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America's economy continues to sputter. But stocks are picking up steam and flirting with four-year highs. We're even seeing new "dot-coms" hitting the market. Last May, the social networking site LinkedIn went public at $45 per share, then leaped to $94.25 in its first day of trading. Internet coupon vendor Groupon opened in November at $20 per share, then jumped 31% on its first day of trading. And earlier this month, Facebook filed registration papers with the Securities and Exchange Commission for what may be the hottest IPO since Google.

Companies typically go public to raise money to expand. But Facebook doesn't really need cash from an IPO. The company made nearly $4 billion in advertising revenue in 2011. So why go public?

Well, companies also go public to let founders and early investors cash out. Mark Zuckerberg, Facebook's 27-year-old founder, is already a "paper" billionaire, ranked #14 on the Forbes 400 list of richest Americans. (Not many entreprenuers find themselves richer than Scrooge McDuck while still at an age that they watch Scrooge McDuck.) But Facebook's IPO will give Zuckerberg and fellow early investors liquidity, converting paper wealth into cash for the houses, charitable gifts, and other spending that new dot-com millionaires historically indulge in.

The IPO will also stick Zuckerberg with a historically large tax bill. (You knew that was coming, right?) In fact, one of the big reasons the company is going public in the first place is give Zuckerberg a way to pay taxes when he exercises options to buy even more stock.

Here's how it works. For tax purposes, the value of most stock options is treated as compensation and fixed the day you exercise them -- whether you actually sell them or not. Let's say you pay $5 to exercise a share of your employer's stock, on a day when that stock is worth $25. Your company gets a deduction for that $20 per share, even though there's no cash outlay. That's great for the company. But at the same time, you'll owe immediate tax on $20 of income, even if you hold the stock in hope of future appreciation. (If the stock tanks before you actually sell, you still owe tax on that gain.) That may notbe so great for you!

Zuckerberg currently owns 414 million shares of Facebook. He also has options to buy another 120 million shares for -- get this -- just six cents each. Zuckerberg has announced plans to exercise those options and sell enough shares to cover his taxes. We don't know yet what Facebook shares will trade for. However, private-market trades have valued shares at $40 each. If Zuckerberg exercises all 120 million options when shares are valued at that price, his taxable gain will be nearly $5 billion. He'll owe 35% to the IRS, plus 10.3% to the state of California, for a total tax bill of over $2 billion. That's right, billion with a "b." Can you imagine signing a return with a billion-dollar tax bill? How about signing a checkfor that much -- payable to the IRS!

The important thing to realize here is that Zuckerberg's tax bill came as no surprise. It's actually the result of careful planning. Remember, Zuckerberg's pain is Facebook's gain. The strategy will probably give Facebook enough deductions to wipe out the entire tax on its 2011 profit, plus refunds from 2009 and 2010, plus even more to carry forward.

Think about that the next time you click the "Like" button on your computer. And remember, we're here to bring the same sort of smart tax planning to yourbusiness.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Higher Taxes on the Way

That's what the future holds if Congress continues on its current course.

If Congress can't agree on a way to extend the payroll tax cut, a relatively simple issue, there's little hope of them coming to gripes with an extension of the Bush tax cuts. That's going to be far more difficult.

But higher taxes won't be the end of the consequences. Those higher taxes are almost sure to put a damper on economic activity. We might be treated to the worst of both worlds--higher taxes and a second recession. While it's still early, recent history does not bode well for a compromise before the end of the year.

Contact us TODAY for your tax plan.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Research Tax Credit

In Bayer Corporation et al. (U.S. District Court, Western Dist. of Pennsylvania) the Court held that the company could not use a sampling method to substantiate expenses qualifying for the research credit. The Court noted that Reg. Sec. 1.41-4 requires that a taxpayer must retain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Real Estate Taxes vs. Assessments for Improvements

You can't deduct assessments made by a government for improvements to your property.

