Small business owners we work with take pride in their early start up assets: a new office, company car, computers and technology.  But when it comes to valuing those assets BE CAREFUL!  Using estimates, measurements and other valuations of assets can be a sticking point during an audit.  Items such as goodwill and other intangibles are under increasing scrutiny by financial auditors.  A good rule is to discuss such times with your accountant and to keep those assets under a cap that might raise red flags.

Often business owners fall in love with their own assets and want to keep their asset estimates high.  Truth is, that can really become an issue down the road – especially if the business is successful in the long run.  No one wants a young company that is doing well to suddenly become hampered in an audit.  At Foreman & Airhart we work closely with our small and mid-size business customers to ensure that they have a fair and defensible valuation strategy for their assets – real or intangible!

Not all IRS audits are the same. Not all tax return issues involve the same complexity or require the same level of scrutiny.

The IRS, in its effort to enforce the income tax laws of the Unites States, has three different types of audit examinations in its arsenal:

1. Correspondence examinations
2. Office examinations
3. Field examinations

Correspondence examinations are conducted entirely through the mail. (The IRS NEVER uses e-mail to correspond with taxpayers.) Since this audit requires less involvement from IRS examiners it is being used more frequently by the budget strapped IRS. This method is considered the ‘work horse’ of the IRS’s tools.

Office examinations involve small businesses or individual income tax returns that predominantly include sole proprietorships. Office examinations generally take place at the IRS office located nearest to where the taxpayer maintains its financial records. Once the IRS has selected a tax return for office examination, the return is assigned to an examiner and scheduled. Office examinations are conducted primarily by interview. The taxpayer will provide certain records to support the items on the tax return. During this process, an examiner might ask a taxpayer to explain certain items such as insufficiently substantiated charitable contributions or itemized deductions which appear to be disproportionate to the taxpayers reported gross income.

Field examinations are initiated by sending a letter 2205 or 3572 which lays out the issues to be examined and lists a specific IRS agent as the point of contact. Sometimes the taxpayer will receive a telephone call from the field agent prior to receiving the letter. The taxpayer has 10 days to schedule an interview.

It is advisable to have your CPA represent you with any IRS interaction. This will ensure that the audit will be conducted in an efficient manner and that any adjustments are verified and agreed to by your CPA representative.

Things to remember: There is a 3 year statute of limitations on all tax returns filed with the IRS. (beginning with the date of filing)

 Feeling like you should save more?  According to Keith Chen in his fascinating TED Talk, the reason Americans may not save as much as people from other developed and prosperous countries is because of the language we speak. Because English forces its users to talk differently about time (the future is different from the present) than other languages where the future and the present is grammatically spoken about in the same way, English speakers may begin to act differently because savings for the future is removed from our behavior today. The savings behavior of “futured language speakers” versus “non-futured language speakers” is different.

Chen’s research is of more than academic interest. Saving is important; it fuels investment, which in turn fuels productivity. And it can enable people to live comfortably in retirement, a big issue in our aging country. Chen’s work thus might help countries that don’t save much–the United States and Britain especially–to get their citizens to improve their saving habits.  Well, we can hope.

If you are concerned about your savings level, you don’t have to learn a new language.  Maybe we can help….

As business owners, dentists and doctors review their 2012 taxes and plan for 2013, it is a perfect time to review more than the numbers.  Accounting relationships are just that: relationships.  As accountants to Twin Cities professionals, we work to make sure that our clients get more than just accurate books.  Accountants need to provide:

1) Personality and Compatibility: Our best relationships start with good communication.  Some folks want to chat for a while. Others like someone who gets to the point.  Make sure your accountant reflects the style that makes you comfortable.

2) Accessibility: In any case, you need an accessible accountant.  One who can always make time.  One who always returns phone calls.

3) Communication-style: Too often accountants talk to one another in jargon and tax “short hand.”  That’s fine within the firm, but clients need straight forward answers.

5) Competency: Surprised that’s not #1?  That’s because being competent is a non-negotiable requirement.  Competency is a given.  There are ways to test for competency.

But only smart clients can decide on the first three items.  Demand them and find the right accountant for you.

Even if it has been a rough year, many businesses will offer some kind of holiday recognition to their employees.  44% will gift food, 13% will gift cash and 37% will provide a retailer gift card.  From an accounting perspective, holiday bonuses or “gifts” are treated as a taxable event subject to both income and payroll tax. Ebeneezer IRS does not see these as “gifts” so much as another payment to an employee.

The only exception? “de minimis” fringe benefits that cannot be easily valued.  Since cash, food  or gift cards can all be easily valued and entered onto the books what is left?  A gift must be of “nominal value” to be excluded from income. The IRS does not define “nominal value,” but it is clear an item with value over $100 is not considered de minimis. However, many experts advise “nominal” is much lower, either $25 or $50.  Think of something like a tote bag,ornament or other gewgaw.

So with that bit of merry cheer, we sign off for our own holiday – and wish you a holiday that would never be described as de minimis.

With December 31 around the corner, here is a quick check list every small business can use to make the year end as smooth as possible.  Let’s face it: none of us likes doing these things.  But smart business people know that starting early and making progress each day will make the accounting process better than delaying and postponing the inevitable.  To stay on top, we recommend that you R – A – I – D

R = Reconcile

Internal bookkeeping should balance with bank statements.  All money is accounted for – by either being in a bank account or in a bookkeeping account, in a payables account (a liability) or a receivables account (an asset.)

