Friday, November 22, 2013

ATTITUDE…OR NOT

One of the truly hard disciplines of life that is very important in business is the practice of not having “attitude”.  When we have been hurt in some way that we feel is unjust, we are inclined to interact with that person in the future with a degree of righteous indignation.  While that may make us feel somewhat better in the short run, the long run effect is usually detrimental to our business dealings and to our mental health.  If our detractor is a customer, supplier, or employee our attitude may sour our relationship so that we lose that valuable relationship.  We are better off to let the hurt run off our backs and move on, preserving our relationship.

If you agree with me, and you may not, the question is how we let the hurt run off our backs without being offended.  The most straight forward way is to practice not being offended in the first place.  It has been said that no one can offend you; you have to choose to allow yourself to be offended.  When someone is saying something that hurts you, you can see it as a challenge to discover where the person’s attitude is coming from and addressing it, rather than letting it offend you.  I can vouch for the fact that this is not easy.  However, as you get better and better at not being offended you will find life much smoother and business more profitable.  If you are not very successful at not being offended in the first place, the next best way to handle a hurt is to keep quiet for awhile and let yourself simmer down.  Think about the perpetrator’s motives and see if you can address them without anger and without being dishonest with either him or yourself.  Sometimes, when the person is just being unreasonable, you may have to just emphasize how you would like to keep the business relationship and not address those issues that you know you do not agree about.

Your choices are to react with attitude and perhaps have a feeling of righteous justification, or you can take a more studied approach and perhaps keep a valuable business relationship; you choose.

Loren L McCann, CPA, MS (Tax)

Friday, November 15, 2013

TO THINE OWN SELF BE TRUE


In Hamlet, Polonius gives his son, Laertes, the sound advice, “To thine own self be true”.  That advice is something we can use in business in the sense that we should be aware of our likes, dislikes, and limitations and not try to be all things to all people.  Over the years I have seen many businesses get off on the wrong track by trying to offer things that some of our customers want but that we have no expertise to provide.  It is important to know what we are good at and try to do those things well rather than trying to do all things.  In the short run, it often seems easy to add many different goods and services to our product line as a method of expanding the business.  Unfortunately this road often leads to including goods or services that we are not very knowledgeable about, resulting in customers that are not fully satisfied with us.  We would be better off doing the hard job of thinking and planning how we can better provide the goods and services we really know well.  It often takes looking at your business in new and radical ways because if you limit the selection of services you sell, you must find new ways to sell them. 

Running your business well involves lots of planning.  Know what your limitations are so that you do not waste valuable time trying to do everything, and end up doing nothing very well.

Loren L McCann, CPA, MS (Tax)

Friday, October 4, 2013

THE DEADLINE

Keeping track of the various tax deadlines can seem daunting.  This link might help: http://www.sutton-mccann.com/Due-Dates

Just a reminder that the deadline for filing your 2012 Individual Tax Return is October 15, 2013.

Friday, August 23, 2013

FUNDRAISING FUN


A couple of weeks ago Sutton-McCann & Company participated in the Lungevity Fundraiser “Breathe Deep, Seattle”. This 5k raises funds for research on the prevention and treatment of lung cancer. What an inspiring event and a wonderful team-building opportunity for our firm.

Sharon Holcomb, EA


SHOULD CHURCHES PAY TAXES?


More and more often these days we hear people complain about churches not paying taxes.  I find in the vast majority of cases that the people complaining have a muddled idea of what taxes they think churches should pay and usually no idea of what taxes churches do pay.  I would like to clear up some of the confusion regarding what churches pay in taxes in the areas of property taxes, income taxes, and sales taxes.

First, in the area of real property taxes, most states limit the number of properties that any organization can exempt from taxes.  I believe the number in Washington is five properties.  If the church owns more than five properties the excess properties are taxed at regular rates.  For example, the church I attended had one “property” of about 2 ½ acres but it was listed as five different tax lots in the county records.  Any additional property acquired by the church would be fully taxable.  In addition, many of the special fees and assessments made by the county on the property tax statement are not exempt, so the church paid a significant amount of property tax.

When it comes to income tax, I find that peoples’ thinking is particularly fuzzy.  Our income tax system taxes entities on their net income after expenses.  Very few churches have any net income after expenses if you count their ministry work as an expense.  I never hear people declaring that the Red Cross, for example, should pay income tax on all its donations before deducting the expense of helping in emergencies.  Perhaps some think that some churches run commercial businesses and don’t have to pay taxes on that profit, but they are incorrect.  All federally tax exempt entities have to pay regular income tax on business profits that are unrelated to their tax exempt purpose.  In addition, most tax exempt entities have to pay income tax on their investment income beyond a minimal amount.  It may be that in the income tax area people are really talking about their belief that individuals should not receive a tax deduction on their personal tax returns for making a contribution to churches on the grounds that churches are not in the same category as other charities.  That is a philosophical argument that is too deep for this format, but if that is what they are thinking they should make it clear so that a reasonable discussion can ensue.

