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Dear Clients and Friends,

     It's Summertime and tax planning is probably one of the last things on your mind.  The problem is that if you wait until December to think about your 2005 taxes, there may not be enough time for any tax strategy to take effect.  Additionally, with the major changes to the Ohio tax code, many of the changes begin right away.  If you can set aside some time for tax planning right now, it can be very beneficial.

 •  First, check your withholding for 2005.  The best indicator that you need to make a change in your withholding is either a large refund or balance due on your 2004 tax return.  A large refund means you've given the IRS an interest-free loan--money that you could have invested yourself.  A large balance due can mean you end up paying penalty and interest charges on top of your regular tax liability.  To change your withholding, file a new Form W-4 with your employer.  Newly retired individuals who will no longer have withholding should review their need to start making quarterly estimated tax payments.

 •   Maximize the benefit you get from making tax-deductible contributions to a retirement plan by making your 2005 contribution as early in the year as possible.  You then extend the period during which your investment can grow tax-deferred.

 •   Now is a good time to establish your long-term tax planning strategies.  Some possibilities to consider:  a salary-deferral arrangement with your employer, investing in assets that will appreciate rather than produce current income, shifting income among family members to take advantage of lower tax brackets, and structuring your borrowing to maximize interest deductions.

 •   This is also a good time to get your tax and financial records organized.  Organization will help you capture tax deductions you might otherwise miss.

     It's easy to just forget about taxes until next year, but a little effort now could save you time and money next April.  Let us help you determine a strategy and make some moves that can reduce your 2005 tax bill and improve your financial situation.

Sincerely,

Nicholas F. Nolan III

A good domestic worker can help take care of your children, assist an elderly parent, or keep your household running smoothly.  Unfortunately, domestic workers can also make your tax situation more complicated.

     Domestic workers of all types generally fall under the "nanny tax" rules.  First, you must determine whether your household helper is an "employee" or an "independent contractor".  If you provide the place and tools for work and you also control how the work is done, your helper is probably an employee.

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    Americans love their gadgets.  And the more features we can combine into device the better.  Cell phones, once used only for talking, now serve as appointment trackers, digital cameras, and web browsers.  But combining the business and personal use of cell phones is as hard as ever if you are seeking a tax write-off.

     Self-employed cell phone users often view their mobile phones as just another piece of business equipment.  But the IRS sees things differently.  Because cell phones, like computers and cars, can provide significant personal entertainment and pleasure, usage charges can be deducted only when the business use is formally documented.  This is where many taxpayers get disconnected.

     Proper documentation means keeping track of the cost, time, and business purpose of each call.  The purpose should include what association the other party and with your business.  Daunting as this may sound, your monthly statement might answer some of thee questions automatically if itemized.  But by itself the monthly statement will not be sufficient to allow a tax deduction for business calls. All four points must be covered.

     If your cell phone company charges a flat monthly fee, you must go even one step further.  You must figure the percentage of calls made for business reasons and apply it to the monthly fee to calculate the deduction.

     What about the cost of the phone itself?  If the business usage is more than 50%, the business portion of the phone's cost can be deducted in the year of purchase under Section 179.  Otherwise, you are looking at writing off the business portion of the cost of the phone over five years.

      Business expenses can be tricky.  Before you go "roaming" for a new phone, take a minute to set up a recordkeeping system that will give you all the tax deductions to which you're entitled.

Disaster-Proof Your Business

     Every business is vulnerable to natural disasters such as fires, floods, tornadoes, hurricanes, and earthquakes.  However, advance preparation can minimize your exposure in several ways.  For example:

      •   Physical assets.  Buildings, equipment, furniture, inventories, and supplies should all be protected by adequate property and casualty insurance.  Review each policy for "named perils," which are the disaster covered (such as floods or earthquakes).  If your location is prone to one of the "perils" not listed, consider expanding your coverage or buying an additional policy to include it.

      •   Income.  Business interruption insurance will reimburse you for lost profits.  Your policy should allow a realistic time period for recovery, even if it costs a little more.

