. The amount of the credit increases from 35 percent (25 percent for tax-exempt organizations) of eligible premium payments in 2013 to 50 percent (35 percent for tax-exempt organizations) in 2014. The tax credit is subject to a reduction if you have more than 10 full-time employees or if average annual full-time employee wages exceed $25,000.

Finally, employers must report the cost of employer-sponsored group health plan coverage on employee W-2s.

Schedule your appointment now so I can estimate your business’s tax liability for the year, review policies surrounding the acquisition and disposition of fixed assets, discuss options for reducing your business’s taxes for 2013, and to address any concerns you may have.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace or Mind.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Click here to schedule an with Kenneth Hoffman.

If you found this article helpful, I invite you to leave a comment and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. 

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Voting With Your Feet

It's safe to say that people don't like paying taxes. America was born out of a tax rebellion, and Americans have resisted every variety of tax ever since. Some of them even go as far as renouncing their American citizenship to avoid the tax man.

Expatriation sounds like an awfully big step just to pay less tax. But more and more Americans are doing it. In 1994, Campbell's Soup heir John T. "Ippy" Dorrance III saw greener pastures in Ireland, trading what was then a 55% estate tax for Ireland's 2%. And just last year, Facebook founder Eduardo Saverin "defriended" Uncle Sam and the IRS after moving to Singapore, potentially saving hundreds of millions in tax.

Americans who give up their citizenship pony up an "exit tax" on the value of their assets when they leave, essentially paying as if they had sold everything the day before surrendering their passport. But that doesn't stop the determined from leaving — in the second quarter of this year, 1,131 Americans bid bon voyage to their citizenship.

Americans aren't the only ones who say "enough" to their home countries' taxes. Sir Richard Branson, the British billionaire and founder of Virgin Group, revealed this month that he has sold his 200-acre Oxfordshire estate and moved full-time to Necker Island, his retreat in the British Virgin Islands. Now Britain's Sunday Times has accused him of doing it to save taxes.

Branson responds that "I have not left Britain for tax reasons, but for my love of the beautiful British Virgin Islands and in particular Necker Island . . . . We feel it gives me and my wife Joan the best chance to live another productive few decades. We can also look after our health." He adds that "I have been very fortunate to accumulate so much wealth in my career, more than I need in my lifetime, and would not live somewhere I don't want to for tax reasons."

Necker sounds like a pleasant-enough exile. The Balinese-inspired "Great House" boasts nine bedrooms, including a 1,500-square-foot master suite. There are six one-bedroom "Bali houses" for guests scattered about the grounds. And there are two swimming pools and two tennis courts. The island is even home to an endangered species, the Virgin Islands dwarf gecko. When Branson isn't in residence kitesurfing or playing tennis, you can rent the whole 74 acres for the bargain rate of just £275,800, or roughly $450,000, per week. Famous guests have included Princess Diana and actress Kate Winslet, who was credited with saving Branson's 90-year-old mother from a fire in 2011.

But Branson is clearly no dummy. (Forbes magazine ranks him the sixth-richest man in Britain, with an estimated $4.6 billion fortune.) It can't have escaped his notice that the top income tax rate in the islands is 45 percentage points lower than it is in Britain. If you're thinking "wait a minute, the top rate in Britain is 45%, so that means he's paying nothing in the islands," you're right.

What do you think? Does Branson just prefer gentle Caribbean trade winds over dreary English winters? Or is the sunny tax climate the real lure?

Fortunately, there's an easier way for you to pay less tax — even if you can't afford Necker Island's tropical paradise. Call us for a plan. We'll show you if the new Obamacare and "fiscal cliff" taxes threaten your wallet, and show you how to protect yourself without standing in line for a new passport.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace or Mind.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Click here to schedule an with Kenneth Hoffman.

If you found this article helpful, I invite you to leave a comment and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. 

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Story Problems for Grownups

Back in grade school, you did all sorts of math problems. You started out with drills to learn your basic addition, subtraction, and multiplication. You learned long division (ugh). You moved on to fractions. And all along the way, as part of your teachers' efforts to convince you that it all matters here in the "real world," you did "story problems." Remember those?

Well, now you're all grown up, so here's a grownup story problem to ponder:

You're an IRS auditor, toiling away to protect the government's revenue base. Then you decide to leave "the dark side" and start your own practice. Things start off great, but you want more. So you mock up some fake tax returns, tell some clients they owe $11 million, and have them make payments into a bogus "trust account." Then you take the money for yourself, make some home improvements, buy a beach house in Mexico, pay to use a private plane, pay $2 million on your personal credit cards and loans, and make some investments. It's good to be rich, isn't it? But now there's a teensy-weensy little problem. The IRS is on to you, your clients are hopping mad, and two of them are scheduled to testify against you! What do you do?

