The government wants to grab your 401K and IRA

by admin on September 1, 2010

The government wants to grab your 401K and IRA money. Discussing the pros and cons about converting to a ROTH IRA in a May 2010 post I warned you of the possibility. In that post I said:

“One caveat though.  The government has kicked around the idea of either requiring retirement accounts to hold a certain percentage of government bonds (whether you want to or not), or even in some more extreme economic and political scenarios, requiring the conversion of your retirement accounts completely to government retirement bonds (think enhanced Social Security).”

Two new developments on that front that you need to know about: the required use of Treasuries in your retirement account and the forcing of employers to provide retirement plans.

Just like the health care bill was forced upon strapped small businesses, we find John Kerry introduced legislation in August to requiring employers of 10 or more people to provide what he terms “automatic IRAs.” For those companies that can’t afford or choose not to have a retirement plan, too bad. Kerry demands that you create “automatic IRAs” for your employees and fund it.

It gets better though. Hearings are scheduled for September 14th and 15th with the Department of the Treasury to see if they can require retirement funds to hold a percentage of government securities in their investment portfolio. Just what you wanted to do right, be forced to buy US Treasuries? If the government can’t convince foreign governments to buy the debt being created to cover the huge deficits, they’ll just force you to buy them.

Whether this happens now or later you can bet it’s only a matter of time. We don’t know how this round of hearings will turn out, but it would be a good idea to contact your Congressmen and let them know what you think of these plans. Small business has enough problems getting through this economic downturn without more highly burdensome regulations being dumped on us.

Also as you think about what to do with your 401K or IRA, go back and read my post from May on converting to a ROTH or simply withdrawing your retirement dollars in 2010. That along with this post ought to help you make an informed decision.

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S Corporation Tax Saving Strategies

by admin on August 26, 2010

S corporations can often reduce your taxes when used for operating businesses. Here are some ideas on how to do so. In my examples I assume your business has always been an S corporation as there are other implications if it was once a C corporation.

You may be taking money out of your S corporation in several ways including a salary, rental payments from leasing real estate to the corporation, and distributions of some of the S corporation’s net income. Even minor changes in these payment categories can generate differing tax results.

Income Shifting. S corporation shareholders often attempt to minimize their salary to increase the pass-through income flowing to other owners, such as their children. Clearly, an owner rendering significant services to the corporation cannot unreasonably reduce salary to increase income to other shareholders. However, reasonable adjustments may be made with this goal in mind.

Reducing Compensation. Wages paid to an S corporation shareholder-employee are subject to payroll taxes. However, S corporation income is not. Thus, shareholder-employees may be able to reduce their payroll tax liability by minimizing salaries to increase pass-through income.

The IRS watches this closely and has cracked down on those owners who take completely unsupportable positions, like no salary at all. However, as long as you stay in the lower end of a reasonable range for your salary, you should be okay. You must be paid for the services you actually render to the corporation.

Generating Rental Income. It is generally beneficial for an owner with rental real estate to lease it to their S corporation. Any resulting net rental income is exempt from payroll taxes. But again, the arrangement must be reasonable as the IRS has the authority to characterize rent payments as compensation to the extent the rent exceeds market rates. S corporation shareholders using a portion of their home for the corporation to work from or to store corporate inventory may lease space to the corporation. The benefit is the rent is exempt from payroll taxes.

The Benefit To You. S corporation shareholders can often choose how to structure funds being paid to themselves from their corporation. While compensation and rental amounts must be reasonable, shareholders’ tax savings can be substantial. These strategies should be reviewed with your CPA as there are many more opportunities and pitfalls.

If you are operating your business as a sole proprietorship or an LLC you may want to consider switching to an S corporation to take advantage of these opportunities.

Your CPA can help you chart a tax savings course. So what are you waiting for? Get going!

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More taxes, fuel for irresponsible spending.

August 16, 2010

There is a raging debate going on about extending “tax benefits” that are going to sunset, or expire at the end of 2010. Arguments range from making the “tax benefits” permanent for the middle class and taking them away from the top earners, to just letting them expire altogether raising everyone’s taxes. In reading a [...]

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Health Care Reform makes W-2 reporting costly

August 8, 2010

Last week I warned you about the coming 1099 reporting nightmare under health care reform.  Today it’s W-2s. Starting January 1, 2011, just months away, you’ll need to start tracking health insurance information to report on employee’s W-2s. Even though most of those W-2s for 2011 won’t be issued until January of 2012, terminated employees [...]

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A 1099 Nightmare For All Businesses

August 1, 2010

Ah, hiding in the 2,409 page document they call the health care reform bill was a little noticed provision about 1099s. Make sense right? Health care and 1099s. This is a dangerous little piece of legislation that will bury small business in paperwork and administration. The Cato Institute calls it a “costly, anti-business nightmare.” I [...]

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Banks in Trouble – is Yours?

July 29, 2010

Just a reminder to keep an eye on your banks financial health. If your bank goes under or is acquired by another institution you could find your lines of credit drying up.  Here is a link to Calculated Risk, a blog that provides an update on the status of most bank every Friday. Check back [...]

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Section 179 Deduction, a Blessing or a Curse?

July 25, 2010

Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. For tax years beginning in 2010, the maximum Section 179 deduction is a whopping [...]

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Charitable Donations and Family Gifts

July 18, 2010

Say you want to make some gifts to family and/or charitable donations to your favorite charities (who may really be hurting financially). You can make gifts in conjunction with an overall revamping of your holdings of stocks and equity mutual fund shares held in taxable brokerage firm accounts. Here’s how to get the best tax [...]

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Capital Gains and Losses – Timing is Everything

July 11, 2010

As you evaluate investments held in your taxable brokerage firm accounts, consider the impact of selling appreciated securities this year instead of next year. The maximum federal income tax rate on long-term capital gains from 2010 sales is 15%. However, that low 15% rate only applies to gains from securities that have been held for [...]

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Tax benefit for prepaying itemized deductions in 2010

July 5, 2010

Many people don’t realize that they never got the full tax benefit for their home mortgage interest deductions. The write off of their state and local taxes and charitable contributions was limited too. It’s just one of the ways that the government raises your taxes without you knowing it. It’s called the phase-out rule. For [...]

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