Employees get more than a paycheck

Surveys show that employees tend to underestimate the amount of money that their employer is spending on employee benefits. It’s up to you to get them to realize their paycheck is only part of the compensation they are receiving as employees.

Make your employees aware of their total compensation package. After all, your employees can’t appreciate all those extra dollars the company pays if they don’t know about them.

In conjunction with preparing an employee’s W-2 for 2013, prepare a list of the amounts that make up his or her total compensation package. Consider going over each employee’s total benefits package during the employee’s annual review.

Your benefits summary should include such items as the following: salary, bonus, pension plan contribution, deferred compensation, medical and dental insurance, life insurance, disability insurance, FICA (social security & Medicare), worker’s compensation, and unemployment insurance.

Also include the number of paid vacation days, personal days, sick days, and the value of employer-provided benefits such as work clothing, parking, and meals.

Don’t let taxes cloud your economic decisions

ome tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.

Here’s one example of the tax tail wagging the economic dog. Let’s say that you run an unincorporated consulting business. You want some additional tax write-offs, so you decide to buy $10,000 of office furniture that you don’t really need. If you’re in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you’ll still be out of pocket $7,200 ($10,000 minus $2,800) – and stuck with furniture that you don’t really need.

There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example:

* Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

* A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.

* Someone turns down extra income, because it might “push them into a higher tax bracket.”

* An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

Tax-cutting strategies are usually part of a bigger financial picture. If you are planning any tax-related moves, we can help make sure that everything stays in focus. For assistance, give us a call.

Check the tax issues if you are caring for elderly parents

As the population in the U.S. continues to age, more and more people will find themselves caring for their parents. Here are some of the tax breaks that caregivers should consider.

* If you provide more than half of your parent’s support, you may be able to claim your parent as a dependent on your tax return. To be eligible, your parent can’t earn more than $3,900 in 2013, excluding their nontaxable social security and disability income.

* What if you and your siblings all pitch in to support a parent? Anyone who contributes at least 10% of the total support can be the one to claim the $3,900 exemption if all of you sign a multiple support agreement.

* Even if a parent’s income exceeds $3,900 this year, you can still deduct the medical expenses paid on the parent’s behalf, as long as you provide more than half of his or her support.

* If you hire someone to take care of your parent while you work, you might qualify for the dependent care tax credit. Your parent must be physically or mentally incapable of caring for himself.

* Unmarried individuals who support a parent can file their tax returns as “head of household.” To qualify, your parent doesn’t need to live with you. Instead, as long as you pay more than half of the cost of maintaining your parent’s main home, including a rest home or nursing facility, you qualify for this preferential tax treatment.

For more information about the tax issues affecting caregivers and their parents, please give us a call.

The fringe benefits you offer can be an important factor for hiring and retaining your team.

Fringe benefits are important to your employees. Wage levels often don’t differ much between companies, so the fringes you offer can be an important factor in hiring and retaining workers.

Major fringe benefits such as health insurance are expensive. But if you’re willing to be creative, you can design other attractive benefits at low or no cost. Often these benefits are tax-free to your employees. The exact benefits will depend on the size of your work force and the nature of your business. But here are some ideas to consider.

* Flexible schedules. If the nature of your business allows, offer flexibility in working hours. Canvass senior employees for suggestions on changes. Consider ideas such as closing earlier on summer Fridays to give employees a longer weekend. Make up the time with slightly longer hours on other days.

* Personal leave days. Offer eight hours of paid leave every two months for employees to take care of personal business.

* Transportation benefits. If you’re in a metropolitan area, help your employees solve their commuting problems. Work with your local transit authority to offer free bus passes. Consider offering subsidized parking or even van pools in major urban areas.

* Company discounts. Give employees discounts on your own products. Negotiate discounts with other businesses – health club memberships, for example.

* Provide employees with a free monthly health newsletter, with updates and tips on health care issues. Many hospitals and charities publish such newsletters as part of their marketing efforts.

* Arrange lunchtime seminars on topics such as basic financial planning or health issues. It’s not difficult to find professionals willing to speak for no fee as part of their business development.

Kids & Money – Guide your children to financial maturity

Preschool – Skills to Teach * Identify coins and bills; learn what each is worth. * Understand that you can’t buy everything; choices are necessary. * Save money in a piggy bank.

Grade School – Skills to Teach * Read price tags; learn comparison shopping. * Do money arithmetic; make change. * Manage an allowance; use it to pay for some of child’s own purchases. * Open a savings account and learn about interest. * Participate in family financial discussions about major purchases, vacation choices, etc.

Teens – Skills to Teach * Work to earn money. * Budget for larger purchases. * Learn to use a checking account. * Learn about investing – stocks, mutual funds, CDs, IRAs, etc. * Share in financial planning (and saving) for college.

College/Young Adult – Skills to Teach * Learn about borrowing money (interest, default, etc.). * Use credit card judiciously. * Participate in family estate planning discussions.

Knowing about money – how to earn it, use it, invest it, and share it – is a critical life skill. It’s never too early to start teaching your children about financial matters.

Autumn tax tip

Review your tax deductions for 2013 while there’s still time to manage them for a lower tax bill this year. The standard deduction for 2013 is $12,200 for married couples filing a joint return and $6,100 for single taxpayers. If your deductions are close to the threshold, consider accelerating deductible expenses. For example, you can add sales tax paid on a new vehicle to the IRS standard amount when claiming the itemized deduction for state and local sales tax.

