Summer Newsletter is out!

Hey Friends, out latest newsletter is available.  You can read it here:

http://www.franty.com/news/jun13.pdf

“Summer afternoon—summer afternoon; to me those have always been the two most beautiful words in the English language.” ~Henry James

Let us know what you think!!  Enjoy YOUR Summer.

Happy Valentine's Day, Friends!

It's difficult to celebrate today while we’re in the midst of a heavy tax season but here's a fun (and true) little story about love, romance, marriage & monogamy:

When President Calvin Coolidge and his wife Grace were being given simultaneous but separate tours of a prominent chicken farm, the First Lady asked her guide whether the rooster copulated more than once a day. “Dozens of times,” she was told. 

Armed with this juicy little tid-bit, Mrs. Coolidge said to her guide: “Tell that to Mr. Coolidge.” 

Feeling a bit uncomfortable, the tour guide approached the President to inform him of Mrs. Coolidge’s revelation.  When told, President Coolidge hesitated for a moment and then asked the guide:  “Same hen every time?” 

When the guide said, “No Sir. A different hen each time,” the President responded: “Tell that to Mrs. Coolidge.”

Sorry, I couldn't resist.  Hope you enjoyed that fun (and true) little story.

Voice Mail? Who needs voice mail!!

Hi All,

There was a severe storm that rolled through our area on Wednesday and, as a result, our office building has suffered some electrical damage.  Our power was out for a few hours and the internet connection was down for about 24 hours, but we’re back in business now.

It’s pretty reassuring to know that surge protectors work and, at the same time, it’s pretty alarming to learn that when surge protectors get fried they don’t protect the things that they are meant to protect!  Fortunately for us, we’ve only lost a network adapter and the voice mail component to our phone system (plus, of course, a few fried surge protectors).

The network adapter has been replaced and our voice mail system is in the process of being replaced.  If you happen to call our office, you won’t be able to leave any voice messages until the problem is fixed.  

What’s even more unfortunate for us is that it appears that our ten year old office phone number may have been someone else’s before it was assigned to us!!  If you call here and don’t get an answer, you will be confronted with the following message:

“The voice mail box for New Castle Recycling is full.  Please try your call again later.”

New Castle Recycling? Really!?! That’s not even close!  We’re trying to get the phone company to change that message but it’s been a 10 year battle and we don’t think it’ll be resolved anytime soon.

Accordingly, we wanted to let you know that your best bet to reach us after hours in the next week or so would be by email.  Here is a link to all of our email addresses:

http://www.franty.com/contact.html

Thanks very much for your patience.  Best regards,

Standard Mileage Rates for 2013

The Internal Revenue Service issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate.  The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51.  Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

http://www.irs.gov/uac/2013-Standard-Mileage-Rates-Up-1-Cent-per-Mile-for-Business,-Medical-and-Moving

More Subchapter S Corporation Audits Are Coming

Dear Friends,

I hope you are having a wonderful summer!  It’s hard to believe that we’re almost in August already.

A new report by the Treasury Inspector General for Tax Administration notes that IRS audits have led to a substantial number of recommended adjustments reported on S corporation returns; however, the number of no-change audits was 62% in fiscal year 2011 for returns selected by the “Discriminant Index Function system”.

The IRS plans to analyze data files to better identify productive S corporation returns for audit. The growth in the number of S corporation returns processed has continued since 1997 when they became the most common type of corporation return filed.

The IRS estimates there will be a 26% increase in S corporation returns from the 2011 processing year to the 2015 processing year. What’s the take-away from this information?  There will be a lot more S Corporation audits and IRS wants to focus on “Productive” S Corporation returns.

If you are a stockholder in a “Productive” Subchapter S Corporation, there are some things that, at a minimum, you should ensure are being handled properly.  First of all, make sure that stockholder/employees are being compensated adequately.  We can’t emphasize enough how big an issue this is and we have suspected that IRS would intensify its focus here.

Secondly, make sure that vehicle mileage logs are prepared and maintained for company owned or leased vehicles utilized by stockholder/employees (or family members or, frankly, any one else that drives a company vehicle).  Personal use of company vehicles is always covered in any business tax return audit.  If your S Corporation is not maintaining mileage logs, you will lose tax deductions.

Finally, verify that all transactions between stockholders and the S Corporation are supported by appropriate documentation.  If transactions aren’t properly documented, IRS would reclassify them as disguised compensation subject to payroll taxes (including the new ObamaCare medicare tax that takes affect in 2013).  Reclassification of these amounts as additional compensation would also result in IRS claiming that previously filed payroll tax returns were incorrect and subject to additional tax, penalties, fines and interest.