     •   Records.  Missing records can cause a host of problems, including making it hard to quantify your disaster losses.  Duplicates of financial statements, customer lists, asset inventories, and other important data should be maintained in a secure off-site location and update regularly.  Important on-site documents should be stored in a fire-proof safe or vault. 

      •   Computers.  Critical computer data should be duplicated regularly on portable hard drives or other storage media.  Updated copies should be stored off-site.

        •   Recovery.  Consider buying "extra expense" insurance to cover relocation costs for a quick post-disaster recovery.  Also, you should identify alternative sources of operating assets (such as furniture and equipment lessors), and investigate other business locations.

Flexible Spending Accounts

     Many companies offer flexible spending accounts to allow employees to set aside pre-tax dollars each year to pay for unreimbursed medical expenses and dependent care costs.  Each December, many employees have scrambled to use any funds that remained in the account at year end--otherwise it was forfeited.  A new IRS rule will permit employers to modify their flexible spending plans to extend the reimbursement period for a given year until March 15 of the following year.

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Professional Accounting Expertise

Lease or Buy Equipment?

     It's not easy to decide whether it's wiser to buy or lease a piece of business equipment.  For most business owners, the first impulse is to buy.  With advantageous depreciation rules, buying is an attractive option.  Lower interest rates make buying equipment over time an affordable option.  But there may be times when leasing is preferable.

        •   Capital conservation.  Purchases normally require a 10% to 20% down payment, whereas equipment leases require a smaller down payment.  Additionally, "soft costs" such as shipping, installation, and warranties can be built into the lease.

        •   Obsolescence.  If the equipment becomes obsolete before the end of its useful life, leasing the equipment may allow for a "turn back" or upgrade at the end of the lease, thereby keeping the technology current and minimizing repair and replacement costs.

         •   Urgency.  For expensive equipment that is required immediately, leasing might be the best way to obtain it quickly.  If you purchase, you might be tied up with your lender for some time, providing financial statements necessary for loan approval.

        •   Deductions.  If you find that you're unable to expense the equipment, a lease might allow for a shorter deduction period compared to depreciation, thereby increasing your tax deduction.

Sold on leasing?  Don't be.  Buying has its advantages also.

        •   Immediate deduction.  You may be able to immediately deduct up to $105,000 of the cost of qualified equipment in the year of purchase using the depreciation first-year expensing rules. That's significant and can reduce your taxes substantially.

         •   Appreciation.  Some equipment actually increases in value over time.  Buying such equipment can create future wealth.

         •   Useful life.  The equipment may be valuable and productive long after the lease has expired.  Purchasing will allow you to continue to use that equipment and avoid the need to return or upgrade it at the end of the lease term.

       At Nolan, Giere & Company, we can help you consider the options and recommend the best strategies for your business.

Ways to Help Your Grandchildren with College Expenses

        If you have grandchildren, consider these tax-friendly ways to help fund their college education.

        •   Tax-advantaged education programs.  The tax law provides two programs specifically intended to help with education expenses:  Section 529 plans and Coverdell Education Savings Accounts (formerly called education IRAs).  Both provide the following advantages:

     -    Earnings within the account are not taxed.

     -    When the student withdraws the money, it's tax-free if used for qualified expenses, such as tuition, books, fees, supplies, or room and board.

     -    If the beneficiary doesn't go to college, the funds can be rolled over for another family member's education.

     Funds used outside either program's restrictions are subject to penalties.

        All of the states (and D.C.) sponsor their own Section 529 plans, which are available through most institutes of higher learning.  You're allowed to use any state's program, and the plans have no restrictions based on your income.

        Most financial institutions offer Coverdell Education Savings Accounts.  Unlike 529s, Coverdells may be used for elementary and secondary school expenses as well as college costs.  However, annual contributions to a Coverdell are limited to $2,000 for each beneficiary, and the $2,000 allowance begins phasing out for joint filers earning over $190,000 annually or single filers earning over $95,000.

        •   Direct tuition payments.  When you pay your grandchild's tuition directly to a college, the payment is exempt for gift tax purposes without being taxable income to the child.  A benefit of making direct payment of tuition is that you remain in control of the money yourself until tuition comes due.