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Dear Clients and Friends,

     As the year 2005 comes to a close, we have included many articles on year end tax strategies.  When we begin preparing tax returns each year, we often find missed opportunities for tax savings that could have been garnered if clients had made changes, investments, or donations prior to the end of the tax year.  If you read anything in this newsletter that sparks an interest or that may have some possibilities for your own situation, please don't hesitate to call.

     Everyone gets busy during the last several weeks of the year with the holidays, travel, and other commitments - so tax issues are often delayed until after the New Year.  Unfortunately, this delay can sometimes be costly.  Take a moment now to reflect on your year from a financial perspective.  Is there anything new, different, or unusual that we'll need to consider?  Do you have any special circumstances that you foresee for 2006?  Let us know if you have any thoughts or considerations that you would like to discuss.

     Thank you for another great year of business!  We truly appreciate your confidence in Nolan, Giere & Company, and we remain committed to providing outstanding service and the highest level of expertise.

Sincerely,

Nicholas F. Nolan III

     The value of services you contribute to a charity is not deductible, even if you would normally be paid for your services.  For example, if you are an electrician, you can't deduct what you would normally bill.  But if you contribute materials, you may deduct the cost of the materials.

     Using your car for charity work entitles you to a deduction for your unreimbursed costs.  You may deduct either your actual costs or the IRS standard rate of 14¢ per mile.  With either method, you can also deduct tolls and parking fees.  If your driving is related to Hurricane Katrina relief, the standard mileage rate is 34¢ a mile, effective through year-end 2005.

     Volunteers who pay their own expenses when traveling away from home overnight for charitable purposes are entitled to deduct these costs.  To qualify for the deduction, there should be no significant element of pleasure, recreation, or vacation in the travel.

     Your costs must be properly documented and reasonable in amount to be deductible.  Contributions of $250 or more require written documentation from the charitable organization.  For more information, contact us. 

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    A recent report by the Government Accountability Office pointed out that 27% of 1.8 million taxpayers eligible for education-related tax breaks did not take advantage of them on their income tax returns.  As a result, they paid from $169 to over $500 more in taxes than necessary.

     If the complexity of the tax credits and deductions for education expenses is keeping you from claiming them, you, too, may be paying higher taxes than necessary.  With a little effort, you can get the details and advice you need to make the wisest choices for your particular situation.  Here's a brief rundown of what's available.

      •   Education savings accounts let you set aside up to $2,000 per year per child in a tax-deferred account for elementary, secondary, or higher education expenses at either private or public schools.

      •   Section 529 plans include tax-favored college savings plans and prepaid tuition accounts.  Tax-free withdrawals can be used to pay for tuition, fees, supplies, equipment, and certain room and board expenses.

      •   The college expense deduction lets you deduct up to either $2,000 or $4,000 (depending on your income) for tuition and related college expenses.  If you qualify, you can deduct these expenses whether or not you itemize.

      •   Student loan interest of up to $2,500 is deductible, subject to income limitations.

      •   A Hope credit of up to $1,500 per student can be claimed for tuition and fees relating to the first two years of post-secondary education.

      •   A lifetime learning credit of up to $2,000 per family can be claimed for post-secondary education expenses and certain job-related courses.

      Don't pay more in taxes than necessary because you've failed to take advantage of the education tax breaks that exist in the law.  We can help you with details and assistance in planning for the best utilization of the available education tax breaks.

     Many small businesses and self-employed business owners make the mistake of not thinking about taxes until it's time to file their returns.  That's simply too late--most moves must be made before year-end.

      Here are a few tax cutting ideas that could help you reduce your 2005 business taxes.

      •   Purchase business assets.  If your business will soon require additional computers, furnishings, or even transportation equipment, make those purchases before the end of the year and tax maximum advantage of the expensing election.  You're generally allowed to deduct up to $105,000 of qualified purchases this year.

     •   Hire your children.  If you're a self-employed taxpayer, you can reduce your taxable income (and associated self-employment tax) by employing your children who are under the age of 18.  You can avoid payroll taxes on the child's wages and shift income from your higher bracket to their lower bracket.  The wages you pay must be reasonable for the work performed. 

      •   Plan for retirement.  If you don't have a retirement plan, consider setting one up before the end of the year.  In fact, there are federal tax credits for some of the costs of setting up a new retirement plan.  If you can already have a retirement plan, consider maximizing your contributions.

       •   Use your credit card.  Even a cash basis business can deduct expenses purchased with a credit card on the date of the charge--rather than later when the credit card payment is made.  So if you find that you need business supplies or equipment before the end of the year and you're short of cash, consider using your credit card and deducting the charges this year.

      •   Review your entity.  Many small businesses start out as sole proprietorships or partnerships.  Now may be the time to transition to another entity such as a corporation which can help shelter you from financial and liability risks.

     The best way to maximize your business deductions is to plan before the end of the year.  For assistance, contact our office.

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Professional Accounting Expertise

Analyze the Numbers Before You Invest

     How much should you pay for a business, rental property, or any other investment?

     There are several considerations in valuing a business including its profitability, age of the business, condition of the industry, location, competition, and so on.  Let's cover just one aspect of profitability--cash flow from the investment. 

     Let's assume that you're trying to achieve a 12% before-tax yield.  Project, as accurately as you can, the cash you will receive from the investment each year for the next five years.  Also estimate the value of the investment if it were sold at the end of that time.  We are using five years because the present value of money received more than than five years from now is not very large (as you'll see later).  Also the reliability of cash projections beyond five years is questionable.

     If you want a 12% return, you can only pay $893 today to receive $1,000 a year from today.  If you are to receive the $1,000 two years from now, you can only pay $797 today, $712 for three years, $636 for four years, and $567 for $1,000 to be received five years from now.  If we take it out tot he tenth year, you can only afford to pay $322 today if you want to achieve a 12% return.

     Let's say that an investment will pay $100,000 each year for five years and have a sales value at the end of the fifth year of $1,000,000.  From the present value numbers above, we compute the first year's receipts at a present value of $89,300, the second year at $79,700, and so on for a value of $927, 500 for all cash received (including the sales proceeds).

     If you paid $927,500 for this investment, you'd have a return of approximately 12% on your money ("approximate" because the money will probably be received in varying amounts throughout the year and not just at year-end).

       For assistance in running the numbers to evaluate an investment opportunity, give us a call.

Lending Money to Relatives

        Lending money to a relative may sound like a recipe for disaster.  However, under the circumstances, it can be a profitable experience for you and your relative.  For example, your savings may be earning very low interest in a bank CD or savings account.  Meanwhile, your niece may need a loan for a car.  You can lend her money at a lower rate than she can get elsewhere and still improve your return significantly.

        In another common example, children may borrow from their parents to remodel a house.  By structuring the loan correctly, both sides can come out ahead.  The children pay a below market interest rate and avoid points and other fees, while the parents increase their investment return.

         We've all heard stories of family loans that never get repaid and cause nothing but bad feelings.  To avoid these problems, the first rule is to formalize the loan by putting it in writing.  Having a formal loan note can prevent later squabbles over terms and can be used as evidence if the IRS ever questions the arrangement.  The note should clearly state the amount, the interest rate, the terms of repayment, and the collateral, if any.  If the loan involves real estate, you should consult an attorney to make sure the loan is properly structured and recorded.

        Watch out for tax traps when you set the interest rate.  Generally, you can charge any interest you want on loan amounts below $10,000 (even zero interest).  Above that amount, there are IRS rule that may affect the minimum interest rate you can charge.

This newsletter provides general tax, financial, and business information for our clients.  The information should not be acted upon without further details and/or professional assistance.