In the area of state sales tax, churches have to pay sales tax just like any other consumer.  Churches also pay excise tax on telephone service, license fees, and all the other miscellaneous taxes that the rest of us pay.

So whether you believe churches should pay taxes or not, let’s be sure that we know the facts before voicing our opinion.

Loren L McCann, CPA, MS (Tax)

Wednesday, August 14, 2013

THE CORPORATE TAX RATE DEBATE

Periodically Congress takes a look at the corporate tax rates and, depending on where public opinion is at the time, either raises or lowers the corporate rates.  The problem stems partly from the two views of what corporations really are.  Corporations are a legal fiction that we have created to facilitate the large scale investment needed to fund businesses that need huge amounts of capital.  Many of our laws treat corporations like people in order to be able to deal with them more easily.  This legal fiction fools some of us into thinking of corporations as real people, and indeed sometimes they act like real people.  Corporations, however, are not real people and no matter how many levels of parent and subsidiary corporations you have, ultimately it is individual people that own all property.
 
Those who believe that corporations are people think that corporations should pay a high level of tax, and those who believe that corporations are conduits to real people think that corporations should pay little or no tax.  I understand that corporations are mere conduits to real people and that ultimately real people own all property.  Therefore people should pay the taxes.  However, I recognize that without some limitations, corporations could hold profits inside the corporations, avoiding taxes for a very long time.  In the Great Depression Congress realized that public policy is best served if corporations distribute any profits not needed for normal business operations and planned expansion, so they passed the Excess Profits Tax to tax corporations at a punitive rate if they hold onto profits that they do not need in the business.  The Excess Profits Tax needs to be beefed up to insure that all un-needed funds are distributed to their owners, and if this is done, the corporate tax rates should be lowered.  Lower rates will make us more competitive on the world market and will put more return in the hands of the shareholders who will pay the taxes owed.
 
I believe that some of the demand for high corporate tax rates is a response to the bad behavior of some corporate managers.  I believe that corporate managers should be held more responsible for their actions.   If corporate managers act illegally or unethically they should be held accountable and should not be able to hide behind a corporate shell.  But the tax system should be used as a source of revenue, not a means of punishing bad managers.   We have tried to regulate so many aspects of society with the tax code that we have created an unbelievably complex system.  Let’s put the tax burden on people, the real owners of property, and regulate bad behavior within other areas of the law.
 
Loren L McCann, CPA, MS (TAX)
 

Friday, August 2, 2013

IMPORTANT STUFF


One of my desk drawers at home is devoted to important stuff. It’s not that big of a drawer, but it has a very critical purpose… and that is to keep me out of trouble! This is the place the vehicle title rests until we make the next trip to our safe deposit box. It’s the place my paid medical and dental bills go, especially if I want to get reimbursed from my Health Savings Account.  It’s also where I put any letters and receipts I receive for charitable contributions. During tax season all of the envelopes marked “Important Tax Documents Enclosed” wait in there until I have time to deal with them.

This drawer does not get cluttered with bills to pay, magazine subscription offers to consider, or invitations to respond to. However, I do stick vacation reservation confirmations in there. And vehicle tab receipts that I have paid for online but not yet received.

Since going to the drawer system I have greatly reduced my time looking for important papers. I strongly encourage you to consider such a system. You could use a file box, tray, file folder, or large envelope. It makes preparing for income tax season so much easier. Also, it relieves stress when you are heading out the door for a much needed vacation!

Sharon Holcomb, EA

Monday, July 29, 2013

INFORMATION, INFORMATION, INFORMATION

There is an old adage in the retail business that the three most important points in your business plan are; location, location and location.  Meaning that no matter how good the rest of your business plan is, if you do not have the customer traffic, you will not succeed. 

I was recently reminded in an unpleasant way that the three most important management techniques in being a personal representative, trustee, or manager in a family estate, trust or business are; information, information and information.  It has been my experience that about 80% of all family disputes about the running of, and distributions from family estates, trusts and businesses could have been avoided if the person in charge had just communicated more often and in more detail with the other concerned parties.  Most arguments and dissatisfaction within these family enterprises arise from differing expectations or understandings of the facts. 

