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Evernote

We usually discuss tax or accounting topics with this blog, so this one is a slight departure.  It’s to be expected that an accounting firm would be a heavy user of technology, so I’d like to discuss one piece of software that we’ve become big fans of recently.

If you’re not familiar with it already, Evernote is a web-based note taking application.  That simple explanation doesn’t quite do it justice, though.  The feature that makes it so useful and flexible is its ability to synchronize itself across multiple platforms and devices.  I have it installed on my office PC, my home PC, my laptop and my Android phone.  All these devices have access to the same data.  What gets entered on one is visible on all the others automatically.  Notes can be tagged and stored in different notebooks.  Notes can be text, pictures, or audio files.  It’s actually a bit difficult to explain what Evernote is.  It’s much easier to discuss how it can be used.

There are a dozens of use cases discussed on Evernote’s website, so I won’t try to duplicate all that here.  Rather, I’ll use my own use of it as an illustration.

I use Evernote for my work by clipping content from the internet that I need to read later.  I keep a todo list for work related items.  While I’m out of the office, Evernote’s audio note taking function allows me to record a note for action when I return to my desk.  With Evernote, you get a dedicated email address that will create a note when you send an email to it.  This allows me to capture notes from emails quickly.  I use Evernote to write these blog posts as well.  I use a tagging system that allows a post to move from an “idea” to “work in process” and finally to a “published post”.  I can access my unfinished posts anywhere and anytime that I think of something to write about.

In terms of personal use, the note that I use a few times weekly is my grocery list.  When I run out of something, I quickly enter that item on my grocery list note.  In the grocery store, I pull out the phone and have access to the list.  I have another to hardware stores and the warehouse club as well.  I keep my personal todo list in Evernote by tagging items with “todo”.  I run a search for that tag and can find a list of all those things that I can’t quite get around to doing.  I store user manuals in Evernote.  When I buy something new, I go to the manufacturer’s website and download the manual in a pdf file and send it to Evernote.  I can then discard the paper copy that came with it.  On a recent trip, I saved my hotel reservations in Evernote.

I find that I use each device differently.  My phone is primarily used to capture data quickly and for simply viewing data.  The PC application is better at organization and for clipping content off web pages.  I might take a picture of something and put the phone back in my pocket.  Later, when I get to a computer, I might enter the details of the item.  For example, I recently found a copy of QuickBooks at our warehouse club at a very low price.  I quickly took a picture of it.  Later, at my PC, I tagged it and posted it on our firm’s intranet to let everyone else in the office know about it so they could tell clients where to find it.

Evernote is free to install and use.  They offer a premium service with higher data limits and the ability to save any file.  I only recently upgraded to premium.  The free account is good enough for the majority of users, as I used it for months before upgrading.

Last Month's Tax Cut Extensions -- What's in it for me?

By now you’ve no doubt heard that President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 — or the Bush tax cuts extension in December.  Sorting through the political rhetoric is difficult at best.  So, now that it’s law, let’s see what’s in it for the typical taxpayer or small business.  Of course, this is not meant to be an exhaustive analysis — just a plain English summary of the highlights that will interest most of our clients.

Before we dive into the details, let’s remember that the two tax cut packages signed by President Bush in 2001 and 2003 had many different sunset dates.  December 31, 2010 was the most common.  Many of the provisions of these two acts were set to expire at the end of last year.  Therefore, if nothing had been done, most taxpayers would have seen a large increase in their tax liabilities for 2011 and beyond.

Unless otherwise noted, the following items are extended through 2012.