Transactions requiring appropriate documentation would include, for example:

·        Lease agreements for S corporation rental of stockholder owned property(ies),

·        Board minutes prepared for all board meetings (with at least an annual board meeting, at a minimum),

·        Stockholder distributions are made in direct proportion to stock ownership and as a part of a plan of distribution (rather than indiscriminately),

·        Stockholder/Employees should submit expense reports for reimbursement of out-of-pocket expenses, just like every other employee.

This is serious news and it will require a large number of Subchapter S corporations to take a good hard look at how they are doing things.  We have learned that, in many cases, IRS agents like “form” over “substance” so it’s imperative that you have all of your S Corporation documentation handled properly. 

Time is on our side.  Take some time to review your business practices and make sure that you’ve got your Subchapter S Corporation “I’s” dotted and “T’s” crossed.  We can help – please let us know if you need some guidance.

~Franty & Company

In Defense of Capitalism

Do you like Twitter?  I really enjoy it and find it to be an amazing place to get information.  If you’re not Tweeting, it’s something that you should spend some time exploring. 

I read a “Tweet” a few days ago that really got me thinking.  Most of our clients are in business and I wanted to thoughtfully address the Tweet we read about Capitalism. The Tweet in question read as follows:  “#Capitalism is a political economy based on the private ownership of production for class exploitation.”  Really?  I thought you were all in business or working to make a profit.  I didn’t realize that you were a bunch of exploiters.  Let’s take a look at that.

About 120 years ago, French sociologist Gabriel Tarde (http://en.wikipedia.org/wiki/Gabriel_Tarde) addressed the popularization of luxuries. Tarde identified that “an industrial innovation enters the market as an extravagance for the elite before it finally turns, step by step, into a something considered indispensable to all in a society.”  This was more than 120 years ago!!  I found that quote to be quite prophetic.

The history of technology and marketing confirms Tarde's thesis. There used to be a considerable time lag between the emergence of some new & amazing product and it’s becoming affordable for everyday use 

Think: Apple & the iPhone

It sometimes took centuries before an innovation was generally accepted. Think of the slow popularization of the use of forks, soap, handkerchiefs and of a great variety of other things.  While Tarde was publishing his observations, the famous industrialist and philanthropist Andrew Carnegie (http://en.wikipedia.org/wiki/Andrew_Carnegie) concisely wrote that “Capitalism turns Luxuries into Necessities.”

From its beginnings, Capitalism displayed the tendency to shorten this time lag and finally, in today’s world, to eliminate it almost entirely. This is not merely an accidental feature of capitalistic production; it is inherent in its very nature.

Capitalism is essentially mass production for the satisfaction of the wants of the many. Its trademark is large scale production by big business. For big business to prosper there can be no question of producing limited quantities for the sole satisfaction of small elite. The larger big business becomes, the more and the quicker it makes accessible to the whole people its newest technologies (Again, Think: Apple and the iPhone).

The evolution of the automobile from a plaything of the wealthy into a universally used means of transportation required more than twenty years.  The same can be said of airline travel.  In my youth, I had the impression that only wealthy people could afford an airline ticket but today it is an everyday occurrence to book a flight on the internet.  There was practically no period in which the enjoyment of such innovations as television or the products of the frozen food industry were restricted to the wealthy. I think of things like air conditioning, microwave ovens, personal computers, iPhones, GPS devices and Wi-Fi; these items were virtually unheard of only forty years ago but today they are often considered necessities.

The author of the offensive tweet and other disciples of Karl Marx (http://en.wikipedia.org/wiki/Karl_Marx) are anxious to describe the "unspeakable horrors of capitalism" which, as Marx believed results "with the inexorability of a law of nature in the progressing impoverishment of the masses." The Marxists’ prejudices prevent them from noticing the fact that capitalism tends, by the necessity of big-scale production, to wipe out the striking contrast between the way of life of the wealthy elites and that of the rest of us. 

Did you use your GPS this week?  I sure did.  I started writing this on my PC and finished it on my iPad connected to the internet via Wi-Fi.  I'm in my air conditioned home and we just finished a delish meal of leftovers fresh out of the microwave.  Indeed, Capitalism turns luxuries into necessities.

Homework Assignment for the Self-Employed

If you're self-employed, you may have a tough time relating to traditional financial advice.  The financial self-help publications are targeted towards mutual fund investing and the on-line sources of information are geared towards employees earning paychecks and not having to worry about all of the things that go through the mind of a self-employed person.

It's harder to budget when you don't make the same amount of money each month.  If your monthly income isn’t consistent and you have no employer withholding your tax contributions, budgeting and financial planning gets a little more complex.

