Taking Care Of Tax Business

Small business owners represent the fastest-growing segment of professionals in this country. Regardless of the industry, these entrepreneurs have their hands full everyday adhering to a business plan, managing daily cash flow, negotiating credit lines, overseeing operations and ensuring their overall business turns a profit.

Small business owners represent the fastest-growing segment of professionals in this country. Regardless of the industry, these entrepreneurs have their hands full everyday adhering to a business plan, managing daily cash flow, negotiating credit lines, overseeing operations and ensuring their overall business turns a profit.
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The deadline to file one's taxes is fast approaching and keeping up with changes in the tax code can be both time-consuming and confusing. Following is a sampling of tips taken from the The Ernst & Young Tax Guide 2008 that apply to the busy small business owner.

When President Bush signed new legislation to raise the federal minimum wage, many small business owners worried higher labor costs would cut into their bottom lines. According to the new law, the pay scale for lower-paid workers would climb proportionately over time. In July 2007, the minimum wage was increased to $5.85 an hour. This wage is expected to increase to $6.55 an hour in July 2008 and $7.25 an hour in 2009.

However, the Small Business and Work Opportunity Act of 2007 (signed in May 2007) still provides some tax relief to those small businesses facing the burden of higher minimum wage. The Act helps offset recent wage increases by granting business deductions, tax credits and filing simplification. It also incorporates tax incentives from the Work Opportunity Tax Credit and Section 179 properties.

Tax Strategies
Taking Care Of Tax Business


Small business owners represent the fastest-growing segment of professionals in this country. Regardless of the industry, these entrepreneurs have their hands full everyday adhering to a business plan, managing daily cash flow, negotiating credit lines, overseeing operations and ensuring their overall business turns a profit.
Click here to download "How to Build a Global Sector ETF Portfolio," a free report from Forbes.

The deadline to file one's taxes is fast approaching and keeping up with changes in the tax code can be both time-consuming and confusing. Following is a sampling of tips taken from the The Ernst & Young Tax Guide 2008 that apply to the busy small business owner.

When President Bush signed new legislation to raise the federal minimum wage, many small business owners worried higher labor costs would cut into their bottom lines. According to the new law, the pay scale for lower-paid workers would climb proportionately over time. In July 2007, the minimum wage was increased to $5.85 an hour. This wage is expected to increase to $6.55 an hour in July 2008 and $7.25 an hour in 2009.

However, the Small Business and Work Opportunity Act of 2007 (signed in May 2007) still provides some tax relief to those small businesses facing the burden of higher minimum wage. The Act helps offset recent wage increases by granting business deductions, tax credits and filing simplification. It also incorporates tax incentives from the Work Opportunity Tax Credit and Section 179 properties.
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The Work Opportunity Tax Credit will now be extended for three and a half years through Sept. 30, 2011. This expansion also includes a credit for employers who hire disabled veterans or individuals from countries that have suffered significant population losses and allows small business owners to take advantage of this credit even if they are subject to the Alternative Minimum Tax (AMT).

Thinking of buying some new equipment or software to help your small business run on all cylinders? Now would be a good time to do so. Under Section 179 of the tax code, the deductible amount for small business purchases of tangible, depreciable property (not including buildings) has increased to $125,000 in 2007. Also included under Section 179 is an inflation-indexing component for 2008 through 2010 (of note, businesses will be required to capitalize and depreciate any amounts in excess of these limits).

Another important item for small business owners to keep in mind is that as they complete their 2007 tax returns, now is also a good time to start planning for the 2008-filing year. The Economic Stimulus Act of 2008 contains items that will help bring about positive changes in the tax law for small business owners. For example, under this new provision, the Section 179 expensing limit will double to $250,000 for eligible assets purchased during the 2008 calendar year.

Don't Stop Thinking About Tomorrow

Small business owners must constantly generate ideas to keep their business profitable and their staff secure. But at the same time, they must also plan for the future.

Various retirement plans encourage employers and their employees to save today in order to provide for a more comfortable tomorrow. Many employees make annual contributions to traditional (or Roth) IRAs and participate in company-sponsored 401(k)s that may include a matching provision by their employers.

But what if you are the employer? What is the best retirement plan alternative for you and your employees?