Well, if you're Steven Martinez of Ramona, California, you send your limousine driver (!) to offer a hit man $100,000 to take out the clients. But you don't just whisper some names in his ear and slink back home. Oh, no. Because you're an accountant, you're thorough. Right? So you surveil the victims and watch them to document their habits. You give the hit man packets with photos of the victims and their homes and detailed instructions and information about them. (How else do you think an accountant would go about whacking his clients?)

Unfortunately, Martinez should have followed his hit man, too. Then Martinez would have seen him scurrying straight to the FBI. (Oops.) It's tough to deny the charges when the Feds have you on video, "cool and calculating," telling your killer to buy two guns — and a silencer! (Try explaining that when it hits Youtube and goes viral!)

Last year, Martinez pled guilty to charges including murder-for-hire, witness tampering involving attempted murder, solicitation of a crime of violence, mail fraud, filing false returns, Social Security fraud, aggravated identity theft, and money laundering. (You've got to wonder, if he had jaywalked to meet with the hit man, would they have charged him with that, too?) On April 12, 2013, District Court Judge William Q. Hayes pretty much threw the book at him, sentencing him to 286 months in prison (plus five years supervised release if he ever makes it out) and ordering him to pay more than $14 million in restitution. Let's see what sort of "home improvements" Martinez can make with the 11 cents/hour he makes stamping license plates!

As tax professionals ourselves, we're appalled at how Steven Martinez betrayed his clients. We're proud to affirm our commitment to helping you save tax within the bounds of the law — because we know just how many legitimate opportunities there are to save. We're pleased to offer you the plan that helps you save taxes and sleep soundly at night. So call us for that plan!

Click here to schedule an with Kenneth Hoffman. 

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace or Mind.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Click here to schedule an with Kenneth Hoffman. 

If you found this article helpful, I invite you to leave a comment and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. 

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

2013 Year End Tax Planning

Year-end tax planning could be especially productive this year because timely action could nail down a host of tax breaks that won't be around next year unless Congress acts to extend them, which, at the present time, looks doubtful. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70-— or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won't be around next year unless Congress acts include: 50% bonus first-year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.

High-income-earners have other factors to keep in mind when mapping out year-end plans. For the first time, they have to take into account the 3.8% tax surtax on unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than unearned income, and others should consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimate tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, consider an individual who earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple's income won't be high enough to actually cause the tax to be owed

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

• Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2013.
• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
• Postpone income until 2014 and accelerate deductions into 2013 to lower your 2013 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2013 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2013. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year or where lower income in 2014 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2013.
• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2014.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2013 if doing so won't create an alternative minimum tax (AMT) problem.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2013 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2013. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2013, but the withheld tax will be applied pro rata over the full 2013 tax year to reduce previous underpayments of estimated tax.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2013, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
• Accelerate big ticket purchases into 2013 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won't be available after 2013.
• You may be able to save taxes this year and next by applying a bunching strategy to miscellaneous itemized deductions, medical expenses and other itemized deductions.
• If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2014.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2013. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period beginning in 2013 or in the first 3 months of 2014.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2014, and (2) held for more than five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.
• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2013, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2014 the amount required for 2013 plus the amount required for 2014. Think twice before delaying 2013 distributions to 2014 bunching income into 2014 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2014 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2013, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2014, the dollar limit will drop to $25,000, the beginning-of-phaseout amount will drop to $200,000, and expensing won't be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
• Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won't be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
• Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2013. Under current law, the WOTC won't be available for workers hired after this year.
• Make qualified research expenses before the end of 2013 to claim a research credit, which won't be available for post-2013 expenditures unless Congress extends the credit.
• If you are self-employed and haven't done so yet, set up a self-employed retirement plan.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2014, and disposing of a passive activity to allow you to deduct suspended losses.
• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace or Mind.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a comment and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. 

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

A Sweeter Tax Than Most

When you hear the word "tax," you probably think of something the IRS takes out of your paycheck. Or you might think of something they take out of an inheritance. But taxes affect virtually every financial transaction you make. Take, for example, that simple jar of honey lurking on the shelf in your refrigerator.