For Individuals

  • 10% tax bracket — The 10% tax bracket created by the 2001 tax cut is preserved.
  • Rate cuts — The reduction in tax rates in the tax brackets above 15% is kept in place.  The other tax brackets were cut (and now extended) as follows: 28% to 25%, 31% to 28%, 36% to 33% and 39.6% to 35%.
  • 15% tax on capital gains and qualified dividends.  Additionally, the 0% tax on capital gains for those in the 10% and 15% tax brackets is extended.
  • Social Security payroll tax cut — for 2011 only, the Social Security (FICA) tax withheld from employees’ paychecks is reduced by 2% to 4.2%.  The employer’s portion is unchanged at 6.2%.
  • AMT — The Alternative Minimum Tax patch preserved the nearly doubling of the exclusion from AMT for 2010 and 2011.  The bottom line here is that a tax that was never intended to be paid by the middle class is pushed out temporarily.  Until Congress decides to act in a permanent way to address this issue, we will see these extensions every few years.
  • Increased standard deduction for married taxpayers filing jointly.
  • The $1,000 per child tax credit is preserved instead of being reduced to $500.
  • Earned Income Tax Credit is largely left intact.  Unfortunately, many small business owners and the recently unemployed are qualifying for this credit as a result of the recession.
  • The maximum credit for child and dependent care expenses is kept at $3000.
  • The ability to deduct sales tax instead of state income tax is extended.  This primarily helps those living in states without an income tax.
  • Certain education tax benefits such as the ability to claim an “above the line” deduction for tuition and other higher education expenses is preserved.
  • The $250 deduction for teacher’s classroom supplies is extended.

For Small Business

  • Depreciation — Both the “bonus” depreciation and the expansion of the Section 179 election are either kept intact or expanded.    Equipment placed in service after September 8, 2010 through December 31, 2011 is eligible for 100% bonus depreciation.  For property placed in service in 2012, a 50% limit applies.  The already high limits on Section 179 elections are left in force.  Small businesses rarely exceeded these thresholds anyway.  This is a complex topic with lots of limits in play, but generally, you can either expense or rapidly depreciate almost any business asset placed in service through 2012.

There are other provisions as well.  Since this is running long already, we’ll omit them.  Just know that there are changes to gift and estate taxes and extensions of unemployment benefits, energy and other business credits.

In short, this act largely maintained our present tax system for a bit longer.

Increased Late Filing Penalty: S-Corp, Partnership Returns

Think twice before you let your S-corporation or partnership tax return due date or extension of time to file lapse because the consequences have steepened. For tax years beginning in 2010, the late filing penalty amount for an S-Corporation or Partnership return has risen from $89 to $195. This penalty is calculated based on the total number of shareholders/partners during any part of the tax year multiplied by each month-or partial month-the return is late (up to 12 months). An example is provided below:

An S-corporation with a calendar-year end (Jan 1-Dec 31) is required to file the 1120S annual tax return on the 15th day of the third month following the close of the tax year—or March 15th of the following year. If the corporation has 3 shareholders, no extension of time to file was submitted and the return was filed on July 16th, the late filing penalty is calculated as follows:

Number of shareholders during the year = 3

Months late = 5 (March 16th – July 16th)
*if submitted on July 15th it’s only 4 months late

$195 penalty x (3 shareholders) x (5 months late) = $2,835
*or $567 per month

All penalties imposed by taxing agencies are non-deductible for income tax purposes, so you’re hit twice by the same penalty. Not only are you required to remit an unnecessary penalty, but you’re also denied the deduction of the penalty on that year’s tax return.

It’s important that documentation is gathered to support the date you submit your return, especially if you’re filing close to a deadline or after a deadline has passed. The taxing agencies may assess a late filing penalty from the date the return was received as opposed to the date it was mailed, which could be up to a 2 week differential.

We would recommend sending your return by registered or certified mail, which documents the official post-mark date and address where items were mailed. This certification will serve as sufficient evidence needed to abate a late filing penalty that is wrongfully imposed.

No penalty will be imposed if the corporation shows that the late filing was due to “reasonable cause”, but what constitutes reasonable cause?  This term can be interpreted in many different ways by taxpayers and by the IRS and deserves a blog of its own. It is up to the IRS to determine if your cause is reasonable, so it’s in your best interest to timely file all tax returns.

Changes to Payroll Tax Payments

The IRS has announced that proposed regulations will expand the use of electronic payment systems for payroll and other tax payments, eliminating the use of paper coupons in 2011.

Up to now, businesses could submit tax payments by using a coupon (Form 8109-Federal Tax Deposit Coupon) at their bank along with a check for the payroll tax amount.  Going forward, businesses will be required to make these payments electronically using the EFTPS (Electronic Federal Tax Payment System) or a payroll processing provider, such as our firm.  This payment can be made by telephone or computer.

You will need to register in order to obtain a PIN number to begin this process.  Our office has the enrollment form available or you may enroll on line at EFTPS.gov.  We are happy to assist you with this application.