SIMPLE (Savings Incentive Match Plan for Employees) IRAs are designed for small businesses with fewer than 100 employees. For example, in 2007, employees (including the owners) were able to make contributions of up to $10,500 and companies had to match a certain percentage for all those participating.

SEP (Simplified Employee Pension) plans are designed for self-employed individuals who desire to contribute even more to a retirement plan on an annual basis, but do not want to incur the added complexities of starting a full-scale 401(k). In 2007, participants in this program were able to contribute up to 25% (or as much as $45,000) of their self-employment income, based on whichever of the two was the lower amount.

Defined contribution Keogh plans allow the small business owner to contribute up to 20% (or as much as $45,000) of their self-employment income (also based on whichever of the two is the lesser amount), but also require the administrator or employer to file a tax return on an annual basis. Defined benefit Keoghs also provide small business owners with the opportunity to contribute even more to the plan based on age and income level.

When reviewing these options, it's important to keep in mind that these retirement plans must cover both the employer and their employees. They are not available for use solely by the employer themselves.

Keep in mind that the information above is general in nature, and may not apply to your specific situation. Tax laws can be complicated, so you should consult your tax adviser for more information. If you run a small business (or are contemplating such a move) there are a number of resources available for you. Sources such the IRS' Web site or The Ernst & Young Tax Guide 2008 can provide you with further details on items related to owning a business.

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Tax-Free Investing

It happens every spring: You look at your investment returns. Then you look at your taxes. And if you’re like most investors, you wonder whether there isn’t some way to keep more of what you earn.

Taxes can reduce your investment returns by up to 35%. But it’s worse than that. The impact of taxes actually increases over time because it’s not simply the tax you pay on each dollar you earn. It’s the dollars lost to future compounding that can have a crippling effect on your long-term returns.

Tax-free funds

What can you do to take the bite out of taxes? For starters, take advantage of every opportunity to invest in a retirement plan or account that allows you to defer taxes until you withdraw money. One investment lets you go a step further and pocket your earnings free of taxes: a mutual fund that invests in the bonds of state and local governments and agencies to fund projects such as schools, public hospitals and water districts. Municipal bond funds typically yield less than taxable bonds. But because the income they earn is exempt from federal income tax, they can generate a higher taxable-equivalent yield for investors in higher income-tax brackets.

Easy to figure

Here’s how you figure a fund’s taxable equivalent yield.

1. Subtract your marginal income tax rate from 1.0
For example, (1.0 - .35) = .65

2. Divide the tax-free yield by the product of #1.
For example 3.0 ÷ 0.65

3. The result is the taxable equivalent yield
For example, 4.6%

That’s the yield that a taxable fund would have to earn to equal the yield on the tax-free fund.

Some municipal securities are subject to the Alternative Minimum Tax (AMT), a tax system created to ensure that wealthy individuals pay a minimal level income tax. It’s a good idea to check a fund’s investment policy to make sure you’re getting the tax protection you need. If the securities in a tax exempt fund appreciate in value, the capital appreciation is subject to taxes.

Keep in mind that taxes change, and there’s no guarantee that today’s tax rates will prevail over the long term. But if you want to investigate whether there are tax savings that belong in your pocket, take time to discuss tax-exempt investing with your financial professional.

Do homework before investing overseas

Investing in overseas stocks has been like a whirlwind trip abroad for U.S. investors the past few years. Now the journey has ended, at least temporarily, with a lesson in market forces.

Once high-flying markets like China and India are now feeling some of the same strains that are dogging Wall Street. Concerns about an economic slowdown have popped up worldwide and that means U.S. investors looking to put down money overseas probably need to be more selective.

Overseas holdings have had an allure for investors like Alexis Doyle, who likes them simply because there can be stronger returns outside the United States. Doyle, an educator who lives in New York, looks for "good value regardless of geography."
And she's not daunted by the recent upheaval around the globe - she thinks other countries can at times make her more money than the U.S. will.

"Basically, what the feds are doing is cutting interest rates aggressively so you have to find higher interest rates elsewhere," she said, referring to recent decisions by Federal Reserve policymakers to lower interest rates to stimulate the U.S. economy. While lower rates can be good news for some people with credit card debt or for those seeking loans, it means the interest earned on investments including savings accounts and bonds will likely decrease.