From saving money for taxes to ensuring your retirement needs are met, here are seven tasks to you should consider implementing if you're self-employed.

Save percentages, not fixed $$ amounts

If your monthly income fluctuates, designating a specific dollar amount to emergency savings and retirement accounts could lead you to save too little during high-income months and too much during low-income months.

Instead, allot a percentage of your monthly income to retirement and emergency savings. That way, you'll contribute more to your most important financial goals when you have more money, and less when you have less. Regardless of what you make in a given month, 10 percent of your monthly net income is always a good rule of thumb for how much you should set aside for your retirement account and emergency savings fund (we’ll tackle “Taxes” next).

Pay Taxes First

The “Pay Yourself First” theory goes out the window when we’re talking about Taxes! If you are self-employed, your contributions to federal & state taxing authorities must take precedence. While paycheck earners have their taxes withheld, self-employed individuals must set aside taxes on their own. One of the biggest mistakes that self-employed people make is failing to set aside money for taxes and learning they owe $10,000 or more at tax time.  And because that first big tax bill is generally unexpected, we find that many self-employed clients don’t have that money when they need it.

Self-employed people also must make estimated tax payments on a quarterly basis. If you pay late, you'll end up paying interest and penalties, which will ultimately cost you more. To make sure you have enough set aside, stash away 30 percent to 35 percent of your net profit each month for taxes. After we’ve worked with you to maximize your business tax deductions, it’s likely that your actual tax bill will be lower than that range, but it's better to be safe than sorry.

Take Advantage of Time

While you're preparing for that tax bill, it's perfectly acceptable to make a little money on the money you're using to pay your taxes. Though you won't get rich off of the investment returns, an interest-bearing checking or savings account will at least let you make something on the money that you're stashing aside. That’s how companies like ADP and Paychex make most of their profits.

While you won't be writing many checks from this account, make sure you won't be penalized for low balances because you will be hitting the account hard every quarter to pay your taxes.

Short-term CDs are another option for those who want to make a little money on their tax savings. Unlike checking and savings accounts, which offer more liquidity, CDs tie up your money for a set period of time.  For self-employed individuals who know they won't be touching that money for three or more months, a three-month CD could be a good option for your tax money.

Make a Budget and Stick to it

You may not be able to predict your income from month to month, but you can determine how much money you need to live on. Figure out how much you must spend on housing, utilities, food and other living expenses, and then use that money to determine how much you'll be allotted to spend each month. We suggest that you transfer this amount each month from your business checking account to your personal checking account.

If you're not reaching this number consistently, you're not making enough money.   No crafty accountant can help you achieve your financial goals or save on taxes if you don’t make enough money to live on.  If this is the case, make an investment in our services because we may be able to help with a plan to grow your revenue.

If you are making more than what you need to cover your living expenses, don't increase your spending! We find that some of the wealthiest people we work with are often the most careful with how they spend their money – and that’s smart no matter how much money you have.   Ben Franklin’s famous adage “a penny saved is a penny earned” still holds true today.

Build Financial Confidence by Building Cash Reserves

If your small business is anything like ours, you’ll have more income in some months than others (did someone say “Tax Season”?). When you have a month in which you double or even triple your typical income, take out your percentages for taxes, retirement and emergency funds, give yourself your salary, and put the rest in what we like to call your “Reserve” Fund – and Never, Ever use the money that’s in your Reserve fund!  OK, that’s not really true but it’s the mindset you should adopt.  If you find that you need funds to cover a substantial expense, be creative and figure out how you can pay for it without touching the Reserve Fund.

As the balance in your Reserve Fund builds up, you'll gain confidence and increase that much-needed feeling of financial security. 

Tackle Other Financial Goals

Once you have six months' worth of operating & living expenses in your Reserve Fund, you should focus on other financial goals. If you have substantial debt, you'll want to tackle that first. After that, ask yourself how you can best use your extra cash flow. Do you need to invest in your business for expansion, do you have two teenage kids to send to college, do you want some permanent life insurance, or do you want have other financial goals? 

Since your basics are covered at this point, the extra money you make in a good month can go toward paying down that debt or building up that 529 college savings plan. If you're consistently making more money than you need, increase the percentages you're allotting to retirement and savings. If you’ve made it to this point in the plan, it’s time to begin working with a qualified personal wealth advisor.

Communicate With your Tax Professional

Once your plan is set and working, check in with us periodically to make sure you're also on track with taxes.  If you haven’t learned this already, you’ll find that taxes can really hit you hard when you’re not prepared.