Americans eat more honey than anyone else in the world — about 400 million pounds of it a year. Most of it goes towards sweetening foods like cereals, cookies, and breads. Even whiskey producers are adding honey to their blends to attract younger drinkers. (The Scotch Whiskey Association just stung Dewars for labeling their new "Highlander Honey" as "scotch" rather than "spirit drink.")

Where does all that honey come from? Well, China is the world's largest honey exporter. But Chinese beekeepers sometimes use pesticides banned here in the U.S. They sometimes dry their honey by machine, which lets the bees produce more, but leaves the honey with a foul taste similar to sauerkraut. Worst of all, Chinese producers sell their honey at prices as low as half of what our domestic producers charge.

Back in 2001, the U.S. government slapped Chinese honey with punitive tariffs, currently set at $2.63/kilogram, to protect American producers. Those taxes can triple the cost of Chinese honey. So today, about 40% of our honey comes from here in the U.S., with the rest coming from Argentina, Brazil, Canada, and other countries.

What's a poor Chinese beekeeper to do? Enter the "honey launderers." Chinese producers send their honey to nearby countries like Malaysia, Vietnam, India, or Korea, and re-label it as coming from those countries. They add rice sugar, molasses, or fructose syrup to hide any unpleasant tastes or smells. (Ick.) They filter the honey to remove the pollen, which palynologists, or pollen specialists, can use like a natural "fingerprint" to track down a honey's origin. And they pocket the savings they create by evading the tax.

How much tax does the illicit honey avoid? A lot. Back in 2008, Immigration and Customs Enforcement officials charged 14 people with a globe-trotting scheme to evade $80 million in payments. And in February of this year, officials busted two of the nation's biggest suppliers for evading $180 million more. In a scene reminiscent of Donnie Brasco, officials launched "Operation Honeygate" and planted an agent "on the inside" for a year. The agent served as one supplier's director of procurement, and the investigation led to five individual guilty pleas, two deferred prosecutions, and $3 million in fines.

What's the lesson? Taxes are baked into the price of everything you buy, whether they're even paid or not!

There's not much we can do to help you avoid hidden tariffs on baked goods. Fortunately, we can help with the taxes that really count — taxes on your income, your payroll, and even your estate. If you're busy as a bee, you deserve to keep everything the law allows. So call us for the plan you need — and remember, we're here for everyone else in your hive!

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace of Mind to his clients.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a comment and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

When 20 Is Less Than 20.1 Million Dollars

Labor Day has come and gone, and, while fall isn't "officially" here, it's time to put away those summer whites. Never mind that the mercury is still hitting 100 degrees in parts of the country; forget about those pennant races still heating up in the AL West and NL Central. This weekend, the National Football League kicks off regular season play! This week's season opener is just the first step on the road to Super Bowl XLVII, to be played outdoors onFebruary 2, 2014, at the Meadowlands in New Jersey. (If you look hard enough on ESPN, you can find pre-game coverage starting early next week.)

Earlier this year, Baltimore quarterback Joe Flacco won MVP honors in Super Bowl XLVII and signed a new six-year contract worth $120.6 million. It makes him the highest-paid player in the game, just ahead of New Orleans quarterback Drew Brees. But in a surprise twist that NFL statisticians would love, Brees will actually take home more money than Flacco.

How can that be? Taxes, of course — why else would we be talking about it?

Here's how it all works. Flacco plays his home games at M&T Bank Stadium in Baltimore, with his new contract paying him $20.1 million per year. According to Americans for Tax Reform, the IRS will intercept $8.72 million of that paycheck. Maryland and Baltimore County will pick off $1.72 million more, for a total combined tax bill of $10.44 million, or 51.98%. Flacco will also pay a "jock tax" for several of his away games — for example, when he plays the Cincinnati Bengals on November 10, he'll owe Cincinnati's 2.1% earnings tax on his pay for that game. And he'll pay even more tax on his bonuses, endorsements, and other income. It would be hard to blame Flacco for thinking the tax man roughs him up worse than any team's defensive line!

Now, Flacco could take home far more by playing for a team in one of the nine states that don't levy income taxes. The Jacksonville Jaguars (2-14 for 2012) would love a Super Bowl MVP at their helm. So would the 8-8 Dallas Cowboys. Neither Florida nor Texas tackle players with state or local income tax, which means Flacco would have taken home that $1.72 million sack.

Meanwhile, Drew Brees plays his home games at the New Orleans Superdome, with a contract paying him "only" $20 million per year. That's $100,000 less than Flacco makes in Baltimore. Brees pays the same 39.6% income tax and 3.8% Medicare tax as Flacco. But Louisiana's top tax rate is just 6% (on income over $50,000), compared to Maryland's 6.25% (on income over $1 million). That difference might not seem like a lot. But bring out the chains, and it means Brees actually keeps $470,000 more per year than Flacco.