For example, the paving of a dirt road to your home or business. You can add them to the basis of your property if they increase the value. On the other hand, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

The Super Bowl and Tax Planning

A decade or more ago, the Super Bowl had become a bit of a joke. Fans looked forward to watching the commercials, sure. But the actual game itself had become a dreary series of lopsided blowouts. Super Bowl XXIV was perhaps the worst offender, with the San Francisco 49ers pounding the Denver Broncos, 55-10, in a game that wasn't nearly as close as that score suggested!

More recently, the game has been more competitive and more entertaining. The NFC champion New York Giants reached this year's "big dance" by defeating the 49ers, 20-17, in a game that came down to the final play -- in a Cinderella playoff run that followed a middling regular season. The AFC champion New England Patriots made it by beating the Baltimore Ravens, 23-20, in a game that came down to the final play. That set up Sunday's contest, when the Giants defeated the Patriots, 21-17, in yet another game that came down to the final play.

Sunday's game proved the truth of the old cliche that "offense sells tickets, but defense wins games." Patriots coach Bill Belichick gambled by actually letting Giants running back Ahmad Bradshaw score in the final minute in hopes of keeping precious time on the clock. That gamble succeeded in giving quarterback Tom Brady 57 seconds to engineer a last-minute drive -- but ultimately failed when Brady's desperate final heave to tight end Rob Gronkowski fell harmlessly to the ground.

That same cliche about defense winning games applies to your finances as well -- especially when it comes to tax planning. If you want to put real money in your pocket, you've got two choices:

• Financial offense means making more money. (As Charlie Sheen would say, "duh.") But that's not always easy, especially in a tough economy like today's. You can invest all sorts of time efforts into growing your business or your income, only to see them sail wide right like a missed field goal.
• Financial defense means spending less money. That's often easier than making more. And when it comes to spending less, it makes sense to focus on the big expenses. For most affluent Americans, that means taxes, rushing you like the Giants' backfield. Maybe you can save 15% or more on car insurance by switching to GEICO. But in the long run, how much can that really do for you?

Financial defense is important enough that some financial moves which look like offense are actually defense in disguise. Wall Street is buzzing about Facebook's upcoming initial public offering, wondering if the company can really be worth $100 billion. But the company is raising "only" $10 billion in cash. And Facebook doesn't need the money. They're "engineering a liquidity event," in large part so founder Mark Zuckerberg can pay his own taxes! (We'll talk more about this as we get closer to the actual offering.)

It's easy to think of us as just "tax people" and focus on the forms we file for that April 15 deadline (April 17 this year, for you procrastinators). But focusing on just compliance misses the value you get from proactive taxplanning, and misses the total value we offer as your financial "defensive coordinator." So call us when you're ready to "call an audible" and play real financial defense. We promise not to let the IRS just walk the ball across the goal line!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

What to Do If You Are Missing a W-2 or an Inaccurate W-2

Make sure you have all the needed documents, including all your Forms W-2, before you file your 2011 tax return. You should receive an IRS Form W-2, Wage and Tax Statement, from each of your employers. Employers have until Jan. 31, 2012 to issue your 2011 Form W-2 earnings statement.

If you haven’t received your W-2, follow these four steps:

1. Contact your employer  If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.

2. Contact the IRS  If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, Social Security number, phone number and have the following information:

•  Employer’s name, address and phone number

•  Dates of employment

•  An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2011. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return  You still must file your tax return or request an extension to file by April 17, 2012, even if you do not receive your Form W-2. If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X  On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Deducting Business Losses

Even if you own 100% of a business, be it a sole proprietorship, LLC, partnership, or S corporation, you can't deduct losses from the entity unless you can show you materially participate in the business.

That is, you're involved in the activity in managing or working in the business. Showing up once a week to review the books for two hours won't qualify as material participation; participation must be substantial.