We are available to show you how the information is entered into the EFTPS system, or if you prefer, we can make the payment for you.  Our office will make this payment for you as part of our payroll service–at no additional cost.

Tax Considerations for Second Homes

The midst of the Great Recession might seem like a strange time to write about second homes; however, when you consider that the real estate market is severely depressed, I suspect that many taxpayers who have the means to purchase a second home will probably find that now might just the best time to buy that we will see for a generation.  Perhaps you already have a second home.  Let’s lay aside predictions for the real estate market and the larger economy and address the tax impact of owning a second home.

First, let’s define a second home and discuss what it is not for a bit.  A second home, by definition is a personal use asset.  Just as your residence is a personal asset, so is a second home.  It is therefore, not investment property.  Of course, almost everyone purchasing a second home would hope to see an eventual return on their investment in it.  For tax purposes, however, there is a difference.  Investment property is acquired solely for its ability to return a profit.  I’ll expand on renting your second home later, but for now, let’s also say that a second home is not a rental property.

We are all familiar with the fact that mortgage interest and property taxes on our primary residence are deductible as an itemized deduction.  The same is generally true for second residences.  The property taxes are always deductible for second homes.  The interest is probably deductible as well, although there are some limitations on it.  The interest paid for the purchase of the property is deductible for both regular tax and Alternative Minimum Tax — AMT.  This is true even if the loan is structured as a line of credit as opposed to a traditional mortgage.  Line of credit, or equity line, interest for money not used to purchase or refinance the property is deductible for regular tax but not for AMT.  To state it more simply, if you took cash from the loan or used the money for anything other than the purchase or refinance of the property, the interest it not deductible for AMT.  (AMT is a much larger topic, so we’ll save that for another post.)  Of course, if you borrowed more than the property’s value, that interest is not deductible, but that’s largely irrelevant as those mortgages are a thing of the past.

Let’s assume that, like most people, you bought your second home hoping to make a profit on it after holding it for a while and enjoying the use of the property.  As a personal use asset, the gain on the sale is taxable, but a loss would not be deductible.  The gain would be either long term or short term based on how long you held the property.  Currently, we have preferential tax rates for long term capital gains, but that may change in the future.  If you are looking to sell a second home now that has declined in value, keep in mind that the loss will not be deductible. This is the same law that prohibits you from deducting the depreciation on your car, by the way.

Now, let’s wade into the topic of renting your second home.  Let me start by saying that the rules governing renting a second home are very complex.  You should consult your tax professional with your exact situation.  We can assist you with determining the current classification of your property and advising you on how to use the property to take maximum advantage of it from a tax standpoint.

Imagine a sliding scale.  On one end of the scale is a traditional second home with no rental use at all.  On the other end of the scale is a pure rental property with no personal use.  The complexities come with the middle ground.  As we increase the rental of the property, it is treated more like a rental and less like a second home.  With this image in mind, let’s start with the following:

Renting your property for 14 or fewer days
This is the best possible outcome for tax purposes.  If the property is only rented for 14 or fewer days out of the year, you can ignore the rental portion.  This means that you cannot deduct any expenses related to renting the property.  It also means that you need not claim the rental income.  If you can remember the summer of 1996, this is why so many people here in Georgia tried to rent their homes for two weeks during the Olympics.

Renting your property for more than 14 days
Under this scenario, we have a property that is basically a hybrid of a second home and a rental property.  All rental income is claimed.  Expenses are prorated based on the number of days the property was rented out of the year.  I’m simplifying it quite a bit, but if you rent the property for nine months, you claim 100% of the rental income and 75% of the expenses.  There is an alternate method of allocating expenses known as the Bolton or Tax Court Method which will probably yield a higher deduction.  The remaining interest and taxes are still deductible for the personal use portion as itemized deductions as discussed above, but other deductions such as depreciation and utilities are disallowed.

Personal use is less than 14 days or 10% of the rental days
The personal use of the property is ignored.  In this case, you have a rental property and all expenses for the property may be deducted.  For this test, days spent maintaining the property do not count toward personal use.

You can understand that the level of personal and rental use is a point that might be hard to prove in an audit.  For this reason, we recommend that you keep a log of your activities with respect to a mixed use property.  This log should record the days that the property was rented, used for personal use.  Also, for work days, document the work that was done on those days.  Proving that you spent the entire month of February at your slope-side condo in Vail hanging wallpaper will be next to impossible without solid evidence or some allowance for the days that you did not work on the property.

