Do you regularly monitor your company's cash accounts? You should. Even if you leave the job to your bookkeeper or accountant, you should stay aware of where the cash is going and how the spending is approved. Along with inventory "shrinkage," theft or improper expenditures of cash are among the chief sources of loss for small companies.

Periodically, you hear about a huge loss caused by an employee who's been quietly embezzling cash for years. But many smaller cases are never noticed. And it's not always employees at fault. In fact, the vast majority of employees are scrupulously honest and loyal. Outsiders can be stealing your cash too, by submitting false or inflated invoices that are paid without proper review.

What can you do to reduce the risk of losses? The textbook answer is "internal controls." This refers to things such as standard procedures for approving and paying bills. It includes segregation of duties - having more than one person involved in preparing, signing, and reconciling checks. Unfortunately many small companies don't implement proper controls - either because there's not enough staff or because they think it's too much trouble.

Regardless of the size of your business, here are some steps you can take:

* Maintain a strict rule that all invoices must have an approval signature before being paid. Nothing focuses a person's mind like having to sign his or her name on something.

* Have a policy that all employee expense reports must be signed off by a higher-level employee.

* Make it a rule that the person who prepares a company check can't sign that check.

* Ask your bookkeeper or accountant to give you a signed note each month affirming that the bank statement has been reviewed and balanced.

* Check personally to make sure that these procedures are being followed.

* On occasion, ask to see the bank statement and canceled checks for the prior month. Review them in detail. Not only will this increase your chances of spotting fraud, but it will also remind you just what the company's cash is being spent on.

Please contact our office for details or for assistance in improving controls over your company's cash.

* Talk to your parents about their financial affairs. Parents may be reluctant to discuss their finances, but someone needs to know the names of their lawyer and accountant. Someone needs to know where their important financial papers are located. If they are still fit, encourage your parents to make a detailed financial list for you, including information about bank accounts, investments, insurance policies, retirement plans, location of safe deposit boxes, etc. Getting familiar with important information now will be much easier than trying to find this information after a parent becomes physically or mentally impaired.

* Review your parents' financial picture together. Do your parents have enough retirement income and savings to provide for their needs? Should steps be taken to help stretch their assets over their life expectancies? What if they eventually need nursing home care? Assess whether long-term care insurance makes sense for them.

* Consider these important documents. A durable power of attorney allows another person to make financial decisions on a parent's behalf if he or she becomes incapacitated. A medical directive or living will is a document stating a parent's wishes about medical treatment in case he or she becomes too ill to communicate these wishes.

* Help put your parents' estates in order. Does each parent have a will, and if so, where are the wills stored? When were their wills last updated? The 2001 Tax Act made major changes to the estate and gift tax rules. Have their estate plans taken these changes into account? Encourage your parents to review their beneficiary designations on insurance policies, annuities, and retirement plans to make sure their choices are still suitable.

Talking finances with your parents now can make caring for your parents in the future much easier. For assistance, give us a call.
 

Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.

Capital gain on vacation properties. Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property's contract price (including any mortgage assumed or taken "subject to"), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. "Adjusted proceeds" include the property's sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There's no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.

Vacation home rentals. Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

Income from rentals totaling not more than 14 days per year is nontaxable.
Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property, which entitled them to a greater number of deductions.

A public hearing on the existing regulations, held at IRS headquarters in Washington, D.C., in early April 2013, only confirmed how the application of the NII Tax to certain categories of income—particularly income arising from "passive activities"—is challenging even the experts. Nevertheless, taxpayers are not getting a reprieve from the immediate application of this new tax.  The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. Current confusion over exactly how the 3.8 percent operates can impact on tax strategies that should be put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII Tax liability.

NII Tax Thresholds

For tax years beginning after December 31, 2012, the NII surtax on individuals equals 3.8 percent of the lesser of: net investment income for the tax year, or the excess, if any, of:

the individual's modified adjusted gross income (MAGI) for the tax year, over
the threshold amount.
The threshold amount in turn is equal to:

$250,000 in the case of a taxpayer making a joint return or a surviving spouse,
$125,000 in the case of a married taxpayer filing a separate return, and
$200,000 in any other case.
Trusts and estates are also subject to the NII surtax, to the extent of the lesser of: (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins (which, for 2013, is $11,950).

Net Investment Income

The primary confusion over application of the 3.8 percent NII Tax revolves around finding a precise definition of "net investment income" as enacted by Congress. To appreciate the complexity of the task, just look at the applicable Internal Revenue Code provision. Code Sec. 1411(c)(1) defines net investment income as the sum of:

Category (i) income: Gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in Code Sec. 1411(c)(2);
Category (ii) income: Other gross income derived from a trade or business described in Code Sec. 1411(c)(2); and
Category (iii) income: Net gain attributable to the disposition of property, other than property held in a trade or business not described in Code Sec. 1411(c)(2); over
Deductions properly allocable to such gross income or net gain.

A Code Sec. 1411(c)(2) trade or business includes a passive activity under Code Sec. 469 with respect to the taxpayer or trading in financial instruments or commodities.

Comment.  Code Sec 1411 effectively creates a new tax and a new tax base, on top of the income tax, alternative minimum tax, self-employment tax and payroll taxes. Nevertheless the Preamble to the proposed regs states that, except as otherwise provided, the income tax rules should apply to Code Sec. 1411 unless good cause otherwise exists. Practitioners have asked the IRS that the final regulations give greater reassurance of this general rule.

Complexity

The IRS has stated that the principal purpose of Code Sec. 1411 is "to impose a tax on unearned income or investments of certain individuals, estates, and trusts." Unfortunately, Code Sec. 1411 is not so direct and simple, with its three categories of income (that is, (i), (ii) and (iii), above), complicating matters, albeit in an effort to close every door to those who try to "game the system."

Application of the 3.8 percent NII Tax to capital gains and dividends from a personal stock portfolio is clear under this rule of thumb. But clarity breaks down when a "trade or business" is thrown into the mix and the concept of "passive activity" is added to it.

If gain or other income is the result of an active business activity, it generally escapes NII Tax. However, when the "active" business is a passive activity (for example, a rental business), it may be deemed to generate income that is subject to the NII Tax. Furthermore, when a passive activity is not merely incidental to a business however otherwise active that business should be, the NII Tax also becomes an issue.

Passive Activity

Any revised or additional rules from the IRS on the application of the NII Tax on passive activities should be made more user friendly to the broad middle range of taxpayers and their advisors, one expert at the hearing recommended.  The IRS should err on the side of explaining things clearly and simply, even at the expense of not covering every possible nuance of interpretation.

At the same time, however, other experts are asking for more detail, at least in the way of clarification. For example, the IRS has stated that passive activity for NII Tax purposes should be applied within a narrower scope than the passive activity loss rules under Code 469.  Those Code Sec. 469 rules restrict "passive losses" from reducing income that is not "passive income."  Experts want the IRS to explain exactly what they mean by a "narrower scope."

Self-Rental Activities/Grouping

The self-rental recharacterization rule under Code Sec. 469 affects taxpayers who rent property to a trade or business in which they materially participate. Concern has been expressed over the possibility of interpreting net investment income under Code Sec. 1411 to include rental income from a self-rental activity grouped with a trade or business activity in which the taxpayer materially participates.

The material participation and trade or business requirements should be tested on the grouped activity as a whole rather than on a component basis, one expert in particular stressed at the hearing. If that test is passed, he argued, the trade or business income and rental income from the grouped activity should be excluded from the reach of the NII Tax. For example, the owners of self-rental properties should not have that rent considered as separate from their overall business activity and subject to the net investment tax simply because properties are held in a separate LLC to avoid tort liability.

Regrouping deadline

The proposed regulations permit businesses subject to the NII Tax to elect to regroup their activities for passive-loss purposes in 2013 or 2014. This regrouping election allows taxpayers with a fresh start to accommodate the new NII surtax. Without permitting regroupings, taxpayers would be bound by their original grouping decisions, some of which may have been made as many as 20 years ago, only for purpose of Code Sec. 469 passive loss rules and not the NII Tax. Some small business representatives are also concerned that, because of the complexity of the rules, the final regulations should extend the deadline for a regrouping election through 2015.

Application of the net investment income tax is particularly difficult to get a handle on in a variety of situations.  Unfortunately, however, at 3.8 percent, it is costly enough not to be ignored.

If you have any questions about how the NII Tax may apply to your business, rental operations, or overall investment strategy, please do not hesitate to call our office.

You are required to file "Treasury Department Form 90-22.1," the "Report of Foreign Bank and Financial Accounts," if you have a financial interest in or signature authority over a foreign financial account. These accounts include bank accounts, brokerage accounts, mutual funds, or other types of foreign financial accounts. This is not a form that you file with your tax return. Rather it is a separate form due June 30 each year that is filed with the Treasury Department in Detroit (due June 28 this year since June 30 is a Sunday). Generally, this report is required to be filed if you have an interest in such accounts, and the aggregate value of those accounts exceeds $10,000 at any time during the calendar year.

If you do have assets in foreign banks or brokerages, be sure to meet your filing obligation. The requirements can get complicated, and the penalties for nonfiling are severe. For details or filing assistance, contact our office.