For example, one heir of an estate may think that their parents left an estate of $1 mil when there really is only $700,000.  An accurate inventory of the estate assets with supporting documents would have cleared this up before any mistaken expectations could cause bad feelings.  Or one beneficiary may believe that all the assets of the trust were to be divided equally among the beneficiaries when in fact the trust calls for an unequal distribution.  Or one member of the family may think that the family business earns $200,000 per year, when in fact it only earns $50,000 and needs to retain that amount to expand the business inventory.  All of these disputes could have been avoided by simply communicating information to all parties.

Sometimes the person in charge believes that they are doing the right things and that is all that is required.  But whenever there is a vacuum of information, others will fill the vacuum with their own inaccurate guesses.  Other times the manager believes that they are too busy to do interim reports, they will send out a report when the estate or trust is finally settled.  But by then, people have already formed their opinions.  The information needs to be communicated as it is being developed, before others start to form their own guesses as to what the results should be.  Much time and frustration caused by unhappy family members could be saved if the person in charge keeps everyone up to date as to what is happening and what decisions are being considered.  If the proposed decisions cause disagreement, the disagreement can usually be resolved with much less time and stress if it is fully discussed before any action is taken rather than after.  After an action is taken the decision maker is often on the defensive when justifying what they have done, but before an action is taken it is easier to listen to conflicting ideas without getting upset.

So if you are the one in charge of a family enterprise, whether estate, trust or business, take the time to send out complete and frequent reports on what is happening.  And if you are one of the interested parties but not the one in charge, before getting upset, ask the manager for complete and frequent reports.  Everyone will be much happier with both the results of the enterprise and with their family members if you remember: information, information and information.

Loren McCann, CPA, MS (Tax)

Wednesday, July 17, 2013

HEALTH INSURANCE: WHAT TO DO


We have all been debating, perhaps agonizing over, what to do about health insurance for our employees.  Most of us have tried to understand what the government was going to require us to do and when we had to do it.  However, I would like to suggest a different approach.  Maybe we should ask ourselves, “What is the best way to keep my employees and what is best for them?”  Rather than waiting for the government to tell us what we have to do, why not view it as a problem of what is best for our employees.  Let’s face it, it looks like at some time in the near future we will be forced to deal with the health insurance issue anyway.  I think we should accept that health insurance will be part of the cost of having employees and build that into our planning now, not as a requirement, but as a fact of life.  It is usually more effective to approach a problem as an expected part of the employee equation rather than a government add-on requirement.  We tend to have a more open mind when dealing with issues that are a routine part of business planning.  If we try to think of health insurance from our employee’s point of view we might also think of some options that we would not otherwise have considered.  Even small business can build health insurance into their employment package, and with the government mandate, we can present the revised compensation package to our employees with the added weight of the official requirement to make the transition more acceptable. 
I am convinced that it is time to turn this negative requirement into a positive planning opportunity.  If nothing else, it may save us a few gray hairs and anxious nights.
Loren L McCann, CPA, MS (Tax)

Monday, July 15, 2013

TAX SAVINGS, THE LONG RANGE PICTURE

Most of us will agree that we do not want to pay more taxes than we have to.  But making this year’s tax the lowest that is possible is not always the best idea.  We need to look at the long term picture to see if we might be better off paying a little more this year in order to facilitate paying less in the future.  Let me give you an example:  a couple of years ago one of my clients and I discussed converting his Traditional IRA to a Roth IRA.  The IRA was about $2,500,000 and the resulting tax would be about $900,000.  “Why would you want to accelerate the tax bill on that IRA”, you might ask.  There were several reasons we decided to make the conversion.   As a traditional IRA there was a required minimum distribution each year of over $300,000. This income kept the taxpayers in the highest tax bracket and we expected the highest bracket to go higher in the future.  We also knew that the “Medicare Surtax” was going into effect in 2013.  The taxpayers also had to pay a higher Medicare insurance premium because of their high income each year, and they often had capital gains that would be taxed at a higher rate beginning in 2013.  By converting the IRA to a Roth with no more taxable distributions they were able to lower their tax rate from the highest rate to the lowest rate, avoid the Medicare Surtax, reduce their Medicare insurance premium, and pay a lower tax rate on their capital gains.  An additional plus is that the Roth IRA has no required minimum distribution so the taxpayers could let the IRA accumulate and pass it along to their heirs if they did not need to use it during their lifetimes.