This blog post is not intended to address every possible situation, but just to simplify a fairly complex topic.  We would be glad to meet with you to assist with your situation and help plan your use of the property accordingly.  If you find this information useful, click the orange subscribe button in the address bar to have these posts delivered to your RSS reader.  For more on RSS readers, see my previous post on the topic.

I'm an LLC

One of the first questions that we ask someone who just started a business is what type of entity they have selected.  “I’m an LLC.” is probably the most common response.  Surprisingly, this tells us next to nothing.

First, let’s define an LLC, or limited liability company.  LLC’s are created by operation of state law.  They originated out of the oil and natural gas industry in the 1980’s.  Generally, they give owners the limited liability of limited partnerships, while allowing them to participate in management as in a corporation.  You could think of them as a hybrid of a corporation and a partnership.  They vary a bit from state to state, so this discussion is based on Georgia’s LLC statute.

LLC’s have unique terminology that separates them from corporations.  The owners of an LLC are called members, as opposed to shareholders for corporations and partners for partnerships.  Members who participate in the operation of the LLC are known as member-managers, differentiating them from officers of a corporation and general partners of partnerships.  LLC’s are formed by an operating agreement in the same way that corporations have a charter and partnerships have a partnership agreement.

As they are creations of the states, the IRS faced a challenge in classifying these entities as either partnerships, corporations, trusts or something else.  The solution has become known as the “check-the-box regulations”.  In summary, these regulations define a default classification then list classifications that the LLC can elect.

First, let’s look at the single member LLC.  By default, a single member LLC is a disregarded entity.  That means that the entity that owns it reports it on its return as if there was no LLC.  For an individual operating a business, that means they are self-employed and file Schedule C.  If the LLC holds rental property, that requires Schedule E.  The member might be a corporation or a partnership — even another LLC.  In that case, the results of the single member LLC’s operations are rolled up into the rest of the entity’s activity and reported as if the LLC did not exist.  In this situation, the LLC exists at state law, but not for federal income tax purposes.

A single member LLC can elect to be taxed as a corporation.  Further, it can elect to be taxed as an S corporation.  Actually, this can be done now with a single election, taking the LLC directly from a disregarded entity to an S-corporation.  A single member LLC cannot be a partnership for tax purposes.

If an LLC has more than one member, it is by default a partnership.  It can elect to be taxed as a corporation – either an S or a C.  It cannot be a disregarded entity.  There is one exception, however.  An LLC owned by a husband and wife only may be a disregarded by reporting two Schedule C’s or E’s.  In my opinion, this isn’t of much use because if you have to split the activity, you might as well report it as a partnership.

You can see that all these options make an LLC very flexible.  This explains at least some of the popularity of LLC’s.  In our experience, about two thirds of the new entities that we establish in our practice are formed as LLC’s.

These elections are generally made once and are binding for the life of the entity.  Changes are permitted in a narrow set of circumstances, but that is beyond the scope of a blog post.  It is important to note that once an election has been made, it subjects the LLC to all aspects of the tax code related to that type of entity.  This seems obvious, but it’s worth mentioning.  Also, the states – including Georgia — generally accept the federal election as binding.  So, if you have elected to be taxed as a C corporation, you would file that federal and state form.

Now, the next time someone asks you how your business is organized, you can tell them that you are an LLC electing to be taxed as an S-corporation.

Estate Tax Planning

What is estate tax planning? Estate tax planning in simple terms refers to developing a strategy to transfer assets to your heirs with as little lost to the estate tax as possible.  It should be viewed as a part of general estate planning, which would include creating a will and other legal functions.

What is the estate tax? It is sometimes called the death or inheritance tax.  The estate tax is a tax on the assets of a deceased person – a decedent.  The total value of a decedent’s assets over a set exclusion amount is taxed at a very high rate – currently as high as 45%.  The exclusion was $3.5 million for 2009.  Where it will be in the future is completely unknown.  For all practical purposes, you could think of this tax as being paid by your heirs as any tax owed will directly reduce the amount that you can leave to them.  The estate tax is not the estate income tax, which is – obviously – a tax on the incomes of estates.