An example of these bogus e-mails: You receive a message confirming IRS receipt of your tax return, but the IRS needs more information to process your return. The e-mail looks official and completely legitimate. But it isn’t. The IRS does NOT contact taxpayers asking for personal and financial information. These e-mails should be deleted immediately. Fake IRS websites are also created by scammers to lure victims into filling out forms providing information that results in identity theft.
 

0.9 Percent Additional Medicare Tax

The IRS reminded employers that the Additional Medicare Tax, enacted by the Patient Protection and Affordable Care Act (PPACA) applies effective January 1, 2013. The Additional Medicare Tax is imposed to the extent covered wages, compensation and/or self-employment income exceed threshold amounts ($200,000 for single individuals, $250,000 for married couples filing joint returns and $125,000 for married couples filing separately). Employers, however, must withhold Additional Medicare Tax from wages paid to an individual in excess of $200,000 in a calendar year, without regard to the individual employee's filing status or other wages/compensation.

It is up to the employee to make adjustments to account for any shortfall (if subject to the $125,000 threshold or if the combined wages of a married couple exceed $250,000) or overage (if subject to the $250,000 threshold). Employees cannot request additional withholding specifically for Additional Medicare Tax but can request a change in overall income taxes withheld by their employer. Taxpayers anticipating they will owe Additional Medicare Tax, and who did not request additional income tax withholding, may need to make estimated tax payments.

The standard Medicare tax equals 1.45 percent of covered wages. The 1.45 percent employee-share of Medicare tax is matched by the employer. There is no employer match for the Additional Medicare Tax, however.

The IRS further explained that an employer must begin withholding the 0.9 percent Additional Medicare Tax in the pay period in which they pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. The IRS has added line 5d, Taxable wages & tips subject to Additional Medicare Tax withholding, to Form 941.

Payroll Tax Holiday Ends

The IRS also has reminded taxpayers that the OASDI tax rate is 6.2 percent for both employers and employees for calendar year 2013. The payroll tax holiday, effective for calendar years 2011 and 2012, was not renewed by the American Taxpayer Relief Act of 2012 (ATRA) or other legislation and has expired. The Social Security wage base for calendar year 2013 is $113,700, up from $110,100 for calendar year 2012. The payroll tax holiday had reduced the employee-share of OASDI taxes from 6.2 percent to 4.2 percent (with a comparable benefit for self-employed individuals).

If you violate the Tax Code, the IRS may impose civil and/or criminal penalties, depending on the type of infraction committed. Civil penalties are commonly imposed for a failure to pay taxes when due, failure to report the correct amount of tax owed, a failure to deposit federal tax deposits, filing late, or even failing to pay because of a bounced check. There are more than 100 kinds of civil penalties in the Tax Code, ranging in severity. For example, a penalty for failure to file (separate and apart from a failure to pay) carries a minimum $100 fine, while a penalty for valuation overstatement can result in a 30 percent penalty on the amount of tax owed as a result. Criminal penalties can be even more severe, and may include terms of imprisonment as well as fines.

Taxpayers, return preparers, and third parties with some connection to the tax return in question may all become subject to penalties. Common civil penalties include failure to file tax returns, failure to pay taxes due, underpaying tax due to negligence, and valuation misstatements that result in inaccurate reporting of income (and therefore an incorrect amount of tax owed).

Criminal penalties are imposed for violations of federal Tax Code and Criminal Code, which include the willful (or intentional) attempt to evade or defeat any federal tax, the failure to collect or truthfully account for and pay any federal tax as required, or the failure to keep required records, supply required information or make required returns. Generally the IRS Criminal Investigations Division will conduct investigations into allegations of criminal tax violations, and if it recommends that the government prosecuted, the case could be referred to the IRS Office of Chief Counsel, the Department of Justice, the U.S. Attorney's Office, or some combination of the three.

Hopefully you will never receive a letter from the IRS about either civil or criminal penalties. But if you do, please call our offices with any questions.

The top tax rate is 40 percent, the maximum exclusion for both estate and gift taxes is a unified amount of $5 million (indexed at $5.12 million for 2012 and $5.25 million for 2013), the tax basis of property acquired from a decedent is stepped up, and the portability of a deceased spouse's unused exclusion (DSUE) amount is preserved. The generation-skipping transfer (GST) tax exemption, which is tied to the estate tax rate, is also set at $5 million, adjusted for inflation. However, taxpayers should realize that inheritance taxes imposed by a state may apply to a lower amount, so some estate tax planning for state taxes may be appropriate.

If Congress had not acted on the sunsetting provisions, the maximum estate tax rate would have been 55 percent effective January 1, 2013, and the maximum exclusion would have been only $1 million. However, even though these changes are permanent and do not have an expiration date, one never knows whether Congress may change the law in the future.

Stepped-up basis

Stepped-up basis is preserved for assets passing through the estate. This is particularly important for people whose estates are not large enough to owe estate taxes (under $5 million, as indexed for inflation). In 2010, when there was no estate tax, the Tax Code applied a modified carryover basis regime with $1.3 million worth of assets subject to a basis step-up (plus $3 million for property passing to the spouse). All other properties would have a carryover basis and thus could have significant built-in gains when acquired by the estate tax beneficiary.

Now, all properties passing through the estate for tax purposes are entitled to a step-up in basis, whether or not they are subject to estate tax. This will have a significant impact on income taxes for taxpayers receiving assets from the estate, insulating built-in gains from taxes, and allowing taxpayers to sell assets and invest them in other arrangements.

Unified estate and gift tax

Even though the lifetime exemption under the unified estate and gift tax ($5 million, adjusted for inflation) may never be used up, filing gift tax returns for annual gifts above the exclusion is still necessary. The annual gift tax exclusions ($13,000 for 2012; $14,000 for 2013) are much lower than the lifetime exclusion. However, thanks to the lifetime exclusion, taxpayers often will not owe any gift taxes on a gift, even one that exceeds the annual exclusion.

Portability

The portability of the DSUE amount was enacted in 2010 and originally applied where the first decedent in a married couple died in 2011 or 2012. In ATRA, Congress made portability permanent.

In the absence of portability, the first spouse to die could transfer property to the surviving spouse tax-free, by claiming the marital deduction. But the second spouse, as sole owner of the assets, was in danger of exceeding the applicable estate tax exclusion and owing more estate tax.

For example, a husband owns $7 million in property and the wife owns $5 million in property. Upon A's death, the husband's estate passes $2 million of property to his children, and $5 million in property to his wife, using the marital deduction. When the wife dies, she has $10 million in property (assuming that the wife's earnings and expenses offset each other), but only has an exclusion of $5 million. Thus, $5 million of assets are taxable.

Portability eliminates or substantially lessens this problem. If the husband passes $2 million to his children, and $5 million to his wife, he has a DSUE amount of $3 million. The wife, when she dies with an estate of $10 million, has an estate tax exclusion of $8 million ($3 million from the husband, plus her own $5 million exclusion), and will owe estate tax on $2 million, instead of $5 million. At a 40 percent maximum rate, this is a potential savings of $1.2 million to the wife (and to the husband and wife collectively). Portability lessens the need for complex estate planning when the husband and wife together have assets in the $10 million range (more or less).

Other tax provisions

ATRA provides additional certainty for other estate, gift, and generation-skipping transfer (GST) tax provisions. More liberal rules for using installment payments for estate taxes will continue to apply. The five percent surtax on estates and gifts between $10 million and $17,184,000, which is designed to offset the benefits of graduated rates, will no long apply.

Modifications to the exclusion for qualified conservation easements are permanently extended, again facilitating planning in this area. The repeal of certain distance requirements is permanently extended; accordingly, the exclusion is available to any qualified real property, located in the U.S. or a U.S. possession, that was owned during the three-year period ending on the date of the decedent's death.

ATRA also extended a number of GST tax provisions set to expire at the end of 2012. These included the GST deemed allocation and retroactive allocation provisions; clarification of valuation rules for determining the inclusion ratio; provisions allowing the qualified severance of a trust; and relief from late GST allocations and elections.

Finally, ATRA extended the IRA charitable deduction for two years, through 2013. Taxpayers age 70 ½ and older can make a maximum distribution of $100,000 directly from their IRA (traditional or Roth) to a charity, without including any of the distribution in income.

Not all of ATRA's provisions are beneficial to taxpayers. ATRA permanently extended the deduction for estate taxes imposed by a state, rather than a tax credit. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) first repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction. ATRA also extended repeal of the deduction for qualified family-owned business interests, a provision that has been in effect since 2004.

If you would like more specific information on how the American Taxpayer Relief Act affects your estate plans, please contact this office.

Late legislation

Whenever Congress passes tax legislation late in the year, the IRS has to scramble to reprogram its processing systems to reflect changes to the tax laws. This year was no different. Congress passed the American Taxpayer Relief Act of 2012 on January 1, 2013 and President Obama signed it into law on January 2, 2013. ATRA made changes to numerous portions of the Tax Code.