But investors searching abroad for deals will find many regions have fared worse than the U.S. in recent months.

Global markets have pulled back in March after gaining some ground in February and showing sizable losses in January, according to Standard & Poor's. In China, stocks are off by about one-third this year. Other developing countries that have been a favorite of U.S. investors, like India, Russia and Brazil, have also shown big declines in 2007, while in the U.S., the S&P 500 is down about 8 percent.

Geoffrey Pazzanese, co-manager of the Federated InterContinental fund, which has more than $900 million in assets, said that while volatility in one market can cause ripples in another, the correlations tend to disappear over longer periods. He still recommends that most U.S. investors have about 20 percent to 25 percent of their holdings in international investments.

These days, however, it's important to do some digging before investing.

"You need to pick your markets," Pazzanese said. Investors considering investing in a country should examine long-term themes like demographic shifts, the availability of natural resources and other large forces that shape economies.

"Look first for emerging markets that are growing attractively and that are having a sustainable growth pattern and attractive valuations. You have to just do your homework."

Subodh Kumar, global investment strategist at Subodh Kumar & Assoc. in Toronto, said investors looking to funnel money abroad should examine some of the same defensive areas like consumer staples and health care that they might turn to if they were girding for a U.S. pullback.

"As long as there is uncertainty about a recession in the U.S. and a slowdown globally, I think equity markets worldwide will remain highly correlated," he said.

Kumar said, however, investors shouldn't mistake what could be a short-term slowdown in worldwide economic activity as marking the demise of big growth potential for economies in places like China and India.

There are potential hurdles, he noted. The weak dollar, which is often highlighted as a reason why U.S. investors should have holdings denominated in other currencies, could help or hurt investors.

The dollar's slide in recent months to fresh lows against other major currencies could mean strong returns when investors convert investments back into dollars. But a partial recovery in the dollar, which some observers say is due, could eat into this bounce.

At the same time, a further decline in the dollar could stir unease in international markets and cause them to fall, Kumar said.

He said investors stepping into international investments should likely do so gradually to guard against the effects of short-term fluctuations in currencies and in the world's markets.

"It goes back to looking long term. It's a good idea to be diversified internationally but I still think you can allocate your investments more gradually. You don't necessarily have to do it all at one time."

Hot Sources of Tax-Free Income

You don't need fancy investment strategies or risky tax shelters to get tax-free income. Here are two-dozen straightforward ways...

* Home rentals of up to 14 days are tax free. If you rent out your home or second home for no more than 14 days, you don't have to report to the IRS the rent you receive.

Tactic: If a popular tournament, race, or other attraction is scheduled near you, consider renting your home to an attendee and using the money you receive tax free to pay for your own vacation.
* Roth IRAs allow withdrawals after
age 59 1/2 that are totally tax-and-penalty free. A Roth IRA that's set up early in life will earn compound investment returns for decades and will ultimately provide a tremendous tax-free payoff.
* Gifts of all kinds are income tax free to the recipient. They can reduce or eliminate income taxes that a family is currently paying, too, when income-producing property is given by a high-tax-bracket taxpayer to family members in low tax brackets, such as children over age 13.

Caution: Investment income above $1,700 of children under age 14 is taxed at their parents' top rate.

Gifts of up to $12,000 each can be made to as many recipients as you wish, in 2006 using the annual gift tax exclusion. The limit is $24,000 for gifts made jointly with a spouse.
* Expense reimbursements from an employer are tax free. Negotiate for reimbursement from your employer if you currently incur out-of-pocket business costs for items such as publications, professional dues, meals, driving, purchases of supplies or equipment, etc.

You and your employer can both benefit by converting salary to reimbursements. You'll then pay your expenses with pretax rather than after-tax dollars -- and your employer won't owe employment taxes on the reimbursement amounts as it does on salary.
* Flexible spending accounts (FSAs) for medical and dependent-care expenses let you avoid owing tax on a portion of your pay that you set aside to cover these expenses. If your employer offers FSAs through a "cafeteria" benefit plan, make full use of them.
* Children's salaries paid by a family business effectively let the business take a portion of its income tax free. The business gets to deduct the salary payments at its high tax rate, while a child can earn up to $5,150 tax free in 2006 -- plus another $7,550 taxable at only 10%, and additional income over $7,550 to $30,650 taxable at only 15%.

