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Dear Clients and Friends,

     The U.S. income tax laws had a long and interesting history beginning in 1862 when the first income tax law was temporarily enacted to finance the Civil War.  Even though the Civil War ended in 1865, the tax law was note eliminated until 1872.  After a short-lived revival in 1894 and 1895, the U.S. Supreme Court decided that the income tax was unconstitutional.  In 1913, the 16th Amendment to the Constitution made income tax constitutional, and a permanent fixture in the U.S. tax system.  Since then, the legislative history has continued to expand and grow.  In 1981, Congress enacted one of the largest tax cuts in U.S. history, which was then partially offset by two acts in 1982 and 1984.  President Regan signed into law the Tax Reform Act of 1986, one of the  most far-reaching reforms of the U.S. tax system since its inception.   In recent years there has been what seems to be annual tradition of new tax acts.  Since 1986 there have been nine tax acts, the most recent being President Bush's "Jobs and Growth Tax Relief and Reconciliation Act of 2003.

     After each new tax bill is signed, we, of course, hear the joking references to "The Accountants Full Employment Act".  It certainly does keep us busy.  Our responsibility continues to grow and we must study, interpret, and train ourselves and our staff to meet this obligation.  The next step is to inform our clients as well as to determine the implications the new laws will have on them. This is then implemented into our tax planning which is really an ongoing process each year.  Tax planning can never be done too soon, only too late.  Our goal is to make sure you are informed and aware of the major tax issues each year to make recommendations thereon.

     With that in mind, here are some key provisions from the 2003 tax act that will expire at the end of calendar year 2004:

 •   50% bonus depreciation on certain new property placed in service.

 •   The $1,000 child tax credit reverts to $700 in 2005 and eventually increases back to $1,000 in 2010.

 •   The marriage penalty relief

 •   The standard deduction for married taxpayers, which is twice the amount covered by the 15% bracket for single taxpayers, will also default to prior law.

 •   The increased cut-off points of the 10% brackets will revert back to those used in 2001.  As such, the bracket cut-offs in 2004 will reach $7,150 for single taxpayers and $14,300 for married taxpayers.  However, in 2005 they will drop back to $6,000 and $12,000 respectively.

     With the bonus depreciation expiration approaching, it is time to review your property and equipment needs for 2004.  Accelerating purchases of new equipment into 2004 may bring significant tax savings depending on your potential taxable income.

     In general, all of the above expirations will cause taxes in 2005 to be higher than in 2004.  It would therefore, make sense, from a general planning point of view, to bring more income into 2004 where possible, and to defer expenses into 2005.  However, there is no formula that fits all.  Tax planning is unique to each situation.  If you would like us to review your tax situation in 2004 and make recommendations, please call to arrange a meeting.  Remember, it can never be too soon.

Sincerely,

Nicholas F. Nolan III

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    With interest rates as low as they have been for almost 40 years, now is the time to consider refinancing your home mortgage.  Here are a few tax tips that shouldn't be overlooked.

     While you can fully deduct the points you pay when you buy your home, any points paid on a refinancing are deducted evenly over the term of the loan.  If you refinance a loan for a second time, the balance of any remaining points from the previous loan will become immediately deductible.  Also, if you're deducting points over the term of a loan, those remaining points are deductible when the home is sold.

     If you pull out additional cash in the refinancing, and then use some (or all) of that cash to improve your main home, a portion of the points is deductible if you actually pay those points "up front".  The amount of the deductible points is a percentage of the funds used for your home improvements compared to the total amount of the loan.

     If you pull out additional cash of $100,000 or less when you refinance, the interest on the amount is deductible.  If you pull out more, the interest may or may not be deductible depending on how the additional funds are used.  If you use those funds to expand your business, the interest would be deductible business interest.  If you buy investments, the interest would be investment interest expense.

     While most other loan fees are not deductible, some of your property taxes may be paid through the refinancing and are deductible.  Also, if you do refinance to a lower interest rate, you'll pay less interest and have a lower mortgage interest deduction on your income tax return.  Make sure to double-check your tax withholding in order to avoid an unanticipated tax bill later. 

Don't Overlook Disability Insurance

     Say "insurance" to most people and auto, health, home, and life are the variants that spring to mind.  But what if an illness or accident were to deprive you of your income?  Even a temporary setback could create havoc with your affairs.  Statistics show that your chances of being disabled for three months or longer during your working years are 3.5 times greater than your chances of dying during the same period.