Fortunately, the IRS had anticipated some of the changes, such as a permanent extension of the alternative minimum tax (AMT) relief and an extension of the $1,000 child tax credit, so the agency left its core processing systems unchanged for these provisions. As a result, the IRS reported that 80 percent of individuals were able to file when the 2013 filing season officially opened on January 30. However, that left 20 percent of individuals unable to file on January 30 because the IRS needed more time to reprogram its processing systems for many ATRA-affected forms.

For business taxpayers, the filing season generally opened on February 4. The February 4 opening covered non-1040 series business returns for calendar year 2012, including Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships, Form 990 filed by exempt organizations and most users of Form 720, Quarterly Excise Tax Return. Business taxpayers filing many ATRA-affected forms have experienced delays similar to individual taxpayers.

Delayed forms

Since January 30, the IRS has been making progress in reprogramming its processing systems for the remaining ATRA-affected forms. In mid-February, the IRS began accepting returns from taxpayers filing Form 8863, Education Credits, (including the popular American Opportunity Tax Credit and Lifetime Learning credit) and taxpayers filing Form 4562, Depreciation and Amortization. Taxpayers claiming the student loan interest deduction or the higher education tuition deduction did not experience a delay.

The IRS anticipates that it will begin accepting the remaining forms in early March. Included in this group are taxpayers filing Forms 3800, General Business Credits: Form 5695, Residential Energy Credit; and Form 5884, Work Opportunity Tax Credit. If there is any further delay, our office will alert you.

Penalty relief

The IRS gave special penalty relief to farmers and fishermen because of late legislation. The IRS will waive the estimated tax penalty for farmers and fishermen who did not meet the March 1 deadline for filing and paying taxes. Some tax professional associations have asked the IRS to consider penalty relief for other groups of taxpayers because of the delay in filing the ATRA-affected forms. The IRS has not announced any additional penalty relief but it could. Our office will keep you posted of developments.

Refunds

The IRS's popular online Where's My Refund? tool has been overwhelmed by a large number of requests, the agency reported. To avoid service disruptions, the IRS asked taxpayers to only check on the status of their refunds once a day, preferably weekday evenings or on weekends. The IRS is currently predicting that nine out of 10 taxpayers who file their returns electronically and who opt for direct deposit should receive their refunds within 21 days. That timeframe could change depending on the IRS's workload and the possible impact of across-the-board budget cuts scheduled to take effect after February 28.

Sequestration

Sequestration is the official term for mandatory budget cuts to most federal government operations, including the IRS. Very generally, the spending reductions are to be made equally from defense spending and from all other federal spending (with some programs, such as Medicare excluded). The reductions required in each of these categories are then divided proportionally between discretionary spending and mandatory spending.

ATRA delayed the start of sequestration until March 1. President Obama and Senate Democrats have proposed a package of spending cuts and revenue raisers. The House GOP has rejected previous proposals for revenue raisers, insisting that deficit reduction be accomplished through spending cuts. At press time, negotiations continue.

The IRS will remain open after February 28. However, some of its operations could be impacted if a deal is not reached. The IRS is expected to concentrate its resources on tax administration, including the processing of returns, and tax enforcement. The IRS has released very few details about its plans for sequestration. Our office will keep you posted.

Identity theft

Along with processing returns, the IRS is combating the growing problem of identity theft. Criminals use stolen identities to file fraudulent returns and claim refunds. Typically, this occurs early in the filing season. An unsuspecting taxpayer is often unaware that his or her identity had been stolen until he or she files a legitimate return and it is rejected. In fiscal year (FY) 2012, the IRS reported that it prevented the issuance of more than $20 billion in fraudulent refunds.

The IRS has designed new identity theft filters to flag false returns before they are processed. The IRS has also issued more than 700,000 identity protection personal identification numbers (IP PINs) to taxpayers who have been victims of identity theft. In January, the IRS launched a nationwide crackdown on identity theft suspects. The IRS reported that the coast-to-coast effort against 389 identity theft suspects led to 734 enforcement actions, including indictments, informations, complaints and arrests.

If you have any questions about the 2013 filing season, please contact our office.

While one answer doesn't fit all cases, certain strategies have proven effective for many small firms.

* Compete on your own terms. As a small business, it's unlikely you'll be able to compete with larger competitors on the basis of price alone. Give your customers something other than bargain prices.

* Capitalize on your advantages. Establish close bonds with customers and provide services tailored to their individual needs. If you own a hardware store, for example, you might provide free delivery and assembly for some items. The key is to develop innovative ways to satisfy your customers' needs and retain their loyalty.

* Hire (and keep) the best employees. Small businesses can be great places to work. By providing in-depth training and an enjoyable work environment, your employees will generally return the favor by treating customers well. On the flip side, we've all met staff at nationwide chains who were inattentive or just plain rude. Small businesses can't afford to ignore complaints or allow poor customer service. Don't let one obnoxious employee create a bad reputation for your business.

* Expand your sources of revenue. Maybe you own a coffee shop and Starbucks is moving in. Don't throw in the towel. Add catering to the services you offer. If a larger competitor comes to town, you may lose some market share, but new sources of revenue can offset those losses.

* Differentiate your product or service. Maybe you provide fresher produce because it's grown locally. Or perhaps you offer specialty items that the other guys don't carry. Let your customers know about these differences, and they'll come to you when something special is needed.

Remember, there will always be room in the marketplace for firms -- whether big or small -- that provide quality products at a reasonable price and friendly knowledgeable service.

The "charitable IRA rollover" rule was extended through 2013, permitting taxpayers who are 70½ or older to use their IRA to donate up to $100,000 to charity. The donation must be made directly from the IRA to the charity, and it counts as part of the taxpayer's required minimum distribution for the year.

If you turned 70½ in 2013, remember that you're now required to take a minimum distribution from your IRA (and, unless you're still working, from other retirement plans also) every year. If you delayed taking your first distribution last year, you have only until April 1, 2013, to take it or you'll be subject to a 50% penalty on the amount you should have taken.

Converting a traditional IRA to a Roth IRA is still an available option for all taxpayers. Although a conversion will generate taxable income in the year you do it, later qualifying withdrawals from the Roth will be tax-free. Your conversion opportunities are not limited to just traditional IRAs. You can also convert your 401(k), 403(b), or 457 plan to a Roth.

For details or assistance on IRA matters, contact our office.

FIRST, the payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. The tax increase will also apply to self-employment income exceeding the threshold amounts.

Employers are required to withhold the additional tax from wages exceeding $200,000, regardless of the individual's filing status. They are not required to inform the employee when they begin the additional withholding, nor are they required to match the additional withholding.

SECOND, there is a new 3.8% Medicare tax on unearned income for single taxpayers with adjusted gross income over $200,000 and married couples with income over $250,000. The tax will apply to the lesser of (a) net investment income, or (b) the amount by which modified adjusted gross income exceeds the $200,000 / $250,000 thresholds. The tax may require adjustments to the estimated taxes paid by an individual, but it does not have to be withheld from wages.

Examples of unearned income include interest, dividends, capital gains, royalties, and rental income. Social security benefits, alimony, tax-exempt interest, and distributions from most retirement plans are examples of unearned income not subject to this new tax.

Background

Under the Patient Protection and Affordable Care Act (PPACA) the federal government has made it possible for certain workers who do not otherwise have access to affordable health insurance coverage to obtain a tax credit that would help them pay the costs of their health care premiums. This credit applies to low-income workers whether employed by a small, mid-size or large employer or self-employed.  Under Code Sec. 4980H as added by the PPACA, however, an "applicable large employer" is subject to a shared responsibility payment (an assessable payment) after December 31, 2013 if any of its full-time employees are certified to receive an applicable premium tax credit or cost-sharing reduction and either:

The employer does not offer to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (Code Sec. 4980H(a)); or
The employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that with respect to a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction either is unaffordable relative to an employee's household income or does not provide minimum value (Code Sec. 4980H(b)).
The Code Sec. 4980H(b) penalty applies to coverage that is "unaffordable," meaning that the coverage costs more than 9.5 percent of the employee's household income. Since employers may not be able to determine household income, the proposed regs provide three affordability safe harbors: the Form W-2 safe harbor (based on employee wages); the rate of pay safe harbor (based on hourly or monthly pay rates); and the federal poverty line safe harbor, the IRS explained.

The employer cannot be liable under both Code Secs. 4980H(a) and 4980H(b). Furthermore, the penalty cannot exceed the payment amount that would have been imposed under Code Sec. 4980H(a) if the employee had failed to offer coverage to its full-time employees.

Proposed reliance regs

The proposed reliance regs further clarify what employees are considered "full-time employees" for the purpose of the statute. This distinction is important because the number of full-time employees determines who is an applicable large employer, subject to the affordable coverage requirements and, potentially, the per-employee shared responsibility payment. The proposed reliance regs provide additional guidance on who is a full-time employee, and covers gray areas such as the treatment of seasonal employees.

Other guidance under the regs covers whether employers who have only become applicable large employers in the current year are exempt from the shared responsibility payment. (Generally, they are not.) The proposed reliance regulations also provide certain relief to employers who inadvertently miss some employees.