There are several ways to show material participation, but most business owners will pass the test using the more than 500 hour rule. In Alfred A. Iversen et ux. (T.C. Memo. 2012-19) the taxpayer was the founder of a large manufacturer of surgical and medical equipment in Minnesota. He also owned a working cattle ranch with 14,000 owned and 28,000 leased acres operated as an LLC. The ranch generated losses and the taxpayer claimed he materially participated in the operation. The IRS claimed the taxpayer did not, and disallowed the losses. The taxpayers lived in Minnesota and flew to the ranch either alone or with guests.

The Court noted participation in an activity may be shown by any reasonable means, including calendars, appointment books, or narrative summaries identifying work performed and the approximate number of hours spent performing the work. Contemporaneous daily time reports, logs, or similar documents are not required if other reasonable means exist of establishing a taxpayer's participation.

Neither of the taxpayers maintained a log, diary, notes or other record of the work performed. The taxpayers claimed they spent 2 to 3 hours a day on telephone calls, emails, and fax communications with the ranch manager. Telephone records introduced did not support that claim. Airplane logs indicated few trips during one of the years at issue and the trips were only for a day. Moreover, a family member went along.

The Court also noted that the fact that the airplane flights were paid for by the taxpayer's corporation, not the ranch, indicated the time spent at the ranch often and primarily related to the affairs of the corporation. In addition, the presence at the ranch of a full-time paid ranch manager for most of 2005 and 2006 disqualifies much of the taxpayer's time working on ranch activities from counting under the facts and circumstances test (an alternate test for material participation). The Court concluded the taxpayer failed to show he materially participated in the activity. 

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Deducting Un-reimbursed Employee Expenses

You can deduct on your personal return business expenses that you're not reimbursed for by your employer or by a partnership in which you're a partner. But that's only true if you would not have been reimbursed because of a policy by the business. 

In Peter A. McLauchlan (T.C. Memo. 2011-289) the taxpayer paid various expenses (e.g., advertising, home office, automobile, travel, meals, entertainment, cell phone, professional organizations, continuing legal education, State bar membership, supplies, interest, banking fees and legal support services) in connection with work at the partnership. The partnership reimbursed him for over $60,000 of expenses for each of 2005 and 2006. The taxpayer contended, however, that he paid over $100,000 of partnership expenses in both 2005 and 2006 for which he was not reimbursed.

He categorized and claimed these expenses on Schedules C. Partners in the firm were required, under the partnership agreement, to pay expenses for business meals, auto, travel, entertainment, conventions, and continuing education, collectively called indirect expenses. Indirect expenses were reimbursable under the partnership agreement if approved by a managing partner. The firm had a written reimbursement policy that specifically provided for reimbursement of certain indirect expenses include reasonable travel expenses related to client maintenance and development. As a matter of routine practice, the firm would reimburse indirect expenses that were not provided for in the written reimbursement policy. The firm did not have a limit on the amount for which a partner could be reimbursed. Reasonableness, rather, was the overarching standard for approving reimbursement of indirect expenses. The firm would deem an expense unreasonable if it was personal, excessive or not in the firm's best interests.

The Court noted that the firm routinely reimbursed most of the expenses the taxpayer claimed. Moreover, the firm had no set limit on the amount of expenses for which it would reimburse a partner. The Court found the taxpayer was not required under the partnership agreement or by routine practice to pay such expenses. In addition, the taxpayer failed to point to any specific expense for which the firm denied him reimbursement. The Court disallowed the expenses.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Vendor Co-Op Funds

Many manufacturers and wholesalers provide funds to their distributors and retailers for advertising, demo equipment, point-of-purchase displays, etc. Generally, it's free money. There may be strings attached such as how the money can be used, that products from competing suppliers can't be advertised on the same page, etc., but for the most part the restrictions aren't onerous.

Make sure you know the rules. The amount you receive is often based on your volume with the supplier over a 3, 6, or 12-month period. You usually have a certain amount of time to use the money and file a claim. Make sure someone is in charge of the program so you don't lose out.

Finally, keep in mind that any amounts you receive constitute taxable income. But, of course, that will be offset by the cost of the ads, etc. If you're a manufacturer or supplier, you might consider instituting such a program for dealers.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.