The IRS with little official fanfare and no real advance warning began a “national research project” to study (1) payroll taxes, (2) fringe benefits, (3) independent contractor, (4) expense reimbursements and (5) other related “payroll” issues.

Use of the phrase “National Research Project” seems fairly innocuous and is easily confused with the IRS’ more benign National Research Program. The goal of the latter is to design a strategy to collect data that will be used to measure filing and reporting compliance with the guiding principle “to minimize taxpayer burden as data are [sic] collected.”

Confusion of the National Research Project with the National Research Program may be the IRS’ intent, because there have been few public statements that actually describe what is in reality a massive audit initiative.

As the rumored audits have begun, the IRS finally published “Headliner Volume 280″ describing in only the vaguest terms the audits being unleashed over the next three years. The National Research Program only created ripples in the vast sea of issues that taxpayers must address and many advisors have drawn the same conclusion with respect to the current initiative since the programs have similar names. (more…)

You can apply for income tax relief for up to $2 million (or $1 million if married and filing separately) in debt that is cancelled, or forgiven, by your mortgage lender on your primary residence. The law has been extended through 2012 under the Emergency Economic Stabilization Act.

If you have lost your home through foreclosure or have restructured your mortgage loan, you may qualify for this tax relief under the extended tax law called the Mortgage Forgiveness Debt Relief Act of 2007. The claim can be made by using IRS Form 982.

There are two qualifying factors that must be met on the mortgage debt exclusion: 1) it must be your primary home, and 2) the debt must have been used to buy, build, or make substantial improvements to the residence to which the mortgage applies. Certain business or farm property may also qualify for tax-free treatment, so check with your accountant or tax attorney in this situation.

When a lender forgives debt, it is typically a taxable event. You would receive a 1099-C (Cancellation of Debt) and the income would be claimed on Line 21 on your personal 1040 income tax Form. (IRS Publication 525)

While mortgages for second homes and rental properties do not qualify for the exclusion, some or all of this debt might qualify for other exclusions if you are insolvent at the time the debt was settled.

Canceled credit debt does not have to be included in income if it was a gift, or if the individual is insolvent, or in a bankruptcy case. The exclusion for insolvency is particularly important in this case, because it will likely apply to borrowers with home equity loans or mortgages on second homes and rental properties, and will be helpful in this situation. This is an important point for borrowers whose property has dropped in value below what is owed on the mortgage.

According to the IRS, “A debtor is insolvent when, and to the extent, the debtor’s liabilities exceed the FMV (fair market value) of the assets. Determine the debtor’s liabilities and the FMV (fair market value) of the assets immediately before the cancellation of the debtor’s debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent.”  (IRS Publication 908)

The value of all of your assets and all of the liabilities you owe have to be calculated to figure out if you are insolvent, and by what amount, so as always, check with your professional accountant to see how you can best take advantage of these tax relief measures for exclusions of cancelled or settled credit  and mortgage debts.

REMINDER:

Corporate tax returns are due March 15th and extension deadline filing is September 15th

Personal tax returns are due April 15th and extension deadline filing is October 15th

The tax planning clock is clicking away toward the end of the year.  Is your business ready to take advantage of the tax saving measures available to you? Tax planning is essential for business owners, and should be done on a quarterly basis. However, it’s not too late if you do it before mid-December. Here are some words of wisdom from financial planner, P. Christopher Music.

Well, the year is coming to an end and many business owners are meeting with their accountants and tax advisors to figure out how to reduce that inevitable income tax burden coming in April.  Here are a few strategic ways to keep some more of that money at home.

Business owners are often successful in earning some money beyond the expenses of acquiring it—in short, profit.  The only problem is, the profit is taxed.  So, we work with our tax advisors to lower this burden by strategically spending money in various ways by the end of the year in an attempt to cut off the bleeding.

One of the most popular techniques is to “spend the money since it’s going to be taxed anyway”.  I always get a charge out of this technique since it does not evaluate on what the money is spent.  One of the laws of economics is that money derived from production must be reinvested into production to expand the organization.  In other words, the expense must buy something of value that can further grow in value.

This technique can be summed up in “accelerating expenses”.  Next year the company will have expenses like rent, promotion and marketing, utilities, etc.  Accelerating these expenses only defer the tax owed since you will have to do the same thing next year to avoid the tax.  This has some limited workability, especially if you have volatility in your annual income and can pay the taxes at lower rates in a year with lower income.