Finally, the proposed reliance regs provide several transition rules. A major rule allows employers with plans on a fiscal year to wait to apply the standards until the first day of the first plan year that begins in 2014. Another rule exempts employers from penalties in 2014 if they must add dependent coverage to their health plans. Other transition rules apply to health plans offered through cafeteria plans and multiemployer plans. In addition, there are many notification responsibilities that will be placed upon the shoulders of all employers regarding access by their employees to health insurance.

If you have questions about the health care requirements for employers, the shared responsibility payment under Code Sec. 4980H, or anything related to the tax provisions of the new health care law, please contact our offices.

Which partner will handle various functions of the business should be decided at the outset. Who will make the final call when a major decision has to be made? Who will be in charge of telling an employee he/she is terminated? How many hours will each partner work in the business? Will spouses have a say in the business decisions?

Every partnership, even a very well planned one, is destined to terminate. It will come to an end because one partner dies, or wants to retire, or gets divorced and leaves town. You name it, there are endless reasons why, but sooner or later every partnership ends. So why not address the split-up at the time the partnership agreement is being put together.

Oh, you say, we don’t have a written agreement. We are good friends or brothers and, therefore, no agreement is necessary. Well, if one of you dies and the survivor is facing a lawyer for the deceased or a lawyer for the orphaned children, a written agreement of understanding will come in very handy.

Get with your attorney after the Friday party, but before Monday morning, and write a proper partnership agreement. You, your new partner, and your business will be better for it.

A final thought. Do you even need a partner? Unless you need a partner for financial reasons or you need technical expertise that you can’t get by hiring an employee, don’t take on a partner. You will find running the business and making business decisions much easier.

*Write a business plan.

*Consider location issues.

*Decide on the legal form of entity for the business.

*Get necessary licenses.

*Register with tax authorities.

*Involve your advisors.

Business plan. Your business plan will be useful to you and to lenders. It should present who will own the business and what the legal entity will be. It should identify your qualifications to run this type of business. You should identity your market, the products or services you will sell, and how you intend to advertise to prospective customers. The business plan should spell out the funds needed for start-up and the source of those funds. The plan should contain projected financial statements for the first couple of years. It should also address any insurance requirements and possible lease agreements. The business plan should be lengthy enough to cover the necessary items but brief enough to serve as an operating guide. It should be referred to on a regular basis and adjusted as needed.

Location. Where you locate may be one of your most important decisions. If your business will be online sales, you could operate out of your garage. But if you intend for customers to visit your establishment, it must be located in suitable surroundings. Does the general area tie into your product/service line? Is access or parking an issue? Do the other businesses in the area compliment yours; do they have similar clientele?

Legal form. Under what legal form of business do you want to operate? Should you incorporate, operate as an LLC, a partnership, or sole proprietorship? It is imperative that you discuss these options with your accountant and attorney early in the business planning stage. There are very valid tax and non-tax reasons for selecting a given entity.

Licenses. Your accountant and attorney can also assist you with applying for the necessary permits and licenses. This should be done early on to avoid possible delays.

Taxes. Your accountant will see that you have the proper registration with taxing and filing authorities such as the IRS, the state agencies for tax filings, and worker’s insurance if you have employees.

Advisors. You should run your business ideas past your business advisors before you make sizable financial commitments. Who are your advisors? You will have an ongoing need for a banker, an insurance agent, an attorney, and an accountant. You will benefit by involving them early and frequently.

If you have questions about operating your business, please our Fort Wayne or Marion office. We are here to assist you.

Perhaps one of the easiest payroll fraud techniques is the overpayment of withholding or payroll taxes. Your bookkeeper simply overpays the government. When the refund check arrives, it is deposited by the employee to his or her personal account. In some cases, the employee will have an account at a different bank but in the company name. Such an account could be used for the fraudulent deposit of other company receipts as well.

The greater the number of employees, the easier it is to pull off a scam. Perhaps the payroll clerk has invented a fictitious employee or falsifies hours or commissions for a cooperating employee who shares the stolen funds. Or perhaps the employee holds the payroll deposit funds in his or her own interest-bearing account until it is time to make the payroll deposit to the government.

A payroll review by an independent accountant may help prevent such employee schemes. Even in small companies, it is possible to divide office tasks to make employee theft more difficult.

Give our office a call; we will gladly review your company's internal controls to determine what changes may be needed.

Fort Wayne: 260-423-2414   Marion: 765-662-9955

 DWD presented two organizations with holiday donations this year.  Our first stop was at Associated Churches.  This organization offers families food once a month at no charge through a network of 28 local food pantries in churches and other social agencies.  Associated Churches Neighborhood Food Network is considered an "emergency food bank." Their pantries provide a five-day supply of food to prepare balanced and nutritious meals.  

The second stop we made was at Community Harvest Food Bank.  Like Associated Churches, Community Harvest Food Bank (CHFB) was very grateful for our donation as well. CHFB works with a network of food donors, social service organizations and churches to provide food to hungry people in its nine county service area.  Do you know they provide over 11 million pounds of food annually to those in the northeast corner of Indiana?  That is a lot of food!

In addition to the donations from DWD, our staff internally raised nearly $1,200 and was able to adopt 3 families through Vincent Village.  This organization provides shelter and affordable housing to homeless families in addition to their care and supportive resources to help them become independent and self-sustaining.

Photo #1 Susan Berghoff, Rev. Roger Reece, Carrie Minnich, Amanda Gerber

Photo #2 Amanda Gerber, Tammy Klimek, Carrie Minnich, Susan Berghoff

2013

Two important changes to the Medicare tax are scheduled for 2013. For tax years beginning after December 31, 2012, an additional 0.9 percent Medicare tax is imposed on individuals with wages/self-employment income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately). Moreover, and also effective for tax years beginning after December 31, 2012, a 3.8 percent Medicare tax is imposed on the lesser of an individual's net investment income for the tax year or modified adjusted gross income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately).

The Affordable Care Act sets out the basic parameters of the new Medicare taxes but the details will be supplied by the IRS in regulations. To date, the IRS has not issued regulations or other official guidance about the new Medicare taxes (although the IRS did post some general frequently asked questions about the Affordable Care Act's changes to Medicare on its web site). As soon as the IRS issues regulations or other official guidance, our office will advise you. In the meantime, please contact our office if you have any questions about the new Medicare taxes.

Also in 2013, the Affordable Care Act limits annual salary reduction contributions to a health flexible spending arrangement (health FSA) under a cafeteria plan to $2,500. If the plan would allow salary reductions in excess of $2,500, the employee will be subject to tax on distributions from the health FSA. The $2,500 amount will be adjusted for inflation after 2013.

Additionally, the Affordable Care Act also increases the medical expense deduction threshold in 2013. Under current law, the threshold to claim an itemized deduction for unreimbursed medical expenses is 7.5 percent of adjusted gross income. Effective for tax years beginning after December 31, 2012, the threshold will be 10 percent. However, the Affordable Care Act temporarily exempts individuals age 65 and older from the increase.

2014

The Affordable Care Act's individual mandate generally requires individuals to make a shared responsibility payment if they do not carry minimum essential health insurance for themselves and their dependents. The requirement begins in 2014.

To understand who is covered by the individual mandate, it is easier to describe who is excluded. Generally, individuals who have employer-provided health insurance coverage are excluded, so long as that coverage is deemed minimum essential coverage and is affordable. If the coverage is treated as not affordable, the employee could qualify for a tax credit to help offset the cost of coverage. Individuals covered by Medicare and Medicaid also are excluded from the individual mandate. Additionally, undocumented aliens, incarcerated persons, individuals with a religious conscience exemption, and people who have short lapses of minimum essential coverage are excluded from the individual mandate.

The individual mandate was at the heart of the legal challenges to the Affordable Care Act after its passage. These legal challenges reached the U.S. Supreme Court, which in June 2012, held that the individual mandate is a valid exercise of Congress' taxing power.

Like the new Medicare taxes, the Affordable Care Act sets out the parameters of the individual mandate. The IRS is expected to issue regulations and other official guidance before 2014. Our office will keep you posted of developments.

2014 will also bring a new shared responsibility payment for employers. Large employers (generally employers with 50 or more full-time employees but subject to certain limitations) will be liable for a penalty if they fail to offer employees the opportunity to enroll in minimum essential coverage. Large employers may also be subject to a penalty if they offer coverage but one or more employees receive a premium assistance tax credit.

The employer shared responsibility payment provisions are among the most complex in the Affordable Care Act. The IRS has requested comments from employers on how to implement the provisions. In good news for employers, the IRS has indicated may develop a safe harbor to help clarify who is a full-time employee for purposes of the employer shared responsibility payment.

If you have any questions about the provisions in the Affordable Care Act we have discussed, please contact our Fort Wayne or Marion office.

The maximum rate on long-term capital gains is scheduled to rise from the current 15% to 20% next year. Also scheduled for 2013 is an increase in the top rate on dividend income from the current 15% to 39.6%.

If you expect these scheduled rates to occur in 2013, it may make sense to harvest gains before year-end. Remember, wash sale rules do not apply to gains, so you can repurchase a similar investment immediately. This tactic may allow you to "reset" your basis for a future sale while benefiting from current low rates.

