CERTIFIED PUBLIC
ACCOUNTANT
103 E. Sharon Avenue
Houghton, MI 49931 USA
Phone (906) 482-1305
Fax (906)482-9555
Email rwoodbur@up.net
ONLINE ADVI$OR
Welcome to the January 2001 ONLINE
ADVI$OR
Our monthly online newsletter provides useful tax, business, and financial
strategy information as part of our firm's commitment to total client
service.
The information contained in this site is of a general nature and should not be
acted upon in your specific situation without further details and/or
professional assistance.
For more information on anything in ONLINE ADVI$OR, or for assistance with any
ofyour tax, business, or financial strategy concerns, contact our office.
Major Tax Deadlines
January 16 - Final 2000 individual estimated tax payment is due, unless 2000
tax return is filed and taxes are paid in full by January 31, 2001.
January 31 - Employers must provide W-2 statements to employees.
January 31 - Payors must provide Form 1099s to payees.
January 31 - Employers must generally file 2000 federal unemployment tax
returns and pay any tax
due.
Note: Businesses are required to make federal tax deposits on dates determined
by various factors that differ from business to business. For information on
the tax deadlines that apply to your business, contact our office.
What's New in Taxes
Congress Passes Tax Revision
Before adjourning for 2000, Congress passed legislation providing $31.5 billion
in tax cuts and reinstating the installment method for reporting asset sales by
accrual basis taxpayers.
Part of an omnibus funding bill (H.R. 4577), the tax cuts include incentives to
encourage investment in community renewal projects in economically distressed
areas.
The legislation also extends for two years the availability of tax-advantaged
medical savings accounts. Another provision specifies that effective December
21, 2000, investors in securities futures contracts will be treated for tax
purposes as if they owed the underlying asset.
The installment sales bill (H.R. 3594) is welcome relief to small businesses.
It repeals the 1999 tax change that disallowed use of the installment sale
method for reporting asset sales made by accrual basis taxpayers. These
taxpayers will once again be able to pay tax on an installment sale as money is
received, rather than all at once in the year the sale is made.
For details on these and other provisions in the new tax laws, contact our
office.
Use these new rates for your 2001 tax planning
Many tax numbers are adjusted each year, usually for inflation or as a result
of tax law revision.
As you begin your tax planning for 2001, take the following changes into
account:
* The standard mileage rate for business driving increases to 34.5 cents per
mile, effective January 1, 2001. The mileage rates for medical and moving
expenses increase to 12 cents per mile, but the rate for charitable mileage
remains at 14 cents a mile.
* The maximum earnings subject to social security tax increases to $80,400 for
2001. As before, all earned income (wages and self-employment income) is
subject to Medicare tax.
* The expensing limit for equipment purchases increases to $24,000 for 2001.
This deduction allows business taxpayers to treat the cost of qualifying
property as an expense rather than as a capital expenditure subject to
depreciation. The maximum deduction is limited if purchases exceed $200,000 for
the year.
* The exclusion for foreign-source income and housing costs increases to
$78,000 for 2001.
* The "luxury car" excise tax drops to 4% for 2001.
* The "kiddie tax" threshold increases in 2001 to $1,500.
Taxpayers who make quarterly tax estimates and whose income exceeds $150,000
annually may have to increase their tax payments this year. The prior-year safe
harbor percentage increases from 108.6% to 110%.
For details on changes that may apply to you, give our office a call.
New Business
Deposit rules changed for small businesses
Effective January 1, 2001, certain small businesses will no longer need to make
monthly payroll tax deposits.
Under the new rules just issued by the IRS, small businesses can make their
payroll tax payments quarterly if they have less than $2,500 due. This replaces
the previous $1,000 limit. The higher threshold will reduce paperwork and cash
flow requirements for about a million small businesses and lessen the chance
for errors and the resulting IRS penalties.
In addition, the quarterly payment can be sent with Form 941 instead of being
deposited with a financial institution.
Businesses with $2,500 or more of employment taxes must still make deposits to
an authorized financial institution.
Smart Business
Is paying zero tax a good idea for your corporation?
When you run your business as a regular C corporation, it can make sense to pay
a little tax this year to avoid large estimated tax payments next year.
According to the general rule for corporate estimated taxes, the IRS won't
charge a penalty as long as a company pays in current-year estimated tax at
least the amount that was owed on the preceding year's return. However, this
"safe harbor" is available only when at least some tax was owed for
the earlier period. If a company shows zero tax liability in a given year, next
year's estimated payments must equal 100% of the expected tax liability for
that year. As a result of this quirk in the law, you might want to plan
corporate income and deductions so that you always show at least some taxable
income and some tax liability.