There are other, less dramatic ways that we can save taxes by paying more now.  When putting new depreciable assets into use we often have a choice about using one of the rapid depreciation methods or using a slower depreciation method.  Before making that choice we need to look at the long range picture.  If the year the new asset goes into use happens to be a low income year, it could be better to not use a rapid depreciation method so that more depreciation will be saved for years when the income is expected to be higher.  There are many times when taking a bigger depreciation deduction causes the income to be so low that a person’s itemized deductions are not as effective that year, and since itemized deductions cannot be carried over to the next year, the effect of the added depreciation is lost.

Sometimes a decision has to be made as to whether an expenditure is currently deductible or should be capitalized and depreciated over time.  Theoretically, an expenditure either is or is not currently deductible.  However, as a practical matter, there are lots of times when the facts can be viewed different ways and a decision made as to which way to handle the tax treatment.  In these cases it is important to look at the long term and see when the deduction would be most beneficial.

These are just a few of the kinds of tax choices that you can make.  There are many times that we can make decisions that affect long range tax issues and it is important that we communicate with you face-to-face so that the best decisions can be made.  The better we know you and your plans and expectations, the better those choices will be.
 
Loren L McCann, CPA, MS (Tax)

Tuesday, June 11, 2013

WHAT CAN WE LEARN FROM A VACATION?

Recently my wife and I took a short road trip to Eastern Washington as a little get-away from our routine.  One of our stops was the Whitman Mission near Walla Walla, Washington.  The Whitmans were one of the first missionary couples to come to the Oregon Territory, about 1837.  They were very committed to reaching the local natives with the gospel of Jesus Christ and truly had hearts to serve these people.  However, typical of missionaries of that time period, they did not try to understand the native culture or learn the native language, but tried to teach them about Jesus in the English language and teach them the white culture.  After many serious misunderstandings, the natives rebelled against the mission and killed the white adults at the mission.
 
The lesson that we can try to apply to the business and investment setting is to try to see the other party’s point of view and negotiate knowing their position.  When I first started in public accounting after college I was enthusiastic to show my clients how to do their bookkeeping or accounting “properly”.  When clients would bring in their records at the end of the year, I would patiently show them how to do good accounting to make their records “better”.  What I discovered the following year was that their records were now an attempt to follow my rules, which they did not really understand.  The result was a record system that now neither they nor I could understand.  After one or two years I realized part of my training as an accountant was to help me figure out other accounting systems. Rather than try to teach my clients accounting, I needed to learn to understand their systems.

So how does this apply to how we do business?  When we are doing business deals we should try to see the other person’s problems so that we can better negotiate our deals.  Let’s say, for example, you have a store that sells many products, including widgets.  You sell about 200 widgets per month and need to order some from your supplier.  Widgets cost you about $20 each to buy so you only want to buy one month’s supply at a time.  Your supplier says that if you only buy 200 units he will have to charge you $30 each.  If you want to pay $20 each you will have to buy 1000 units.  What do you do?  Looking at your supplier’s problem you realize that he has a minimum set-up cost in time and materials every time he sets up to make a production run.  This helps you to come up with arguments to help you negotiate.  You can promise to buy 1000 units in the next five months if he will sell them to you for $20, giving him the option of doing the full run of 1000 and holding the inventory himself.  Or you might tell him you have been a steady customer for several years and plan to continue to be a customer, showing him that you understand his problem and here is why he should give you the lower price.  The point is, you see he has a problem and try to find a way that you both can be happy.

Whether buying a house, making an investment, or making a business decision, try to see what the other person’s problems are and see if you can make a proposal that solves some of his concerns.  Many times you can accomplish this just with the words or attitude with which you negotiate, showing that you understand the problems, giving up no real cost to yourself.  Looking at an issue from the opposing point of view can almost always help you to do better deals.

Loren L McCann, CPA, MS (Tax)

Wednesday, June 5, 2013

TO TELL THE TRUTH

There used to be a television program by the name “To Tell the Truth” in which the contestant had to try to tell which panel member was telling the truth.  I only watched the program a time or two and that was decades ago, so I do not remember much about it except that some of the panel members would tell lies about themselves and one would tell the truth.  The contestant had to try to guess which was telling the truth.  I would like to take the position that in business and finance (as well as our personal lives) we should always tell the truth.  I realize that in taking this position I am suggesting we go against common practice.  Many would tell you that it is silly to tell the truth when many of those around us are lying, but I believe we encounter fewer problems in the long run when we commit to always telling the truth.