What about investment losses? Despite the uncertainty over a possible increase in tax rates, it's a good bet that some rules -- such as those covering capital losses -- will not change. When pruning stocks from your portfolio, keep in mind that capital losses are more valuable when tax rates are higher. You may want to postpone taking losses until 2013 if you think rates will be higher next year.

In your investment review, don't overlook the new 3.8% Medicare surtax that will apply to certain unearned income, including interest, dividends, capital gains, and passive rental income. If this surtax goes into effect as scheduled, an individual with adjusted gross income of $200,000 or more ($250,000 for couples filing jointly) could pay an effective federal income tax rate of 43.4% on some income.

Individual situations will vary, so consider all the relevant factors in making your year-end decisions. For assistance in your analysis, contact our office.

You might be surprised at what you find if you take the time to analyze your customers. Start by listing customers in order of sales. Then make your best estimate about the cost of those sales. For example, you might give volume price breaks to your biggest customers that make them less profitable than smaller customers. But don't just look at the cost of sales. Ask your sales staff, your customer service staff, and your accounting staff to assign a simple grade to your customers (e.g., A, B, C, D, or F). This will give you a relative measure of how much time and effort each customer requires.

Once you have profitability and customer care information, you can begin to rank your customers in groups from best to worst. The "best" are easy. They're the customers you should make a special effort to appreciate and retain.

You have several options for the "worst" group. With some customers, you might want to change your pricing structure to charge them for the excessive costs and attention they require. With others, you might want to sit down and address specific problem areas. Sometimes just making customers aware of problems can produce positive joint solutions.

In some cases, the only solution is to part ways. Do this gracefully, without creating unnecessary ill will that can come back to haunt you. If possible, find a plausible business reason to support your action. But if necessary, be blunt and tell the customer that you're cutting back to provide better service to your top customers. Suggest alternative suppliers they might contact to fill their needs.

Eliminating customers may be counter-intuitive, but it can work wonders for your bottom line and your staff's morale. Call us if you'd like assistance with the financial analysis of your customers.

Pre-schoolers and teenagers obviously have different financial concerns and abilities. But there are a few basic lessons that all children should learn by the time they enter college or start a career.

*Having money means making choices. Teach your child how to choose between spending and saving, and how to do both intelligently. A regular allowance will help your child gain real-world financial experience.

*Money requires planning. At the appropriate age (usually about nine or ten), show your child how to develop a simple spending plan. In later years, show how to plan for larger expenditures.

*Money means responsibility. Inevitably, your child is going to make some money mistakes. Try to avoid criticism, but don’t automatically fix every problem and let your child off the hook. Help analyze the reason for the mistake, and suggest how to avoid it in the future.

*Money needs to be managed. Specific lessons might range from how to compare interest rates on savings accounts, to the pros and cons of mutual fund investing. But there should be one common element to all of your teaching in this area: money doesn’t take care of itself.

The way you handle your money may be the most powerful lesson of all for your children. For your child’s sake, as well as your own financial well-being, it’s important to practice what you preach.

But what do you do when the e-mail has the Internal Revenue Service web address in the FROM box and a subject line that claims you're about to be audited by the Criminal Investigation Division?

*Step 1. Stop and think. You've never given the IRS your e-mail address in relation to your tax return. Even if you had, the government does not request personal information such as your bank account, credit card, or social security numbers via e-mail.

*Step 2. Without clicking on any links or responding to the e-mail, forward the entire message to the IRS (phishing@irs.gov). The IRS established this e-mail box in 2006 to investigate and shut down online fraud.

Note: You will not get a response, either online or off, from the IRS when you report scams.

*Step 3. Delete the e-mail.

Besides the audit subterfuge, other common e-mail tax schemes to know and avoid include a promise of additional money due, bogus government grants, and requests for you to check the status of your refund.

Tax scams never die, and they can be taxing. Before you react to any communication from -- or purporting to be from -- the Internal Revenue Service, contact us. We're here to help you resolve tax issues.

When a plan loan is not a taxable distribution

In general, a loan from a qualified employer plan, such as a 401(a) or 401(k) account, must be treated as a taxable distribution unless you can meet certain requirements with respect to amount, repayment period, and repayment method.

First, however, the terms of the employer-plan must allow for plan loans. Due to administrative costs and other considerations, plan loans are made optional for employer plans. If permitted, however, loans must be made available to all employees.

A loan to a participant or beneficiary is generally not treated as a taxable distribution if:

The loan is evidenced by a legally enforceable written agreement that specifies the amount and term of the loan and the repayment schedule;
The amount of the loan does not exceed $50,000 or half of the participant's vested accrued benefit under the plan (whichever is less);
The loan, by its terms, requires repayment within five years, except for certain home loans; and
The loan is amortized in level installments over the term of the loan.
Plan loans may be made only from employer-based plans. Individual retirement accounts (IRAs) cannot be used as collateral for a loan, nor can a direct loan be made from the IRA to the account holder.

Calculating the amount of the plan loan

In addition to the $50,000 or 50-percent vested benefit rule, several other provisions apply to the amount of the plan loan. First, a plan participant may take out a loan of up to $10,000, even if that $10,000 is more than one-half of the present value of his vested accrued benefit. Second, if a plan participant decides to take out another plan loan, the new maximum amount of the total plan loans will be determined by the following method:

($50,000 − (highest outstanding loan balance during the preceding 12-month period − outstanding balance on the date of the new loan)) = new plan loan maximum.

That new plan maximum must be reduced further by any outstanding loan balance.

Repayment period

Participants must repay a loan within five years. There is one exception, however, for a loan used to make a purchase of a first-time home that is a principal residence. The loan term may then be as long as 30 years.

If a participant defaults on a loan payment, the entire principal may become due under the terms of the plan. In addition, most plan terms require that you repay the loan within 60 days if you leave or lose your job. If you cannot repay at that time, the balance of the loan is usually considered a taxable distribution deducted from your remaining retirement plan account balance. That deemed distribution may also incur a 10 percent early distribution penalty.

Repayment method

Loan repayments must be made at least every quarter, and are generally deducted automatically from a participant’s paycheck. Defaulting on a loan causes the IRS to treat the entire outstanding loan balance as a premature (and therefore a taxable) distribution from the employer plan. A deemed distribution occurs at the time of the failure to pay an installment, but the plan administrator can allow a grace period. The deemed distribution then becomes subject to both income tax and the 10-percent early withdrawal penalty.

There are benefits to borrowing from an employer retirement plan, such as providing a ready-made source of credit and the benefit of returning interest paid back into the plan account rather than into the pockets of a third-party lender. There are also many drawbacks to taking out a plan loan. To learn more, please contact our Fort Wayne or Marion office.

The IRS has announced a delay in the effective date, moving it to January 1, 2014. This one-year delay is in response to complaints that the earlier deadline did not give brokers and other financial institutions time to build and test systems to handle the complicated basis reporting requirements.

* What is the alternative minimum tax?

Enacted back in 1969, the alternative minimum tax (AMT) was designed to make sure that high-income taxpayers pay a minimum amount of taxes, even if they have sufficient deductions and credits to reduce their federal income tax liability to zero.

The AMT is like a flat tax. You get a lower tax rate in exchange for losing most deductions.

To calculate the AMT, start with regular taxable income, which includes all your familiar deductions and exemptions. Then make certain adjustments and add back certain "preferences" to arrive at your AMT income. Preferences include personal exemptions, state and local taxes, certain interest on home-equity loans, and miscellaneous itemized deductions.

After adding back the preferences, you're entitled to an exemption amount, though the exemption phases out at higher income levels. The exemption for 2012 is $33,750 for singles and $45,000 for married couples filing a joint return.

You then calculate your AMT by applying a tax rate of 26% to the first $175,000 of AMT taxable income, and 28% to any additional amounts. Finally, you compare your AMT to your regular tax and pay whichever is greater.

* Who is affected by the AMT?

Congress created the AMT to ensure that wealthier taxpayers, who often have the kinds of income and deductions that qualify for preferential tax treatment, would pay at least a minimum amount of tax. Congress also wrote exemptions into the law, so that middle-income taxpayers wouldn't be subject to the AMT.

Unfortunately, these exemptions were not indexed for inflation. As incomes have continued to rise, more and more people have found that they need to calculate their tax bill twice -- once under regular tax rules, and again under the AMT.

Though Congress has expressed a desire to eliminate the AMT, it is still in effect. Every year thousands of middle-income taxpayers find themselves subject to the alternative minimum tax.

* Will the AMT affect you?

Do you need to concern yourself with the AMT? You do if you have a lot of dependents or if you claim substantial itemized deductions. You may also be subject to the AMT if you realized hefty capital gains during the year or exercised incentive stock options. Claiming certain tax credits might trigger the AMT as well. And if you are an owner of rental real estate or a capital intensive business, you need to be aware that the amount of depreciation allowed under the AMT is limited.

Don't forget the AMT in your tax planning. You may be one of those middle-income taxpayers who is now subject to this tax. For details or planning assistance, contact our Fort Wayne or Marion office.

Some sources of money that may or may not be taxable depending on the circumstances:
* Life insurance proceeds.
* Scholarship grants.