Employee balances should reconcile.  Withholding amounts should be appropriately accounted for and deposited with the federal and state governments.

A = Assets

Assets need to be reviewed on the books.  If assets were sold throughout the year, that must be noted.  If depreciation occurred before the items were sold, that must be noted as well.  If new assets were purchased or put into service, sales receipts can create the asset’s initial value.

I = Inventory

A proper inventory not only accurately reflects what a business has on hand, but also its true market value.  Beware of holding inventory at a price above its true market value as it ages. Find all hidden pockets of inventory and ensure it is properly accounted for on your books.

D = Debts

Debts are a natural course of most companies.  It is important to note any changes in the value of the debt, due to payments, forgiveness or new interest rates.

Simply covering the RAID points at year end can make closing out the 2012 books a straightforward process.

Since the economy collapsed, one major benefactor to federal tax credits has been homeowners who have installed energy efficient upgrades to their homes.  Examples have included more energy efficient windows, doors, garage doors, insulation and any alternative energy producing units such as wind turbines or solar panels.  Those credits are about to expire and pundits expect that in the heat of the current fiscal cliff battle, they are not expected to be renewed.

To learn more about the credits, check out the energy star fact sheet here.

We are advising current clients to contact us to find out if you have already met your federal maximum levels for any energy efficient home improvements you have made to your primary OR second home location.  We can help ensure that you get full credit by moving planned upgrades into the current tax year.  We want to make sure that homeowners don’t miss out on their tax credit because they missed a deadline they were not aware of.

It’s just one more way that we do more than taxes!

As the end of the year approaches, you may want to make some gifts to relatives (who may be hurting financially) and/or favorite charities. Make some smart choices about how to make your gifts in conjunction with an overall revamping of your stock and equity mutual fund holdings. Here’s how to get the best tax results from your generosity:

Gifts to Relatives.

We advise that you Do Not give individuals loser shares (Those stocks that are currently worth less than what you paid for them.) Instead, sell the shares and take advantage of the resulting capital losses. Then, give the cash sales proceeds to the relative.

We advise that you Do give away winner shares to relatives when they will pay lower tax rates than you would pay if you sold the same shares. In fact, relatives who are in the 10% or 15% federal income tax brackets will generally pay a 0% federal tax rate on long-term gains from shares that were held for over a year before being sold in 2012. (For purposes of meeting the more-than-one-year rule for gifted shares, you get to count your ownership period plus the recipient relative’s ownership period, however brief.)

A Word of Caution: Before employing this give-away-winner-shares strategy remember gains recognized by a relative who is under age 24 may be taxed at his or her parent’s higher rates under the so-called Kiddie Tax rules (contact us if you are concerned about this issue).

Gifts to Charities.

The strategies for gifts to relatives work equally well for gifts to IRS-approved charities. Sell loser shares and claim the resulting tax-saving capital loss on your return. Then, give the cash sales proceeds to the charity and claim the resulting charitable write-off (assuming you itemize deductions). This strategy results in a double tax benefit (tax-saving capital loss plus tax-saving charitable contribution deduction).

Give away winner shares to charity instead of giving cash. Here’s why. For publicly traded shares that you’ve owned over a year, your charitable deduction equals the full current market value at the time of the gift. Plus, when you give winner shares away, you walk away from the related capital gains tax. This idea is another double tax-saver (you avoid capital gains tax on the winner shares, and you get a tax-saving charitable contribution write-off). Because the charitable organization is tax-exempt, it can sell your donated shares without owing anything to the IRS.

It is like the federal government has a year-end sale for businesses looking to make some equipment purchases!  That means businesses need to buy new equipment and software in 2012 before these tax breaks expire!  Section 179 is one of the few incentives included in any of the recent Stimulus Bills that truly helps small businesses. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses – and millions of small businesses are actually taking action and getting real benefits.

Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. All businesses that purchase, finance, and/or lease less than $560,000 in new or used business equipment during tax year 2012 should qualify for the Section 179 Deduction. If a business is unprofitable in 2012, and has no taxable income to use the deduction, that business can elect to use 50% Bonus Depreciation and carry-forward to a year when the business is profitable. For tax years beginning in 2012, the maximum Section 179 deduction is $139,000. For tax years beginning in 2013, however, the maximum deduction is scheduled to drop back to only $25,000.

CAUTION: Watch out if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deduction. Why? You cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Please contact us if you think this might be an issue for your operation.

This expiring business tax ruling will expire on 12/31/2012 . We advise taking action between now and year-end!

50% First-year Bonus Depreciation. Your business can claim first-year bonus depreciation equal to 50% of the cost of most new (not used!) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service this year. The 50% bonus depreciation break will expire at year-end unless Congress extends it. Contact us if you want more details about this generous, but temporary, tax break.

Note: When applying the 50% bonus depreciation deductions – you can create or increase a Net Operating Loss (NOL) for your business’s 2012 tax year. You can then carry back the NOL to 2011 and/or 2010 and collect a refund of taxes paid in one or both those years. Please contact us for details on the interaction between asset additions and NOLs.