                There are some, I won’t name names, who think that a “white lie” is OK.  I do not agree.  I believe any untruth either makes future dealings worse or, at best, just puts off a difficult situation until a later date.  I think we are better off to suck it up now and tell the truth to begin with.  The people we do business with will respect that we are willing to tell the truth even when it is difficult, and our future dealings with those people will not be complicated by trying to work around a previous untruth.  Everyone makes mistakes or foolish choices that we would rather not have to own up to, but when it involves someone we are doing a business deal with, get it out into the open and deal with it.  Then we can move forward with a clean slate.  I know I would much rather deal with someone who is willing to admit that they made a mistake than to do business with someone I suspect made a mistake but is unwilling to admit it.

                Some might say that this advice is outside of giving business advice and that makes me sad.  How we do business is an important part of business advice.  How would it be if most of the people we did business with were completely honest with us?  Wouldn’t our business lives be both more financially rewarding and more enjoyable?  Part of simplifying our lives could be to tell the truth in all things, even in our businesses.
 
Loren L McCann, CPA, MS (Tax)

Wednesday, May 15, 2013

FINISH THE JOB


One of the factors that often makes the difference between success and failure in an enterprise, whether it is in business or personal exploits, is the failure at the beginning of a task to define what the end of the task is.  Many times in the area of business I have seen what should have been a profitable job become an unprofitable job because the job end-point was not well defined.  For example, in building contracting it is extremely important to define in detail what constitutes the end of the job and that anything done after that is extra work for extra pay.  Many a contract has become unprofitable when the customer continues to ask for changes, corrections, and “fixes” that were not part of the original contract.  Sometimes this is because the contract was never put into writing or the written contract was not detailed enough.

This same problem exists in the service industries too where often there is no written contract or where the service sought is ill defined.  Sometimes we may know what the customer wants but don’t know what is going to be needed to reach the goal.  In these cases it is just as important to think ahead and at least try to put some pauses in the work to allow the parties to assess what has been done so far and what may still be needed to reach the goal.  It is much better to risk having the customer stop the project at one of these pauses than to incur more costs and have a dispute later about getting paid.

We all have probably seen this concept when someone giving a speech doesn’t quite know how to end their speech.  It is very embarrassing to both the speaker and the listeners.  You can see the concept plainly if you make the mistake of saying “I’m going to work in the yard today” instead of “I’m going to trim that bush today”.  The first statement has no defined end-point but the second statement does.  So when the football game comes on you will be glad you used the statement with a definite end-point.  So in all our endeavors, both business and personal, define the end before you start.

Loren McCann, CPA, MS (Tax)

Wednesday, May 1, 2013

WHAT TO DO WITH A WINDFALL


One of the questions we are often asked when a client receives a lump sum from an inheritance or sale of an asset is, “should I pay down my mortgage or should I invest the funds?”   The three main points I discuss with the client are rate of return, liquidity, and comfort level.

Rate of return is the easiest to deal with, but many are confused by the tax deductibility of the home mortgage interest.  We need to compare the after-tax interest rate on your mortgage with the after-tax earnings rate on your proposed investment and favor the higher one.  First determine what your expected marginal tax rate will be on investment earnings and reduce your expected investment return by this amount.  For example; you expect to be in the 28% tax bracket and would invest in taxable bonds with the funds acquired at an expected return of 4.5 %.  Your net return after taxes would be 3.24% (4.5% X [1.0 - .28]).  Next, apply the same calculation to the interest rate you are paying on your mortgage.  Then compare the two rates.  If the tax-adjusted rate on your investment is higher than the tax-adjusted rate on your mortgage, that would point to investing the funds.  If the tax-adjusted rate on your mortgage is higher, that would point to paying down your mortgage.  Keep in mind that if the same tax rate applies to both the investment income and the mortgage deduction, you do not need to calculate the tax-adjusted rate, just compare the actual mortgage interest rate with the expected rate of return on the investment and go with the higher one.

The next thing to consider is your liquidity.  All this means is, do you have enough cash to meet emergencies and make needed choices?  Let’s say you receive $20,000 as an inheritance.  If you have no savings at all you should probably put some or all of the inheritance in a liquid investment like a CD so that you can weather an emergency like losing your job or your house burning down.  On the other hand, if you have a reasonable savings account, you could be free to make the earnings rate comparison described above and either pay down your mortgage or make a longer term investment with the funds. 

The last thing to consider is your comfort level.  For example, some people have an aversion to debt.  Or maybe they were fine with debt when they were young but now they are older and want to be out of debt.  Those people might be better off paying down their mortgage even though the expected rate of return points to making the investment.  Other people might be uncomfortable with the kind of investment needed to get the rate of return necessary to make the investment better than paying down the mortgage, or maybe they just don’t like the current condition of the investment market.  Some might be enthusiastic about the investment market and not bothered by debt.  For that person, the rate of return calculation and liquidity issues are more important.  However, don’t under estimate the importance of being comfortable with your decision.  I have seen some people make the best “economic” decision and then worry themselves into an early grave.