One source of income that is often overlooked is generated by bartering. If you trade goods or services for other goods or services with another person, both of you need to report the fair market value of the goods or services as income on your tax return.

This list is by no means all inclusive. If you need additional information about tax, business, or financial matters, please contact our Fort Wayne or Marion office.  Our CPAs are happy to help.

What happens if you fail to file your return by October 15, the extended due date? One consequence: Unless a disaster-relief exception applies or you have a valid reason, you may be charged penalties and interest.

For example, the penalty for filing your return after October 15, 2012, is 5% of the amount of your unpaid tax, per month, up to a maximum of 25%. After 60 days, a minimum penalty of $135 or 100% of the tax due applies.

In addition, a late payment penalty of ½ of 1% of the tax due may apply for each month or part of a month that you fail to pay the tax due. The two penalties interact and can be combined.

You'll also have to pay interest on the tax due. During 2012, the rate on underpayment of tax has been 3%. The interest is compounded daily and can be charged on penalties.

Since the penalty and interest are based on unpaid tax, neither applies when your return shows a zero balance. Filing a return is still a good idea, however. Why? The general rule limiting the IRS to a three-year period for assessing tax begins when you file. No return, no statute of limitations for being audited.

Giveour Fort Wayne or Marion office a call if you have questions or need filing assistance.

The FAFSA form is necessary for college-bound students and their parents who are applying for numerous federal government education programs or subsidies, such as the Pell Grant, low-interest federal student loans, and the Federal Work Study Program. Eligible taxpayers may use the tool for either the initial or the renewal FAFSA.

Completion of the FAFSA requires certain federal tax information such as the student and parents' adjusted gross income, tax, and exemptions. The free IRS DTR tool enables applicants to automatically transfer their tax return information onto the FAFSA form. The tool will also increase the accuracy of the income information reported on the FAFSA form and minimize processing delays. Taxpayers who are eligible to use the DRT can access it one to two weeks after the federal income tax return is filed if the return is filed electronically. In the cases of a paper tax return, taxpayers may access the tool approximately six to eight weeks after filing.

Who can use the DRT?

To use the DRT to complete the 2012-2013 FAFSA, taxpayers must meet several prerequisites:

1. They must have filed a federal 2011 tax return;
2. Have a valid SSN;
3. Have a valid Federal Student Aid PIN; and
4. Have not changed marital status since December 31, 2011.

What if I don't have a PIN?

If an individual does not have a Federal Student Aid PIN, he or she may apply for one beforehand through the FAFSA application process. An online application is available at www.pin.ed.gov.

What if I can't use the DRT?

In some cases the IRS DRT is unavailable. The tool is not accessible for completion of the 2012-2013 FAFSA if either the student or parents:

1. Filed an amended 2011 tax return or did not file a 2011 tax return;
2. Filed their 2011 tax return as married, filing separately; or
3. Filed a foreign tax return or Puerto Rican tax return.

If a student cannot or chooses not to use the IRS DRT, that student, his or her parents or spouse can verify income information submitted to the Financial Aid Office through a tax transcript from the IRS. Applicants may request a transcript on IRS Form 4506-T, Request for Transcript of Tax Return. Transcripts may be requested online through www.irs.gov or by phone at 1-800-908-9946.  Please contact the Fort Wayne or Marion office if you need additional help.

According to the most recent reading of the U.S. Drought Monitor and other indicators, moderate to exceptional drought covered approximately 60 percent of the contiguous U.S. as of the end of August and is being compared to the droughts of the 1930's, 1950's and the summer of 1988. Unless a loss attributable to drought occurs in a trade or business or a for-profit transaction, however, it is generally not deductible. A loss must occur within a short period of time, for it to be deductible as a casualty loss. The IRS has said that most droughts lack the suddenness necessary for a casualty loss deduction. The conventional tax wisdom has been that, as a practical matter, a casualty loss should not be claimed unless there has been an officially declared water emergency or some general drought designation by the IRS. For example, a casualty loss deduction was allowed for structural damage to a house because of subsoil shrinkage in a 1977 Missouri drought that was declared a federal disaster. So far, the IRS has not spoken to the drought of 2012 but some guidance is expected to be announced in the near future.

Taxpayer has burden of proof

To deduct a casualty loss, the taxpayer must be able to show that there was a casualty loss and to justify the amount taken as a deduction. A taxpayer should be able to show: the type of casualty and its date of occurrence; that the loss was a direct result of the casualty; that the taxpayer owned the property (or was liable for the damage to the owner of the property); and whether there is a claim for reimbursement with a reasonable expectation of recovery.

Business property

The allowable deduction for business property destroyed in a casualty is usually different from the loss of personal property. If the property is used in a trade or business or other activity conducted for profit, the allowable deduction is the lesser of the property's adjusted basis (before the casualty) or its decline in value because of the casualty. If business property is completely destroyed, the deduction is the full amount of the property's adjusted basis, reduced by any insurance recovery, even if the basis exceeded the property's value before the casualty.

Personal-use property

If property owned outside of the business or investment setting, like a personal residence, is damaged, the loss is the lesser of the property's decline in value or its adjusted basis, reduced by insurance proceeds or other reimbursement. Unlike business property, if personal property is completely destroyed, the loss cannot exceed the decline in value from the casualty, even if this is less than the basis. Furthermore, the loss must be reduced by $100 per casualty, and is deductible only to the extent that net casualty and theft losses exceed 10 percent of the taxpayer's adjusted gross income. Unlike businesses, however, individuals have the option of treating a casualty loss as occurring in the immediately prior year, thereby often allowing for a quick refund through filing an amended return.

"Timely" insurance claim

To deduct a personal casualty loss, the taxpayer must have filed a timely insurance claim. The loss may be disallowed if the taxpayer fails to file a claim. Any portion of the loss that is not covered by insurance is not subject to this rule.

A recent court case discusses the requirement to file a timely insurance claim. A homeowner suffered loss of his home from fire. The homeowner immediately notified his insurance company of the loss, was assigned a claim number, and had the insurance company inspect the damage. However, the insurance company denied the claim. One reason it gave was that the homeowner failed to provide a statement as to proof of loss within 60 days, as required under the policy. After the insurance company denied the claim, the homeowner took a casualty loss deduction on his amended tax return.

Taxpayer deduction upheld

The IRS denied the casualty loss deduction, claiming that the taxpayer had failed to file a "timely insurance claim" as required by the tax code. The Federal Court of Claims rejected the IRS's action and allowed the claim. The court said it was clear that the homeowner had filed a claim with the insurance company and that this was sufficient to comply with the tax code. The company's ultimate denial of the claim under the terms of the policy was not relevant.

If you have suffered a casualty, it is important that you claim the full amount of the tax deduction to which you are entitled. If you have any questions about casualty losses, please contact our Fort Wayne or Marion office and talk with a CPA.

The new regulations are generally effective for tax years beginning on or after January 1, 2012. However, certain portions are effective for amounts paid or incurred in tax years beginning on or after January 2, 2012, a subtle but important difference. To complicate matters further, the regulations are, in effect, retroactive insofar as accounting method changes are needed to be filed with the IRS in many cases and adjustments made to reflect these changes.

The new regulations are called "temporary" only because the IRS reserves the right to fine-tune them and issue "final" regulations - the IRS may do this before year end, but it has a three year deadline to do so. In the meantime, the "temporary" regulations stand in as the law.

Highlights

The new regulations present both compliance challenges and planning opportunities. The major take away from examining these new regulations is that it is to the advantage of virtually all businesses to reconsider how they treat certain repairs and improvements for tax purposes.

The following highlights cover only some of the many changes made by the new repair regulations:

Materials and supplies. The definition of materials and supplies has been revised along with the rules for determining the proper tax year for a deduction. The new regulations allow an election to capitalize materials and supplies, and contain special rules for rotable spare parts.

De minimis expensing. Taxpayers with an "applicable financial statement," such as a certified audited financial statement, may now claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met. Under the general rule, materials and supplies are usually deducted in the tax year used or consumed. The new election to deduct materials and supplies under the de minimis rule is particularly helpful if the tax year in which the cost of the materials and supplies is paid or incurred occurs before the tax year of use or consumption.

Amounts paid to acquire or produce tangible property. This portion of the regulations explains which costs associated with the acquisition or production of real or personal property must be capitalized to the basis of the property and which costs may be claimed as a current deduction.

Amounts paid to improve tangible property. This is the heart of the new regulations which provides rules for distinguishing repairs from capital expenditures. It divides capital expenditures into three categories of improvements: betterments, restorations, and adaptations. Generally, whether an expenditure is an improvement is based on facts and circumstances. A safe harbor rule is provided for routine maintenance activities. Also, certain regulated taxpayers may elect to use their regulatory accounting method to distinguish between repairs and capital expenditures.

Unit of property defined. The "unit of property" is a critical concept in determining whether an expenditure is a repair or capital expenditure. Generally, the larger the unit of property, the more likely that work on that property will be considered a deductible repair. The regulation contains detailed rules for determining the size of a unit of property in the case of buildings and other types of property. Planning opportunities present themselves within this framework.