As for the rest of us, this week doesn't just mark the start of football season. It also marks the start of tax-planning season! No NFL team would take the field without a game plan. So why would you think you can beat the IRS without a plan? If you don't have one, the clock is counting down toDecember 31, with no overtime. And remember, we're here for your teammates, too!

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability. 

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Putting for Dough

August is almost here, and golf season is in full swing. Duffers are filling the air with curses as colorful as their outfits. Tiger Woods is taking a break from romancing pancake-house waitresses to work on his game. And Phil Mickelson is the latest man of the hour. Earlier this month, he took a one-hole playoff to win the Scottish Open at Inverness. Just one week later, he posted a 3-under 281 to take the British Open at Muirfield. Mickelson's £1,445,000 in winnings translates into almost 2.2 million in U.S. dollars.

So, he's got that going for him, which is nice. But how much will he actually get to keep?

Mickelson has already told the world how he feels about paying taxes. Back in January, he said he might leave his home state of California because of recent hikes in federal and state taxes. These include 39.6% for Uncle Sam (up from 36%), 3.8% for Medicare (up from 2.9%), and 12.3% for the Golden State (up from 9.3%). "If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate's 62, 63 percent," he was quoted as saying in Yahoo Sports. "So I've got to make some decisions on what I'm going to do." Mickelson's remarks landed him some deep rough, and he wound up comparing them to a botched drive that cost him the 2006 U.S. Open.

But Phil's U.S. taxes may look pretty reasonable when you consider what he'll pay on his recent Scottish winnings:

• For starters, he'll pay the United Kingdom a wee bit over 44% on his tournament purses.
• The U.K. will take a divot out of any bonuses he receives for winning those tournaments. Plus they'll take a chip of the bonuses he gets at the end of the year for his overall tour ranking.
• It gets even better from there. The U.K. won't just tax Mickelson on his tournament winnings. It also taxes him on part of his endorsementincome for the two weeks he spent in-country.Forbes estimates he earned $44 million from Callaway, Barclay's, KPMG, Exxon Mobil, Rolex, and others last year, so that extra endorsement tax may leave him wanting a mulligan.
• He'll get a credit against his U.S. tax for everything he pays abroad. But there's no credit for the extra Medicare tax he'll pay. And don't forget, California takes a penalty stroke, too.

All in all, Mickelson will pay about 61% tax on his British earnings. That's after his considerable expenses, including travel, meals, agent fees on endorsement income, and 10% to his caddy.

We realize that keeping $800,000 or so for a couple of weeks' work isn't bad — especially when that "work" involves playing two of the most storied courses in all of golf. Still, Mickelson's story emphasizes that it really is what you keep that counts.

If you're a golfer, you've certainly heard the saying "drive for show, putt for dough." Well, our proactive planning service is the tax equivalent of putting for dough. That's because top-line revenue is impressive — but if your short game isn't up to par, those big drives may not actually matter. If you don't have a plan, call us for help sinking that long putt across the IRS green. And remember, we're here for the rest of your foursome, too!

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability. 

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Top 10 List To Protect Your Tax Savings

The most important steps in maintaining a tax strategy is proper documentation. 

Proper documentation increases the accuracy of the information you provide to your tax advisor.  This helps your tax advisor do more for you because they have good information.   

Proper documentation also provides the support the government requires in the event you are audited. This means protecting your tax savings and avoiding penalties and interest. 

Best of all, when you keep proper documentation, you do a better job of identifying all of your deductions so it's a great way to reduce your taxes. 

How does your documentation rank? 

Here is my Top 10 list of items to document in your tax strategy. 

1. Annual meeting minutes for your business to support activity reported on your business tax return(s) 
2. Accurate bookkeeping that is up-to-date 
3. Receipts for expenses, particularly travel, meals and entertainment 
4. Loan documents between you and your entities for any loans between you and your entities 
5. Agreements to buy or sale assets (such as real estate, equipment, vehicles, etc.) 
6. Agreements between you and your entities (or businesses) for services performed by or for your entity 
7. Agreements between your entities (or businesses) for services performed by one of your businesses for another one of your businesses 
8. Summary of business activities performed in your home office and the percentage of your home used for home your office
9. Mileage logs to support the business use of your vehicle 
10. Activity logs to support "real estate professional" status 

Of course, not all of the above items may apply to you, but for those that do, you definitely want to have that documentation in place. 

