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Perspective

An Inside View

Dear Clients and Friends,

         There were many beautiful fireworks displays during the recent Independence Day holiday.  There appears to be more people setting off backyard shows, as well as many committees hosting festivals and professional fireworks.

         The professional fireworks shoot higher, the colors are brighter, and the timing is more fluid.  The backyard displays are a little more chaotic, much more dangerous, and really more noise than bright lights.

There’s a bit of an analogy with professional accounting versus “do it yourself” bookkeeping.  For example, at a firm like Nolan, Giere, we are continually looking for the highest returns for our clients.  We provide detail and clarification, financial assessments and statements to make the numbers easier to read and understand.  Plus there is the safety of knowing that your well being is in the hands of a professional.

Sometimes individuals and business try to save a little money by going with the “backyard” approach rather than a true professional approach.  This can cause delays, confusion, wasted time, and missed opportunity.

We appreciate your continued trust and confidence in Nolan, Giere.  We remain committed to offering the highest level of service, and the brightest expertise, in a timely and professional manner.  Thank you for your business!

Sincerely,

Nick

Nicholas F. Nolan III

Summary of New Tax Law

  The Tax Increase Prevention and Reconciliation Act, signed on May 17, 2006, provides benefits if you’re subject to the AMT, or are an investor, business owner, or IRA holder.  The new law is less generous when your kids have unearned income or if you work abroad.

  Here’s an overview:

·  Alternative minimum tax (AMT).  The law increases AMT exemptions for 2006.  If you’re married filing jointly, the amount you can use to reduce taxable income for AMT purposes is $62,550 ($42,500 for singles).  In addition, you can apply nonrefundable personal credits such as Hope scholarship and lifetime learning credits to offset the AMT in 2006.

·  Investors and business owners.  Increased Section 179 asset expensing ($108,000 for 2006) is allowed through 2009, and reduced rates on long-term capital gains and dividend income (15% for the highest brackets) will remain in place through 2010.

·  Roth IRA conversions.  Starting in 2010, you’ll be able to convert a traditional IRA to a Roth no matter the amount of your adjusted gross income.  You’ll still have to include the conversion amount on your return and pay the tax, but you can spread that amount over two years for conversions made in 2010.

·  The kiddie tax.  In the past, when your under-age-14 child had interest, dividends, capital gains, and other unearned income over a specified amount ($1,700 for 2006), you were generally required to pay on that income at your rate.  At age 14 , your child could file a separate return and pay tax at what was typically a lower rate.  Under the new law, beginning with 2006 tax returns, your child’s unearned income over the specified limit is taxed at your rate until age 18.

·  Working abroad.  Changes include indexing the foreign earned income exclusion (raising the maximum exclusion to $82,400 for 2006) and a limitation on the foreign housing exclusion.

Business Solutions

Professional Accounting Expertise

A Business Plan:  Why You Need One

  If you have an existing business and especially if you are starting a new venture, you need a business plan to guide and direct your future.  Here are some tips for creating a plan that your business will actually find useful.

·  First, own your plan.  It’s your plan, and you need to own it.  It’s not something you can completely delegate to a consultant.  You must be an active participant in its development even if you have assistance in the process.

·  It should communicate.  Your plan should tell your story, and it should do so in a compelling way.  Why does your business exist?  What are your marketing, operational, and financial strategies?  What are your goals, and how will you measure progress?  What are the tasks to be performed, and who will do them?

·  It should bring focus and alignment.  Your plan should spell out the responsibilities of your entire management team.  Everyone should know his or her respective role and how it contributes to your plan for business success.

·  It should guide your business.  Execution is the key.  Your plan should be more than a means to obtain funding.  It should be the tool to run your business.  You might need a shorter and tighter version of your plan to make this happen.

·  It should be evolving.  The “planning process” is as important as the plan itself.  Things change quickly so your plan needs to be flexible and adaptive.

·  It should hold you accountable.  Measure and track your progress, and use the plan to hold your management team accountable.  Discipline and control need to be part of the process if you expect to achieve the objectives stated in your plan.

Wayne Gretzky, when asked for the reason for his success said, “Some people skate to where the puck is; I skate to where the puck is going to be.”  A good plan should help you do the same for your business.