There are, however, other options.  One of these options is to use some form of retirement plan.  These can range from a traditional Individual Retirement Account (IRA) where a person can invest up to $5000 ($6000 over age 50), to something called a “Super 401k” that combines various types of retirement plans to allow someone to contribute upwards of $200,000 or more per year.  That’s right.  Now, the benefit of this kind of expense is that it can not only save income taxes in the current year, but it will create an additional asset of value that can be used in the future to create retirement income.

If you have a C corporation, there is a plan called a Section 79 plan (so named after the IRS Code section) that will allow a business owner to purchase cash value life insurance with potentially tax-deductible dollars.  Of course, you have to purchase life insurance on your employees (inexpensive term) and you will only be able to deduct a portion of the annual life premiums, but this may make sense if you qualify for such a plan.  This type of benefit plan would allow the business owner to accumulate assets inside a life insurance policy that can later be used to provide supplemental retirement income.

These are just a couple of options available to business owners besides just spending money “because it will be taxed anyway”.  Use the tools available to lower your taxes and build wealth for the future.

For more information, contact Christopher Music. Wealth Advisory Associates www.wealthadvisoryassociates.com a Registered Investment Advisor, is a comprehensive financial planning firm serving professionals and small business owners nationally. We focus on assisting our clients in achieving a truly affluent lifestyle by using the natural laws of personal economics.

What do you do when you get your Profit & Loss Statement (P&L) from your accountant, or when you print one from your accounting software? Do you ignore it, or look at the total income and the bottom line net income and then toss it in a drawer or file folder without analyzing it? If that’s the case, then you are missing out on some potential opportunities to increase your sales and your profits.

Smart money management practices include staying in control of how your company’s income is being used and to make adjustments that are in the company’s best financial interest. There are many ways to analyze your P&L to identify some lost income opportunities; here are just a few.

1 – Pull last month’s P&L statement so you can compare it with the current month’s statement.

2 – Compare the Total Income figures and the bottom line Net Income figures. Whether you are up or down compared to the previous month, you can use the rest of the report to figure out why that may be the case. Financial management is easier when you do some analysis.

Cost of Goods Sold: Look at your cost of goods sold to see if your inventory was replenished fully or you were out of stock on some items that you could have sold.

Investigate whether the costs have gone up and you need to pass on the cost increases. You can lose sales by being out of stock as well as not passing on price increases from your suppliers. This would eliminate the strange sensation that you may have experienced when you are ‘selling more’ but ‘making less’.   And you think, “What the heck is going on here?”  So be sure to look this over with a critical eye.

If your suppliers have raised prices, you should increase your pricing structure on the products you are selling. This ensures the sales you make have an adequate profit margin built into them. Sometimes suppliers raise their costs and forget to inform you, or the announcement gets lost before it reaches your in-box, and you don’t notice the increase right away.  For example, some express parcel shippers tacked on a $20 fuel surcharge increase when gasoline prices surged to over $4 a gallon.  They did this because their prices increased, so they had to pass them on to you – their customer.

Tip: Get all of your suppliers to fax you their latest price sheets and compare these figures to the costs you have for the items in your accounting system. Then decide if you should raise your prices to pass any increased costs on to your customers.

Tip: It’s better to increase your prices a bit by bit over time, rather than increase them by a large amount all at once.  Notice how a well -known coffee shop raises its prices for coffee a nickel or a dime every 3 – 4 months and customers keep right on buying.

Advertising & Promotion: The first expense item(s) to look at are your marketing expenses. Did you cut back or increase promotion? Did you change your promotion and is working better or perhaps not working as well? Too many businesses cut back on promotion funding in tough times. That’s a big mistake. Deciding to cut back on talking to your current and potential customers can cause them to forget your company and to shop at your competitor who is still promoting.  Consumers have not stopped buying, they are just being more selective about what they buy and where they shop.

Other Expenses Lines: Compare each expense line to the matching expense from the previous month. Are expenses creeping up without you realizing it? If so you can decide where to cut back. Did previous cost cutting measures help the bottom line profit? If so, congratulate yourself.

Balance Sheet Items: If the bottom line Net Income is up, but you don’t have that cash sitting in a bank account where you can see it, it usually means that you paid out the profits to principal owed on debt. Your balance sheet shows you the credit debt (liabilities) you owe and paying those is not deductible except for the finance charges or interest.

For more of these business profit tips, check out our downloadable e-book Business Checklist to Increase Profits.  This checklist is the shortcut to an MBA on money management to generate more profits.  It costs a lot less that an MBA degree, and it’s easier to understand!

What have you learned from your P&L statement? Share it with our readers by submitting a comment.