MACRS general asset accounts. MACRS stands for modified accelerated cost recovery system, which is the basis system now used for the tax depreciation of most assets. Importantly, an election to recognize gain or loss by reference to the adjusted basis of an asset disposed of from a GAA now applies to virtually any asset disposed of. Previously, a taxpayer was usually required to recognize the entire amount realized upon a disposition as ordinary income, and no loss deduction was allowed. Bottom line: A taxpayer may now place an asset, such as a building, in a GAA and--whenever an asset, such as a structural component, is retired--choose whether to follow the GAA default rule that no loss is recognized or elect to recognize a loss equal to the adjusted depreciable basis of the asset.

Businesses that previously retired a structural component which is currently still being depreciated will need to change accounting methods to bring the treatment of the structural component into compliance with the new rules. For most taxpayers, the change in method will involve making a retroactive MACRS general asset account election and then deciding whether to claim a loss on the retired component through a so-called 481(a) adjustment or to continue to depreciate the retired component.

Individuals

In less than three months, the individual income tax rates are scheduled without further action to automatically increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. Additionally, the current tax-favorable capital gains and dividends tax rates are scheduled to expire. Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the tax code, will be cut in half. Millions of taxpayers are predicted to be liable for the alternative minimum tax (AMT) because of expiration of the AMT "patch." Countless other incentives for individuals will either disappear or be substantially reduced after 2012.

In July, the House and Senate passed competing bills to extend many of these expiring incentives one more year (through 2013). No further action is expected on these bills until after the November elections. However, they do signal a highly probable temporary solution to the fate of the Bush-era tax cuts. Regardless of which party wins the White House and Congress, the probability of a one-year extension of the Bush-era tax cuts appears high.

Along with expiration of the Bush-era tax cuts, the two percent payroll tax holiday for 2012 is scheduled to expire. For individuals with income at or above the Social Security wage base for 2012 ($110,100), the payroll tax holiday represented a $2,202 savings. Unlike the Bush-era tax cuts, an extension of the payroll tax holiday is unlikely.

Putting aside the Bush-era tax cuts and the payroll tax holiday for a moment, two new taxes are scheduled to take effect after 2012: an additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax on unearned income. Both new taxes are targeted to individuals with incomes over $200,000 (families with incomes over $250,000). One important misconception about the 3.8 percent Medicare tax is that it is a direct real estate tax. Taxpayers that dispose of real estate may be exempt from the tax either because of income limitations or because of an exclusion provided for primary residence home sales. However, certain high-end homes may feel the sting of the 3.8 percent tax on some or all of the gain realized. Despite some rumblings in the GOP-controlled House, it is unlikely the new Medicare taxes will be repealed before 2013.

All these provisions can be seen as the perfect storm. Year-end tax planning takes on new urgency because of the uncertainty. Some variations on traditional year-end planning techniques may be valuable. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. The same strategy may apply to recognizing income from capital gains and dividends. Another valuable year-end strategy is to "run the numbers" for regular tax liability and AMT liability. Taxpayers may want to explore if certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes. Additionally, keep in mind the new Medicare taxes and how they will impact investments and possibly home sales.

Estate tax planning is also in flux. Under current law, the maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million (indexed for inflation) for decedents dying before January 1, 2013. Unless Congress acts, the estate tax will revert to its less generous pre-2001 rates. Gift and generation-skipping transfer (GST) taxes also will revert to their pre-2001 rates.

Businesses

Businesses are also confronted with uncertainty in tax planning as 2012 ends. Special incentives, such as bonus depreciation, enhanced Code Sec. 179 expensing and a host of business tax extenders, may be unavailable after 2012.

Under current law, 50-percent bonus depreciation applies to qualified property acquired and placed in service after December 31, 2011 and before January 1, 2013 (January 1, 2014 for certain property). For tax years beginning in 2012, the Code Sec, 179 expensing dollar limitation is $139,000 and the investment ceiling is $560,000 for tax years beginning in 2012. After 2012, 50-percent bonus depreciation is scheduled to expire (except for certain property) and the Code Sec. 179 expensing dollar limitation will drop to $25,000 with a $200,000 investment ceiling.

Enhanced Code Sec. 179 expensing is a good candidate for extension after 2012, but at less generous amounts. In July, the Senate approved a Code Sec. 179 dollar amount of $250,000 and an $800,000 investment limitation for tax years beginning after December 31, 2012. The House approved a Code Sec. 179 dollar amount of $100,000 and a $400,000 investment limitation after 2012.

The list of expired business tax extenders is long. The expired incentives include the research tax credit, special expensing for film and television productions, the employer wage credit for military reservists, and many more. A host of related energy incentives have also expired and are awaiting renewal. Unlike past years, Congress is not expected to routinely extend all of the expired provisions. The more widely utilized incentives are likely to be extended; some lesser used incentives may not.

Businesses do have some good news in year-end planning. Temporary "repair" regulations issued in late 2011 include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met. The aggregate cost which may be expensed annually under a taxpayer's expensing policy is subject to a ceiling equal to the greater of 0.1 percent of gross receipts or two percent of total depreciation and amortization reported on the financial statement.

Businesses should also explore the Code Sec. 199 domestic production activities deduction. This deduction, unlike many other incentives, is permanent and will not expire after 2012. The deduction allows qualified taxpayers to deduct an amount equal to the lesser of a phased-in percentage of taxable income (adjusted gross income for individuals) or qualified production activities income. A taxpayer's Code Sec. 199 deduction cannot exceed one-half (50 percent) of the W-2 wages paid by the taxpayer during the year.

Sequestration

The fate of the Bush-era tax cuts and the other incentives is linked to sequestration. The Budget Control Act of 2011 imposes across-the-board spending cuts starting in 2013. Many lawmakers want to postpone or repeal the spending cuts but savings must be recouped somehow. Several energy tax incentives, especially for oil and gas producers, have been viewed as likely candidates for elimination to offset repeal of the Budget Control Act.

Please contact our office if you have any questions about the incentives we discussed and how you can develop a year-end tax plan that responds to the current climate of uncertainty.

Below is a copy of our latest peer review letter.  Should you have questions, please contact our Fort Wayne or Marion office.

SIMPLEs (Savings Incentive Match Plans for Employees) are available in two forms - SIMPLE IRAs and SIMPLE 401(k)s. SIMPLE plans are generally available only to small businesses that don't maintain any other retirement plan. If your business has more than 100 employees, you won't be eligible for a SIMPLE.

Most businesses will find the IRA version preferable to the 401(k) form of SIMPLE. Here's how SIMPLE IRAs work. Eligible employees (including yourself) can elect to have a portion of their earnings withheld each pay period, limited to $11,500 in annual deferrals ($14,000 for those aged 50 or older). The employees then direct how the deferrals will be invested within their own SIMPLE IRAs. Amounts withheld for the SIMPLE IRA reduce the employee's taxable income and grow tax-deferred.

The costs to set up and administer a SIMPLE IRA are minimal. However, as the employer, you're required to make contributions into your employees' SIMPLE IRAs on their behalf. You have the option of contributing either 2% of the wages of every eligible employee or making matching contributions up to 3% of the wages of those employees who participate in the plan.

Generally, the deadline for businesses to establish a SIMPLE plan for 2012 is October 1, 2012. To find out more about SIMPLE plans, give us a call.

 * The first step is an honest self assessment. Common characteristics of a successful entrepreneur are the drive to achieve and the willingness to take risks. To succeed in business, you need good organizational and people skills, confidence to make good decisions under pressure, and the emotional and physical endurance to work long hours. Experience in the type of business you're planning is a major factor.

 * Take the time to do your homework. A business is more likely to fail if you're in a hurry to open the doors. Consult trade associations, other successful business owners, governmental agencies, and professional advisors for information relating to your new business. Is there a demand for your type of product or service? If so, who will your customers be, and where should you locate in order to be easily accessible to them? How will you set your prices to attract customers, yet maximize profits? How will you make your business stand out from the competition?

 * Look for ways to limit your overhead expenses. For example, determine whether you should lease or buy your premises and equipment. If you only need an office to meet with clients, consider places that rent space on an as-needed basis and furnish secretarial help and equipment. Check out the benefits of an enterprise zone, where taxes and even the cost of utilities and phone service may be lower.

 * Incorporate your research into a business plan. Have your accountant assist you with this. Chances of obtaining the necessary start-up capital improve if you have a clear business plan.

 Opening a new business is the dream of many people. For guidance that can help improve the chances of success for your venture, give us a call.

Here's a recap of the basic rules. The capital gains and capital losses you realize during the year are "netted" under complex rules when you file your tax return. A gain or loss is treated as being long-term if you've held the securities for more than one year. For 2012, net long-term capital gain is taxed at a maximum tax rate of 15% (0% for investors in the regular 10% and 15% tax brackets).

If you're showing a net capital gain on paper as year-end approaches, any capital losses you realize will reduce the amount of the taxable gain or offset it completely. An excess loss can then offset up to $3,000 of highly taxed ordinary income before any remainder is carried over to next year. However, the usual strategy of harvesting losses is complicated this year by three key tax law changes scheduled for 2013.

1. The maximum tax rate for net long-term capital gain will increase to 20% (10% for investors in the lower tax brackets).