RMDs require careful planning

fter all the advice you’ve received about saving for retirement, taking money out of your traditional IRAs and other qualified retirement plans may feel strange. Yet once you reach age 70½, the required minimum distribution (RMD) rules say you have to do just that.

Under these rules, you must withdraw at least a minimum amount from your retirement plans each year. Since the withdrawals are considered ordinary income, planning in advance can help you prepare for the impact on your tax return.

Here are two suggestions.

* Make a list of your accounts. The rules require an RMD calculation for each plan. With traditional IRAs, including SEP and SIMPLE plans, you can take the total distribution from one or more accounts, in any amount you choose. You can also take more than the minimum.

However, withdrawals from different types of retirement plans can’t be combined. Say for instance, you have one 401(k) and one IRA. You have to figure the RMD for each and take separate distributions.

Why is that important? Failing to take distributions, or taking less than is required, could result in a penalty of 50% of the shortfall.

* Plan your required beginning date. In general, you’re required to withdraw RMDs by December 31, starting in the year you turn 70½. The rules provide one exception: You have the option of postponing your first withdrawal until April 1 of the following year.

Delaying income can be a sound tax move. But because you’ll still have to take your second distribution by December 31, you’ll receive two distributions in the same year, which can increase your taxes.

To discuss these and other RMD rules, give us a call. We can help you create a sound distribution plan.

Avoid growing pains in your business

One way to kill your business is to grow it too fast. Many profitable small businesses have expanded at the wrong time and at the wrong level of increased costs. The result is that they never again make a profit. How does this happen?

A given amount of building, equipment, employees, and the associated maintenance, insurance, and taxes will allow your business to operate at a certain maximum sales volume. If you want to grow, say double or triple your current sales, you will need more of all the above items. When you commit to that new larger building with more equipment and employees, you have increased your “breakeven point” (the level of sales you need at which you make your first dollar of profit).

Take this example. Assume that you are a local carpet store. You occupy a 4,000 square foot building. You have a fairly fixed amount of inventory, equipment, and employees. Let’s say you are doing $1 million in sales, your gross profit is $300,000, and your fixed costs (building, etc.) are $250,000 with a net profit of $50,000. Since you have an established local customer base, you are convinced that a shop three times this size would make you even more money. Here is what to look out for.

Let’s assume that your new 12,000 square foot building and associated higher expenses have raised your fixed costs to $650,000. If you double your sales to $2 million, your gross profit will be $600,000. That leaves you $50,000 in the hole for the year. You would need sales of $2.3 million to get back to the same net profit you had before you tripled your floor space.

Before you go down a permanent road of no return, play a few games of “what if.”

Good debt or bad debt: What do you have?

You’ve got debt! The question is, do you have good debt or bad debt? Even more important, how do you tell the difference before you take on any more? Here are two questions to ask before incurring any debt.

1. What are the benefits of taking on this debt? Avoiding all debt seems like good advice. But good debt can enhance your financial situation. For instance, loans that fund a college or graduate degree may result in a higher salary. That’s debt with a lasting, tangible benefit.

Likewise, a mortgage for a home or rental property can increase your wealth by providing the opportunity for growth of capital and income.

Good debt can also have secondary advantages, such as the potential for tax deductibility of interest on student loans and home mortgages.

Bad debt, on the other hand, generally strains your cash flow without providing an offsetting advantage.

2. Does the cost exceed the benefit? As a general rule, good debt provides a return that’s greater than the total amount you’ll end up paying. Caution: Remember that your total outlay will be the stated price plus finance charges.

For example, suppose you need to buy a car. A moderately priced vehicle financed with a short-term loan can still have value when the payments end. That falls within the definition of good debt. But with today’s longer terms of five to eight years, your loan might outlast the car. High interest rates and the longer payback period on “stretch” loans can bump your total outlay into bad debt territory.

Credit card debt poses the same peril. Charges you intend to pay back in full at the end of the month may not be a problem. But a restaurant meal, a vacation, or a Christmas splurge can get very expensive once you include the interest charged when you carry a balance on your credit card.

Good debt or bad? Recognizing the difference can lead to better money management – something you need if you want to improve your financial situation.

Follow the tax rules when you borrow from your corporation

If you’re a business owner and your company lends you money, you’ll enter it in the books as a shareholder loan. However, if your return is audited, the IRS will scrutinize the loan to see whether it is really disguised wages or a dividend, taxable to you as income. Knowing what the IRS might look at may be useful when you structure the arrangement.

* First, the IRS will look at your relationship to the company. If you’re the sole shareholder with full control over earnings, that may weaken your case that the loan is genuine. On the other hand, if you’re one of several shareholders and none of the others received similar payments, that suggests it might be a genuine loan.

* Next, the IRS will look at the details of the loan. Did you sign a formal promissory note? Did you pledge any security against the loan? Does the loan have a specific maturity date, or is there a repayment schedule? What rate of interest are you paying? Have you missed any payments, and if so, has the company tried to collect them? The more businesslike the terms of the loan, the more it will appear to be a genuine debt.

* Finally, the IRS will consider other factors. Is your company paying you a salary that’s in line with the work you perform? Has the company paid dividends, or is this the only payment to its shareholder? Is the size of the loan within your ability to repay? How does the size of the loan compare to the company’s profits?

Whether the IRS will try to tax you on the “loan” will depend on all these factors. If you’ve paid attention to the details, the loan should withstand IRS scrutiny. Contact us if you’d like more information about borrowing money from your closely held corporation.