Isn’t this something that only wealthy people need to be concerned with? Maybe.  For decedents passing in 2010, there is no estate tax.  If Congress does not act, starting January 1, 2011, it comes back with an exclusion amount of $1 million and a top rate of 55%.  At this level, many decedents that one would not consider wealthy could be subject to estate tax.  No matter which expert’s forecast you subscribe to, it’s obvious that more estates will owe tax in 2011 than in 2009.

The worst case scenario is one where the estate owes a large amount of tax and it is primarily made up of illiquid assets.  In other words, there is no cash to pay the tax.  In some cases, the executor may have already distributed the cash and other liquid assets to the heirs before learning that estate tax is due.  Under this situation, the only option would be to sell assets under time pressure and probably at a discount to entice a quick sale to avoid the heirs having to pay the tax themselves

Is there any reason other than taxes to do estate planning? Absolutely.  Your will should provide for care for your dependents, and disposition of your assets.  This post is only meant to address the estate tax.  You should consult your attorney for the preparation of a will and other estate matters.

What should I do? First, you should consider carefully whether you might have an estate tax issue to concerned with in the first place.  The first step would be to simply add up the fair value of all your assets.  If it is far less than the exclusion amount, then you don’t have to be concerned with the tax.  However, keep in mind that the exemption amount could change during your lifetime and that your assets could appreciate as well.  This is a case where close does count.

Secondly, if you determine that your estate could potentially be subject to estate tax, there are many things that you can do to reduce its effect or eliminate it altogether.  Some are simple, and some are exceedingly complex.  Unless your estate is very large, simple solutions can most likely suffice.  Even a small amount of planning can go a long way.  Just knowing ahead of time that your estate may owe tax can save your heirs and your estate’s executor from a costly surprise after your death.

Probably the simplest form of estate planning is to gift away one’s assets prior to death.  Currently, you can gift as much as $13,000 per year to each recipient without reporting it.  Your spouse can also make the same gifts.  Thus, you could give away as much as $26,000 annually to each recipient.  If you have enough time and liquid assets, this might solve your estate tax problem.  But, what if the majority of your estate is one large piece of real estate?  You cannot easily gift away real estate in $13,000 or $26,000 pieces.  Further, the basis of the gifted property is your basis and your heirs will not get the “stepped up” basis of fair market value when they inherit it.  (This is the amount to which the sales price is compared for determining gain or loss when they eventually sell it.)

Bear in mind, however, that the annual gifting limits are only to avoid reporting the gifts.  A gift tax return might be required, but no tax is due until your cumulative lifetime gifts exceed $1 million.

Perhaps one of your major assets is your business.  What if you are unsure what the value of your assets is?  Are you interested in funding someone’s education?  Do you want to make a charitable gift from your estate?  There are many factors to be considered.

Estate planning is not something for which there is a one-size-fits-all solution.  Each situation is different and needs an individualized strategy.   There are many strategies available to avoid subjecting your heirs to the estate tax.  If we can help you with your estate tax planning needs, please let us know.

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You may have noticed this logo on some of your favorite sites.  Take a look at the address field at the top of your browser.

This denotes sites that offer RSS feeds.  Using one of the many choices of reading platforms or feed aggegators, you can have content from your favorite site delivered to you instead of visiting the site to see if there is anything new.  I use Google Reader, but the are many others — both web-based and software.

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Welcome To Our Blog

The purpose of this blog will be to provide timely and reliable information related to our areas of expertise.  All topics will be discussed in plain English in the most practical way possible.  We hope that you will subscribe to our RSS feeds so that any updates will come to you as soon as they are posted.

The authors of this blog will primarily be:

George W. Murphy, CPA Originally from south Georgia, George graduated from  Georgia Southern University in 1978.  After a successful career in banking, he founded the firm in 1992.  George’s areas of expertise are assurance and consulting.

Rex G. McInvale, CPA A native of middle Georgia, Rex earned his BBA from Mercer University in 1993.  His background includes public accounting, private accounting and teaching.  Rex focuses on our tax practice and business valuations.

Shawn A. Poole, CPA Shawn grew up in Cobb County.  He graduated from Kennesaw State University in 1999 with a BBA.  Shawn joined the firm in 2004 and was admitted as a partner in 2009.  Shawn specializes in non-profits and assurance.

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