And, of course, the above list is not all inclusive, but if you've got this documentation in place, your documentation is well on its way.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability. 

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

You Think You Got Audited?

Getting an audit notice from the IRS isn't anyone's idea of a party. But it's not the end of the world. Usually the auditor just wants to make sure you're entitled to the breaks you've claimed. Did you really spend as much as you reported on meals & entertainment? Did you really spend enough hours managing your rental properties to qualify as a "real estate professional"? If the IRS finds a mistake, they issue a "deficiency notice" and bill you for what you owe. How bad can it really be?

Well, just ask Raymond J. Lane.

Ray Lane is a longtime tech industry veteran. He started his career at IBM, then moved to Electronic Data Systems and Booz Allen Hamilton before becoming Chairman and CEO of Oracle Corporation. More recently, he's been a partner at the venture capital firm of Kleiner Perkins Caufield & Byers, a board member at Fisker Automotive, and non-executive Chairman of Hewlett-Packard.

In 2000, Lane invested $25 million into a partnership, Vanadium Partners Fund LLC, to invest in technology startups. The fund used a strategy called "Partnership Option Portfolio Securities," or POPS, to generate paper losses far in excess of his actual investment. Then he claimed $251 million in losses to offset income he recognized from exercising Oracle stock options.

Since then, the government has taken direct aim at POPS and similar "abusive" strategies, arguing that they lack economic substance. Lane reports that the IRS originally audited him in 2004, then asked him to sign extensions on a statute of limitations every 18 months while they reviewed his file. Last December, they found the partnership to be a sham, with no "legitimate business purpose." In fact, they argued, Lane's $25 million "investment" — which he claimed was for warrants in the LLC — was designed merely to disguise fees paid to tax-shelter promoters and tax professionals. Lane filed an appeal with the Tax Court. Then, on May 6, he announced he had signed an agreement to pay the IRS $100 million!.

For his part, Lane says "the thing is unfortunate." (Really?) He adds that "the amount of taxes I pay are staggering, and this is the only transaction I've been audited on." He claims to have paid between 32% and 38% of his income in net taxes in the past 15 years. Now, while paying the $100 million to the IRS will certainly hurt, it won't put him in the poorhouse. He still owns two homes across the street from each other in pricey Atherton, California, worth a total of $30 million, along with a home in Manhattan Beach worth $20 million, a farm in Oregon worth $4 million, and two properties in Palm Desert, California, worth another $10 million.

But still . . . a $100 million tax bill! Can you imagine signing that check? Or even authorizing that wire transfer?

Here at our firm, we understand that if you ever get an audit notice, you're not going to be happy — even if there's not a hundred million bucks at stake! That's why we stick with tried-and-true strategies to help you pay less. Everything we recommend is court-tested and IRS-approved. So call us to see how you can put some of these strategies to work for yourself!

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability. 

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.  

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Dad and Taxes

Sunday was Father's Day, and if your family is like most, you talked about golf, or fishing, or the latest happenings on Duck Dynasty. You probably didn't talk about taxes, just because Dad doesn't like paying them! So here are some "father and family" themed tax quotes to put a smile on your face today:

"Every year, the night before he paid his taxes, my father had a ritual of watching the news. We figured it made him feel better to know that others were suffering."
Narrator, The Wonder Years television series

"My father has a great expression: 'The capital-gains tax has created more millionaires than any other government policy.' The capital-gains tax tends to make investors hold longer. That is almost always the right decision."
Chris Davis

"Our forefathers made one mistake. What they should have fought for was representation without taxation."
Fletcher Knebel

"Throughout the first half of our history, Americans hated tax with passion, something they inherited from the founding fathers."
Charles Adams

"Giving money and power to government is like giving whiskey and car keys to teenage boys."
P.J. O'Rourke

"The trouble with being a breadwinner nowadays is that the government is in for such a big slice."
Mary McCoy

"A well-timed death is the acme of good tax planning, better even than a well-timed marriage."
Donald C. Alexander (former IRS Commissioner under Rixhard M. Nixon)

"If you are truly serious about preparing your child for the future, don't teach him to subtract — teach him to deduct."
Fran Lebowitz

If Dad wants to pay less tax, he needs the same thing you do — a proactive tax plan! Summer may not seem like the obvious time to do it, but now is when we have the most time available to help you pay less. So have Dad give us a call — he'll appreciate paying less tax a lot more than he'll appreciate another tie!

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.