2. Ordinary tax rates are going up. For example, the top rates of 33% and 35% will increase to 36% and 39.6%, respectively.

3. A special 3.8% Medicare surtax will apply to the lesser of net investment income for the year or the amount by which modified adjusted gross income (MAGI) exceeds $250,000 ($200,000 for single filers).

Barring any late legislation by Congress, investors may be inclined to harvest capital gains instead of losses at year-end. As a result, you can benefit from the favorable tax rates in effect for 2012. If you've already realized short-term gains in 2012, you might want to realize short-term losses to offset those gains. But don't use short-term losses to offset long-term gains, if you can help it, because long-term gains are taxed at a maximum rate of only 15% in 2012.

Other considerations may come into play. The best approach is to do what's best for your situation. Contact us for assistance in reviewing your options.

Simply put, the breakeven point is the sales volume at which the business generates just enough revenue to cover its expenses. While a business that's breaking even doesn't have a profit, it's not losing money either.

* How to determine breakeven. To calculate your breakeven point, you'll need to know three things: sales, variable costs, and your total fixed costs. Variable costs are those that fluctuate with the number of items sold, such as the cost of materials and sales commissions. Within limits, fixed costs do not fluctuate with sales volume (i.e., rent, insurance, and property taxes).

* Calculating the breakeven point involves two steps. First, it's necessary to figure out the amount left over from each sales dollar after the variable expenses have been subtracted. This is known as the contribution margin. Then the contribution margin is divided into your fixed expenses to get the breakeven point.

* How to use breakeven. How can you benefit from knowing your breakeven point? First, you'll be able to manage your business better once you know the sales volume needed to turn a profit. Second, by monitoring your sales, you can accurately predict whether you're on course to reach your profit goals. Third, you'll be able to take corrective action more quickly.

There are other benefits too. Using breakeven analysis, you can calculate the sales volume you'll need to cover the costs of a proposed new product or service. Plus, if you have a desired profit, you can add it to your fixed expenses and calculate the precise sales volume you need to achieve that targeted profit.

Call us if you would like assistance in using breakeven analysis to improve your business.

At its best, everyone benefits from giving a student a card. The student uses the card for budgeted expenses, pays off the balance each month, and starts building a good credit history. The parents sleep better knowing the student has a credit source in case of emergencies.

At its worst, the student is unused to managing money or living within a budget. The student fails to make payments on time, incurs high interest charges, and ruins his or her credit history. The parents have to step in to bail the student out.

Among the risks:

* Lack of experience in managing money can lead a student to overspend or to neglect making payments on time.

* Peer pressure may encourage a student to spend on entertainment or clothes, just to keep up with friends.

* Failure to agree on a budget beforehand can result in shock when you see your student's monthly statement.

* Parents co-signing for the card can put their credit scores at risk, too.

* Loss or theft of the card can lead to problems that take time to resolve.

To minimize risks:
* Set ground rules for use of the card. Agree on what it may and may not be used for. Put the agreement in writing and have the student sign off.

* Establish a budget. Talk regularly about how your student is managing his or her expenses within the budget.

* Consider alternatives to a credit card, at least for the freshman year. Consider using a prepaid credit card, or set up a checking account with a debit card. That allows the student to gain experience managing expenses within a budget.

Finally, remember you may have no say in the matter. Students are bombarded with credit card offers as soon as they enroll. Card companies are usually happy to issue a card to any student over age 18 in his or her own name.

After enjoying breakfast served by the American Red Cross at Headwaters Park, DWD headed out to its project site at Visiting Nurse & Hospice Home.  Visiting Nurse & Hospice Home is a nonprofit that provides compassionate medical care, and emotional and spiritual support to those entering the last stages of life and to their loved ones who go on living.

To find out more about Visiting Nurse & Hospice Home visit their website at www.vnhh.org or to find out how you can participate in the Day of Caring visit the United Way’s website at www.unitedwayallencounty.org.

Posted by: Carrie Minnich

One shared characteristic is that each comes with a price tag. Here's another: If you have school-age kids, you might be facing the challenge of having to decide which goal to save for. They're both important. So how do you make the choice?

Here are some suggestions that can help you reach a sensible solution.

* Eliminate excuses for not making a decision. Procrastination can be costly. For example, to accumulate $100,000 in five years, you'd have to deposit a little over $1,500 every month in an account that earns 4%. But with a ten-year time horizon, assuming the same return, you can build up $100,000 by socking away less than half that amount, or approximately $700 per month.

What you need to know: Estimate the total amount required for both goals, how much time you have, and how much cash you'll need to set aside on a regular basis.

* Expand your resource horizon. Once you've computed the expense side of the equation, figure out how much you can afford to save. You may find that, with one pool of income and two goals, there's not enough money to fully fund both goals.

But who says you have to pay for everything yourself? Turn an obstacle into an opportunity by searching out alternatives. For instance, while your income in retirement may be dependent in large part on your savings, there are plenty of options for paying
college tuition.

Where to look: Investigate the possibility of advanced placement credits while your child is still in high school. Other potential sources of help include scholarship prospects, federal work/study programs, and summer internships.

* Adopt a flexible approach. Broadly speaking, you have three alternatives for divvying up your available savings between the two goals. You can save for retirement only, save for college only, or opt to do both.

Yet within each alternative are creative strategies. As an illustration, you could start out by saving strictly for retirement, shift toward saving for college when your child reaches a certain age, then switch back after graduation.

Caution: Be careful of falling into the deadline trap. It's likely your kids will attend college before you retire. Since the tuition deadline is closer, you might be tempted to reduce or eliminate retirement plan contributions in the early years of your savings plan in order to focus on education savings.

But consider this: A typical retirement will generally last longer and cost more than your child's education. By putting college tuition first, you could end up with less than you need in your retirement nest egg. Instead, take your overall time horizon into account.

For assistance with the numbers, give us a call.

Yet the truth is, most investors don't make money playing IPOs. It's just that no one brags when they lose money. Nonetheless, investors of all kinds are lined up for a shot at the next IPO. So it pays to know the facts before diving in.

First bit of advice: Don't bet the farm. The problem is that generally IPOs are issued by companies with no track record, inexperienced management, and few assets. And, unfortunately, the underwriters for these IPOs are motivated to complete the transaction, collect their fees, and move on. Their compensation is linked not to the quality of the firms they take public, but rather to the number of deals they sell to the public.

To protect yourself, you must do your homework, as you would for any investment. A company planning an IPO writes a prospectus that describes the business and details management's plans for what they intend to do with the money, how fast they intend the company to grow, and what profits they expect. The prospectus also discusses the competition and markets, and, most importantly, describes the risks of investing in the IPO.

Do the necessary research, and be sure you understand the risks before you make an investment in an IPO.

* Research, research, research. Know what you're buying. Carefully study the characteristics of the coins you're considering, paying specific attention to rarity, grading, market availability, and price trends. Comparison shop for similar coins by checking prices in leading coin publications. If a dealer's advertised price is much lower than listed prices, the dealer may be misrepresenting a coin's grade or quality. Online discussion groups dedicated to coin collecting are also a great place to post questions about a particular coin.

* Know the seller. Before you buy, check out the dealer's reputation. How long has the firm been in business? Is the dealer a member of a professional organization? Has the Better Business Bureau received any complaints about this company? What guarantees does the seller provide?

* Be careful with online auctions. For many years the market for rare and precious coins has been a fertile field for fraudsters, and online selling has taken the game to a new level. Dealers who use online auctions such as eBay have been caught using a variety of scams: doctoring images, posting bogus descriptions, selling counterfeits, sending coins that differ from those advertised (the old "bait and switch" routine), and failing to deliver purchased items. Again, if you're planning to buy at an online auction, find out as much as possible about the seller. Check feedback ratings. Read both positive and negative comments. Make sure the seller has sold similar coins in the past with good results. Ask the seller for clarification if something appears suspicious. And if you win the bidding, beware of sending payments to a location that differs from the one listed in the auction.

Whether buying coins online or off, the old maxim, "let the buyer beware" is always sound advice.

But lending money to relatives can have tax consequences. The IRS requires that a minimum rate of interest be charged on loans. If you do not charge at least the minimum rate, the IRS will still require you to pay tax on the difference between the interest you should have charged and what you actually charged. If these excess amounts become large, or if the loan is forgiven, there may also be gift tax implications.

There are some exceptions, though. Loans of up to $10,000 generally can be made at a lower (or zero) rate of interest, as long as the proceeds aren’t invested. Loans between $10,001 and $100,000 are exempt from the minimum interest requirement as well, as long as the borrower’s investment income is $1,000 or less. If the investment income exceeds $1,000, you’ll be taxed on the lesser of this income or the minimum IRS interest.

For the IRS to treat the transaction as a loan and not a gift subject to the gift tax rules, the transaction must look like a loan. The borrower should have the ability to repay the principal and interest. A contract should be prepared which specifies the loan amount, interest rate, the payment dates and amounts, any security or collateral, as well as late fees and steps to be taken if the borrower doesn’t pay. Have the document signed and dated by all the parties. For assistance, give us and your attorney a call.