When a child under age 18 is paid by a parent's unincorporated business, the payments are also free of Social Security and Medicare taxes. And the Tax Court has allowed deductions for reasonable wages paid to children as young as seven.
* More Social Security benefits may be taken tax free if you invest in appreciating assets, Series EE and I savings bonds, and cash-value life insurance. The increase in the value of such investments adds to your wealth but is excluded from your current income until cashed in -- so it won't push your income over the threshold that makes your Social Security taxable.
* Gain on the sale of a home is tax free up to $250,000 ($500,000 on a joint return) when you have used the home as your main residence for at least two of the prior five years. You can make such a tax-free sale once every two years.

If you own other residences (such as vacation or investment properties) in addition to your principal residence, you can move into them for two years at a time to take tax-free gain on them, too, when selling them.
* Life insurance proceeds are tax free to the beneficiary. They also escape estate tax when the insured individual does not retain "incidents of ownership" in the policy. Achieve this by having the policy owned by another party or a life insurance trust.

Tactic: Instead of leaving taxable bequests of other assets, consider using tax-free life insurance to fund bequests.
* Borrowed funds are tax free -- even if you don't have to repay them during your lifetime. Examples...

o Borrowing against the appreciating cash value of a life insurance policy, with the loan to be repaid ultimately from the policy proceeds.
o A reverse mortgage on a house that provides the home owner with a stream of income, which ultimately will be repaid from his/her estate.
* Frequent-flier miles continue to go untaxed by the IRS -- and the IRS recently stated it will not try to tax them in the future without giving advance warning to the public.
* Capital gain property held until death becomes income tax free to heirs. Currently, at death, the tax basis in the property is stepped up to market value -- making all appreciation in the property's value up to that date tax free to those who inherit it.
* Like-kind exchanges allow you to trade an appreciated property for a similar property -- such as one real estate property for another -- while deferring the realization of taxable gain until the second property is sold.

But that property, too, can be disposed of through another like-kind exchange, and so on, deferring taxation on gain indefinitely.
* Parking paid for by an employer is tax free up to $205 per month. So is up to $105 per month for transit passes or car-pooling expenses.
* Tuition reimbursement of up to $5,250 per year can be provided tax free by an employer to an employee under an educational assistance program.
* Interest-free loans can be a source of cash at no tax cost to either lender or borrower, up to certain limits. Loans of up to $10,000 have no adverse tax consequences.

Loans of more than $10,000 and up to $100,000 are treated as if interest is paid on them (interest is "imputed," so taxable interest income results to the lender) but only to the extent that the borrower has investment income.

Thus, interest-free loans are tax free if the borrower has no investment income.
* Long-term health-care insurance provides proceeds that are tax free. In addition, premiums on these policies are deductible in an amount that varies by age (from $280 at age 40 or younger to $3,530 at age 71 or older). Premiums paid for by an employer may be a tax-free benefit.
* Government bonds are tax favored. State and municipal bonds are generally free of federal income tax, and may be free of state tax as well, providing totally tax-free income. Federal bonds are exempt from state taxes.
* Coverdell education savings accounts let investment returns earned in them be used tax free to pay not only college costs but also elementary and high school costs, as well as for books, supplies, after-school programs, tuition, tutoring, and even home computers.
* Section 529 college savings plans let investment earnings be used tax free for education costs. In contrast to Coverdell accounts, much more can be contributed to a 529 plan, but 529 funds can be used only for college costs.
* Scholarship and fellowship grants are tax free when used to pay for tuition and course-related fees, books, equipment, and supplies.
* Accelerated death benefits (viatical settlements) paid on a life insurance policy to a terminally ill insured individual before he/she dies are tax free.
* Adoption expenses. Employers can provide up to $10,960 in tax-free assistance to employees who are adopting children to help cover adoption expenses.
* Employer-provided insurance, such as health and accident insurance, and up to $50,000 in group term life insurance, can be provided tax free to employees while being deducted by the employer who provides it.