     Yet people with financial savvy often overlook disability insurance.  Perhaps they feel amply covered through their job benefits.  However, such coverage is woefully inadequate.  Most individuals should consider disability insurance in their financial planning.  To get the right coverage for you, take the following steps.

 •   Scrutinize key policy terms.  First, ask how "disability" is defined.  Some policies use "any occupation" to determine if you are fit for work following an illness or accident.  A better definition is "own occupation," whereby you receive benefits when you cannot perform the job you held at the time you became disabled.

 •   Check the benefit period.  Ideally, your policy should cover your disability until age 65, when you'll be covered by Medicare and social security.

 •   Determine how much coverage you need.  Tally the after-tax income you'll have from all sources during a period of disability, and subtract this sum from your minimum needs.

 •   Decide what you can afford.  Disability insurance is not inexpensive.  Plan to forgo riders and options which boost premiums significantly.  If your budget won't support the ideal benefit payment, consider lengthening the elimination period.  (Check to see if your accumulated sick leave, savings, etc., will carry you until the benefits kick in.)

     Ask your insurance agent about the options available to you.  We would also be happy to discuss your situation to help  you with your purchase decisions.

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Professional Accounting Expertise

When Customers Don't Pay

     When can a businessperson take a tax deduction for an unpaid account receivable?  What amount can a businessperson deduct?  The answer to these two questions can be confusing.

     The IRS guidelines contain the term "worthless" in dictating when a business bad debt is deductible.  The deduction can be taken in the tax year that the debt becomes "totally worthless".  Taxpayers must satisfy three criteria under the "worthless" definition.  First, the debt had some previous value.  Second, the taxpayer had a reasonable expectation of collecting the debt.  Third, the taxpayer has no reasonable hope that the debt has any value in the future.

     The accounts receivable a business incurs in its daily routine of providing goods or services to its clients usually meet the first two criteria.  The third criterion, future value, may be determined by a single event.  A bankruptcy filing by your client may fully satisfy the question of future value.  The future value is nothing.  Another common event, the assignment of the account receivable to a collection agency, may answer some taxpayers' questions of future value.  The future value is reduced by the amount of the commission the agency charges upon collection.

     In order to deduct the amount of an unpaid account receivable, the taxpayer must first have included that receivable as income.  Therefore, cash-basis taxpayers may not deduct unpaid accounts receivable because no amount was ever included in income.  However, they may deduct the costs associated with the sale when the receivable becomes worthless.  Accrual-basis taxpayers can deduct unpaid accounts receivable as they meet the guidelines.  For a bankrupt client, the amount may be the total receivable.  In the case of an assignment to a collection agency, the agency's commission may be deductible.

     For more information regarding deductibility of unpaid accounts receivable, contact our office.

     You've beaten the odds.  Your business has succeeded and your profits are growing.  But you struggle with the uncertainty of whether you are operating under the right legal form.  Should you incorporate?  Form a partnership?   Perhaps you should consider a form of business that has become very popular:  the LLC.

     Limited liability companies (LLCs) offer a flexible alternative to partnership and corporate legal forms.  While partnerships provide a seamless pass-through of income and losses to partners, they offer little protection of personal assets from creditors.  Corporations, on the other hand, provide asset protection, but income can be taxed at both the corporate and individual levels.  LLCs make available the best of both worlds:  asset protection with pass-through of income and losses direct to the owners.

      LLCs are not the first form of business to allow this.  S corporations are used by small, closely held entities to achieve the same goals.  But LLCs are preferred under certain conditions.  For example, income and losses in a LLC can be allocated to members disproportionately, thereby allowing for different ownership classes. S corporation income must be allocated to members based on ownership percentage.  Also, unlike S corporations, LLC members can be individuals, trusts, or any other type of entity.  This may provide more options in estate planning. 

     In the real estate industry, LLCs often get the nod over S corporations because it may be easier to increase basis and allow for the deduction of losses.

     On July 20, 2004, Nolan, Giere & Company underwent a Peer Review.  All certified public accounting firms must participate in a peer review every three years.  The purpose is to audit quality control policies and procedures, and to provide reasonable assurance of conformance to professional standards.  In the past, Nolan, Giere has received the highest possible ratings.  We are proud to announce that once again Nolan, Giere has received an unqualified opinion which reflects our continued commitment to the highest standards of the accounting profession.