Example
Your corporation will incur a small operating loss this year. Next year is
likely to be more profitable, with the company projected to owe about $100,000
in federal income tax. If you do no planning, you will be required to pay next
year's tax bill in full via quarterly installments of $25,000 each, creating a
potential cash flow crunch just when your company might need liquidity.
However, if your company were to report (say) $10,000 of taxable income this
year (perhaps by delaying deductible expenditures or selling an appreciated
asset), this year's tax bill would be $1,500 (15% of $10,000). Next year, you
may be required to prepay a total of only $1,500, reducing your quarterly
installments to $375 each. The remainder of your tax bill would be due on the
filing date for next year's return, but in the meantime, you have the use of
your cash.
Warning: If this planning strategy might apply in your situation, you
should note that the safe harbor exception is only available to corporations
with taxable income of less than $1 million for each of the preceding three
years.
What's New in Financial Strategies
Estate planning: Will Congress make it unnecessary?
Lately there's been a lot of talk in Washington about repealing the federal
estate and gift tax. Last year Congress passed a bill containing such a
provision, but President Clinton vetoed the bill, claiming it would benefit
only the rich. If the estate tax is ever repealed, will estate planning become
a thing of the past?
For most people, the answer is no.
Your will. A key component to most estate plans is having a will drawn up. In
your will, you designate how each of your assets (excluding those assets that
have named beneficiaries or are held jointly with right of survivorship) will
be distributed upon your death.
If you have young children, your will should name a guardian for your children
and trustees for the assets that they will inherit. And if you have heirs who
aren't as financially responsible as you would like, you can designate in your
will that their inheritance be held in trust.
Other documents. In addition to your will, two documents essential to your
family's financial well-being are commonly drafted during the estate planning
process. A durable power of attorney allows another person to make financial
decisions on your behalf if you become incapacitated, and a medical directive
or "living will" sets out your preferences for medical treatment if
you become too ill to communicate these wishes yourself.
Business owners. If you're a business owner, estate planning will still be a
must. Even though businesses will no longer need to be sold or leveraged in
order to pay estate taxes, proper succession planning is needed to ensure that
your business will pass to your heirs as smoothly as possible.
Since the rules surrounding estate and gift taxes are very complicated and
continually changing, please give us a call if you would like to discuss your
current estate plan.
Make some financial resolutions for a new year & a new century
Without a plan, without goals, how can any of us know where we're going
financially? The start of a new century is a good time to set your priorities
and resolve to do a better job of managing your money.
Step 1 - Pay yourself first. Have your bank transfer money from checking to
savings each month, or set up an automatic savings plan where you work. ($100
socked away regularly each month and earning only 8.5% grows to $18,000 in just
ten years.) Make your own savings plan your most demanding creditor.
Step 2 - Eliminate consumer debt. Avoid those whopping 18% credit card interest
charges. Pay off your credit card bill in full each month. If you can't do
that, it's time to cut up the cards and start buying only what you can afford
to pay for in cash.
Step 3 - Diversify your investments. Spread your risks among treasury bonds,
money market savings accounts, stocks, corporate bonds, real estate, and
savings bonds. The recent nosedive in technology stock prices is a clear
illustration of the wisdom of not putting all your eggs in one basket.
Step 4 - Profit from tax-deferred savings. Contribute to an IRA or take advantage
of your company's 401(k) plan. If you have self-employment income, set up a
Keogh plan, a SEP, or a SIMPLE.
Step 5 - Bring your estate plan up to date. There's more to it than putting
assets in joint names. Have your will reviewed by a lawyer, and resolve to
start a personal financial plan.
Step 6 - Set long-term financial goals and write them down. Work within three
time frames, setting one-year, three-year, and ten-year goals. Evaluate your
progress each year, and make adjustments as appropriate to achieve your
goals.
Chuckle of the month
It's all in how you see it . . .
A pessimist is one who feels bad when he feels good for fear he'll feel worse
when he feels better.
An optimist is one who, while falling ten stories from a building, says at each
story, "I'm all right so far."
ONLINE ADVI$OR is issued monthly to provide useful information. Return to this
site every month for helpful tax-cutting suggestions, business information, and
financial strategies.
The information contained in this site is of a general nature and should not be
acted upon in your specific situation without further details and/or
professional assistance.
If you would like more information on anything in ONLINE ADVI$OR, or if you'd
like to be on our mailing list to receive other tax, business, or financial
strategy information from time to time, please contact our office. We're here
to help you minimize your taxes, manage your business more profitably, and
identify financial strategies suited to your situation.
Copyright 1998 Richard C. Woodbury P.C. CPA