In the end it is your money and your life.  There is nothing wrong with two different people having the same facts and coming to a different decision about whether to invest verses paying down their mortgage. 

Loren L McCann, CPA, MS (Tax)

Wednesday, March 27, 2013

Is a Health Savings Account for you?

The question of whether an HSA is right for you can be answered with: "It depends." If you already have a high-deductible health insurance policy (individual or family), adding an HSA is a good idea. Also, it may be a good bet if you are in good health and if you've been paying more for health insurance premiums than you've been using in health care. People with chronic diseases, such as diabetes, requiring frequent doctor visits and medication, may need to think twice about enrolling.

Advantages:

·        Invest pretax money to fund them; withdrawals are tax-free (assuming they are used for medical expenses).
·        Invest in a variety of financial products, such as mutual funds and stocks, and contributions can be rolled over from year to year.
·       You can save up for when you really need the funds for a medical expense. 
·       Take out your money at any time to reimburse a medical expense.  
·       There is no time limit as in the traditional “use it or lose it” FSAs.   
·        Savings this year can offset a medical expense next year or the year after.

Disadvantages:

·         You must enroll in a health plan with a high deductible and high out-of-pocket maximums to open one.
·         Penalties and taxes are assessed if a HSA is not used for health care expenses.

David Prusaitis, CPA, CVA

Tuesday, March 19, 2013

THE CUSTOMER IS ALWAYS RIGHT…OR NOT!

There used to be a saying in retail business that “The customer is always right”.  Meaning of course, that we are in business to serve the customers so we had better listen to them.  When I first started in business, fresh out of college, I thought I was much smarter than my clients.  When a client said they thought the answer I came up with didn’t look right, I not-so-patiently explained why I was right and they were wrong.  To my own credit it only took me a few months to discover what an idiot I was.  I learned that if the client thought my answer did not look right, I needed to go over my figures again.  The simple reality is that you usually know your own situation better than we do.  You may need our expertise in tax or other financial matters but you can often tell better than us when something just does not seem right.  Sometimes the answer is that you just could not foresee the end result because of the complexity of the matter and our answer is correct.  But sometimes we may have misunderstood something you said and that led us to a wrong result.
So the point of this is to encourage you to feel free to let us know if our answer just does not feel right to you.  There is no harm in asking us to take another look at things.  Our financial lives are so complicated these days we all need to be careful not to get so focused on the detail that we miss the overall picture.
Loren L McCann, CPA, MS(Tax)

Friday, March 15, 2013

ESTATE PLANNING SMATE PLANNING, WHO NEEDS IT!

Now that Congress finally passed a reasonable estate tax law with a $5,250,000 exemption that is both indexed for inflation and transferable to one’s surviving spouse, who needs to do estate planning?  Well, truthfully, some do not need much estate planning, but remember that estate planning always should have been more than just tax motivated.  Estate planning involves issues like; who will take care of our minor or disabled children, who makes my end-of-life decisions, how is the best way to divide our assets among our heirs considering their differing needs and tax status, can your heirs manage what you are leaving them or should the assets be in trust with an experienced manager, and how should you title your assets for the best distribution to heirs.  These and other decisions still should be made.
Most of us would like to ignore the issue if we could (myself included), but we do our heirs a disservice if we do not address these questions.  I have seen many, many sad estate settlements (with unhappy children of the deceased) that could have been made so much better with only a small amount of planning.  For a modest amount of legal fees you can put some certainty into your will or trust and often avoid some unpleasantness for your heirs that you might not have expected or intended.  Sometimes the biggest mistake we can make is to think too much about our feelings on the matter instead of thinking about their feelings on the matter. 
For your family’s sake, put some thought into the planning sooner rather than later.  If you do not have an attorney we can give you some names of good estate attorneys and you can always ask us some questions about the kinds of things you should consult with your attorney about.
Loren L McCann, CPA, MS

Friday, March 8, 2013

Record Retention

You’re going through your files and want to know how long you need to keep your tax return copies and tax related documentation?  We suggest that all copies of tax returns be kept indefinitely.  You never know when you might need them.

According to the IRS, taxpayers should keep a copy of their tax returns and all return-related, substantiating documents for three years after filing the return (the three-year statute). However, records relating to real estate, stock transactions, retirement accounts and business or rental property which can help establish cost basis and gain or loss, should be kept for as long as you have the property plus an additional three years after you dispose of it.