Time Value of Money

  If you were offered the choice of being paid $100 today or $100 a year from now, you would probably choose $100 today.  After all, even at today’s lower interest rates on savings accounts, your $100 could earn $3 or more over the next year.  This simple example illustrates an important concept:  that the value of money changes with time.  A dollar received today is worth more than a dollar received a year from now—and is worth even more than a dollar received five years from now.

  There are at least three reasons why today’s dollar is more valuable.  First, it can be invested to earn interest or dividends, as in the example above.  Second, future dollars may have their value eroded by inflation.  Third, the further into the future a payment is due, the greater the risk or uncertainty associated with receiving it.

The concept of the time value of money is important in many personal and business financial decisions.  For example, you may have to choose between receiving a lump sum from a pension plan or a stream of payments in the future.  In your business, you may be deciding whether to buy a new piece of equipment which will bring increased revenue in future years.  Both of these decisions involve comparing the value of present and future dollars.

Business Cost Savings

  To save some costs for your business, review the cost of supplies and inventory.  Analyze the cost of materials and supplies.  Are you stocking too much material too far in advance?

  Periodically conduct a competitive review of suppliers, and select those who can deliver good quality and service at the lowest cost possible.

Save for Retirement with IRA

  Are you saving enough for a comfortable retirement?  You can no longer rely on social security or a company pension to provide all the retirement income you will need.  Perhaps it’s time you considered an individual retirement account (IRA) as another option for setting aside more retirement dollars.  Consider these basic IRA facts.

·  Deductible IRA.  If you are not covered by an employer’s retirement plan, you may contribute up to $4,000 to a traditional deductible IRA for 2006 ($5,000 if you’re 50 or older).  If you’re covered by a company plan, the amount you may contribute begins to phase out once your adjusted gross income (AGI) exceeds $50,000 (single) or $75,000 (married filing jointly).  If you’re not covered by a company plan, but your spouse is, the phase-out income range is $150,000 to $160,000.  If you qualify, your IRA contribution is tax-deductible, and taxes on earnings and gains are deferred until you start taking withdrawals.  This allows a tax-free compounding of earnings and gains.  The IRS imposes timing restrictions on withdrawals; they must begin after age 70, and they’re generally subject to a 10% penalty if taken before age 59.

·  Roth IRA.  A married couple with income of less than $160,000 or a single person with income of less than $110,000 may be eligible to open a Roth IRA.  As you approach these levels, the IRS limits the amount of a Roth contribution you can make.  Annual contribution limits are the same as for a traditional IRA, but contributions are not tax-deductible.  Once you’ve had the Roth account for five years and you’re at least 59, your withdrawals are completely tax-free.

·  Nondeductible IRA.  What if you don’t qualify for either a deductible IRA or a Roth?  You might consider a nondeductible IRA.  Though the contribution isn’t deductible, the taxes on the earnings and gains are deferred until you take withdrawals.

Is it a Good Idea to Defer Taxes

  Reporting income on the installment method to defer taxes isn’t always the best strategy.  For instance, say an investment property you bought years ago has appreciated.  You decide to sell, agreeing to accept a down payment now, with the balance of the sales price due over the next two years.  When you file your tax return, you can report the income from the sale over the agreement term.  This strategy spreads the tax on the gain over the same time period.

  But there may be circumstances when you’d be better off electing to recognize the gain in the year of sale and pay tax currently.  In addition, there are cases when the installment method is not available, such as if you regularly sell the same type of property on an installment plan.  You could be considered a dealer, meaning you’re unable to use the tax break except in special situations.

  Sales of business inventory items are also generally ineligible, as are stocks traded on an exchange.  Another example of a sale that doesn’t qualify for installment treatment is selling your property at a loss.  Assuming the loss is deductible, you’d have to recognize the full amount in the year of sale.

  When the sale does qualify for the installment method, you may still elect out.  Reasons to consider doing so include the availability of capital or net operating losses that offset the gain, or credits that reduce the tax.  An expectation of higher income in the future—which would put you in a higher tax bracket—may also make reporting the full gain in the year of sale a good idea.

  Other items to consider include passive activity losses you’ve been unable to use in prior years and depreciation recapture.  Special rules apply to both.