Such tax records can include brokerage statements, bills, credit card receipts, canceled checks and other receipts, invoices, mileage logs, proofs of payment and any other records that support deductions or credits claimed on a tax return.

Of course if you do have documents that are old and are safe to dispose of, you want to make sure you properly dispose of “personally identifiable information” and any financial information. We recommend that paper documents get cross-cut shredded or completely burned.

For more information on what kinds of records to keep go to www.sutton-mccann.com/Retention-Guide.

David Prusaitis, CPA, CVA

Wednesday, March 6, 2013

LEECHES OR BENEFICIARIES?

I recently read where one of our Congressmen accused Social Security recipients of sucking on the government welfare teat and being one of the major causes of the government’s financial crisis.  This Congressman seemed unaware that Social Security is a trust fund set up for the benefit of those designated as beneficiaries.  Trust law is one of the better defined bodies of law.  Trustees are legally bound to manage a trust for the sole benefit of the beneficiaries.  Trustees are prohibited from self-dealing or in any way diverting the funds to anyone other than the beneficiaries.  The Internal Revenue Service recognizes these rules quite well in their efforts to collect taxes that have been withheld from workers and held in trust for the Federal Government by the employer.  If the employer does not pay over the trust funds withheld, the IRS will assess a penalty on the person or persons who should have been acting as trustee for the funds.  And lest you think the function of trustee is not viewed seriously, the penalty is 100% of the taxes withheld from the employees and not paid to the government.
When our Congresspersons talk about the Social Security Trust Fund, they do not seem to know what a trust is or what their responsibility as trustees is.  Rather than decrying the payment of the funds to the beneficiaries, they should be trying to secure the principal so that those beneficiaries receive the funds that have been (or should have been) set aside for them.  As trustees of the funds, they are responsible to see that the funds are available when needed.  We as the people of this nation need to hold Congress responsible, not letting them try to avoid their duty by blaming someone else or redefining the purpose of Social Security to the detriment of the intended beneficiaries.
Loren McCann, CPA, MS (Tax)

Tuesday, February 26, 2013

ON GENERAL PRINCIPLES

Over the past 45 years there have been thousands of times where I have been asked for my professional opinion on some proposed business or investment opportunity.  Usually there are three factors or classes of information that go into the opinion.  The first class of data is the technical data such as rate of return, risk, location, nature of the investment, dollars needed, expertise needed, etc.
The second class of information is the character of the investor.  This one may surprise you.  Any particular investment may be fine for one person and not good for another.  There have been hundreds of times when I have seen a perfectly good technical decision go bad because the personality of the investor did not fit the investment.  For example, the investment in mutual funds by an investor who could not stand to see his investment lose value and therefore sold at the worst time.  Or the real estate investor who absolutely hates dealing with renters and becomes a nervous wreck worrying about the property.  So I always try to make sure the business or investment decision matches the person.
The third class of information is the “general principles” class.  These would be things like, is the dollar amount needed just too much of the persons assets, or is there enough diversification in their investments, or is this kind of asset just too hard to deal with?  These general principles are the hardest to convince a client to apply.  When the other factors look good it is hard to say no just because, for example, you have too many of your eggs in one basket.  But oh, how many times I wish they would have listened. 
So when looking for an advisor, look for someone wise enough to apply all three types of information to your decision and then, may I say it, listen to their advice.
Loren L McCann, CPA, MS(Tax)

Thursday, February 21, 2013

SOMETHING MY MOTHER DIDN’T TEACH ME

My mother taught me many useful things; treat people kindly, do your share of the work (like washing the dishes), be organized.  But one of the things my mother did not teach me was “do not go into business with family members”.  In the 45 years that I have been in business and advising others I have to admit that I have seen a few successes in family business.  At the same time I have seen a hundred failures.  Surprisingly, the failures usually are the result of loving our family members and believing that love cures all ills.  I always advise that before entering any business, especially a family business, you need to write up a detailed operating agreement.  The agreement should cover things like who is putting up the money and how much, who is doing the work, how are decisions made, and how will things be divided up when the business ends.  The problem with family businesses is that if we do not spell out everything in advance, we not only lose a business deal when things end, we may also lose the family member.  So even though I am not your mother, take this advice and prepare a very detailed operating agreement before entering into any business, but especially before going into business with a family member.
Loren L McCann, CPA, MS(Tax)

Tuesday, February 12, 2013

I QUIT…BUT HOW WILL I EAT?

Retirement can be a scary concept.  What are you going to spend your time on (hopefully not television)?  Is there some way you can give back to the community now that you don’t have to spend all day making a living?  Can you quit all at once, or do you need to cut back slowly, both for financial reasons and emotional reasons? 
Here is how we can help you make those decisions, and I hate to even mention it.  Brace yourself….you need to do some BUDGETING.  To most of us budgeting is that dreaded word we don’t speak in mixed company.  However much we may dislike the exercise, retirement is one time when we had better not ignore the discipline.  It does not have to be a formal monthly budget, although that might be best.  It could be as informal as a one-time worksheet of expected income and expense after retirement.  We have some simple retirement planning worksheets on our website under “Financial Tools…Retirement” (http://www.sutton-mccann.com/Financial-Tools).  We encourage you to look over these worksheets and let them help you make your decisions.  We are here to help you too, so let us know when you first start thinking that retirement is coming along.  There are some financial decisions that need to start being considered a couple of years before you actually retire so don’t put off your planning too long, give us a call.
Loren L McCann, CPA, MS (Tax)

Tuesday, February 5, 2013

Filing Season Blues

You may have heard that the IRS cannot accept personal tax returns for processing until the end of January, and those are only the simple returns.  Many of the more complex forms will not be able to be processed until much later than January.  If you have a simple return and are expecting a refund, or if you are one of those people who just likes to get the tax filing over and done with, it is not the IRS (or heaven forbid, your tax preparer) that is to blame.  Congress is responsible for waiting too long to act.  Our tax law is so complex that changes require huge re-programming efforts by the IRS and private tax preparation companies.  So if you are annoyed at being delayed this year, please let your representatives in Congress know about it.  Your communication with your Congressional representatives really does make a difference.  You are one in a district of hundreds of thousands, but your Congress person may only receive a few hundred letters per month so your letter may add a significant impact to the concern you are writing about.  Let’s try to influence Congress to act more responsibly by passing their law changes earlier in the year.  We can be part of the solution if we act on this.

Friday, February 1, 2013

Need News?

Have you signed up for our free monthly newsletter yet? If not, go to http://www.sutton-mccann.com/Monthly-Newsletter and enter your email address. It is that easy. While there, you can check out some of the past issues. Soon you could be receiving a newsletter packed with tax tips and news.

Tuesday, January 29, 2013

The Tax Tail

It has often been said that one should not let the “Tax Tail” wag the dog.  In the context of financial decisions, that means that tax effects are a part of the picture but not the whole picture.  For example, when deciding to buy a house vs. renting, the interest deduction is one of the considerations but by no means the main one.  You must also consider other factors such as: will the house appreciate in value; do the house payments, taxes, and maintenance leave me enough cash to live on; and do I want the added responsibility of maintaining a house?
Most decisions that involve some tax consequence have other important considerations.  Take for example, whether to invest your savings in securities vs. a rental house.  The differences in tax treatment are important, but so are the differences in management responsibility.  There are many times when the rental house would yield a better long-term financial result but the investor may not be cut out for managing rental property and all the hassles that go with it.
In conclusion, to make a good financial decision you need to know how your taxes will be affected, but don’t stop there.  Consider all the other aspects of the decision too, including whether you are just plain comfortable with your decision.

Friday, January 18, 2013

Congress Acts

I don’t know about you, but I was surprised that Congress actually passed a tax bill in time to avoid a huge log jam for the 2013 tax filing season. The law is not all that bad either, or maybe my expectations for this Congress are so low that any law looks good to me. Anyway, they did make some fixes that were long overdue.

Congress finally addressed the Alternative Minimum Tax in a reasonable fashion by permanently increasing the exemption amount and adding a provision for adjusting it for inflation so they do not have to come back to this every year. If you are unfamiliar with the Alternative Minimum Tax just consider yourself lucky and move on. Wonder of wonders, we finally have a permanent estate tax exemption at $5,000,000 plus inflation adjustments. For several years there has been such uncertainty in the estate planning area that people could not do confident planning in this area. Now that we have some surety we can make reasonable decisions about our estates. We also have permanent tax rates consisting of the current rates with the addition of a top rate of 39.6% on high incomes.

Most of the other provisions in the law are either for one year or for five years, giving Congress more time to address these important issues. Even though there are many unanswered questions or short-term fixes, at least it does not look like they will have to come back half-way through the tax filing season to make last minute or retro-active changes. Halleluiah!

Tuesday, January 8, 2013

Payroll Tax Holiday Ended

You have probably heard by now that the Payroll Tax Holiday ended 12/31/2012. This means that employers are required to, once again, withhold 6.2% (up from 4.2%) of your earnings for  Social Security tax. You might not have noticed back in 2011 when your net pay was increased. My guess is that you will notice when your net pay decreases. Hope you enjoyed that tax holiday!