• August 1999

  Welcome to ONLINE ADVI$OR.

  Our monthly online newsletter provides useful tax, business, and financial planning 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 of your tax, business, or financial planning concerns, contact our office.

  Major Tax Deadline for August 1999

  August 16 - Due date for filing 1998 individual income tax returns that received an automatic extension of the April 15 filing deadline. If a second extension is required, Form 2688 must be filed with the IRS explaining why additional time is needed.

  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

  IRS announces new disclosure rules for tax-exempt groups

  Tax-exempt organizations, such as charities, hospitals, and colleges, have new disclosure rules to deal with, as of June 1999. Tax-exempts must now generally provide copies of their annual IRS reports to anyone asking for them. The previous rules only required tax-exempts to make forms available to the public.

  Organizations may charge a reasonable fee for the copies they are required to give to those who request them. As an alternative to making copies for those who want them, the organization may put the documents on a Web site and tell inquirers how to access them.

  Failure to comply carries a penalty of $20 a day for as long as the failure continues, up to a $10,000 maximum.

  Installment sales: A review of the tax considerations

  Taxpayers who sell property at a gain and who receive one or more payments in a year after the year of the sale are taxed in accordance with special installment sales rules.

  Example: Paul Revere sells his horse for $1,000, payable $400 down, plus six annual installments of $100 each. Paul's horse originally cost $200, so his total taxable gain is $800. Part of each payment received is taxable gain. To determine the taxable portion, total gain is divided by the sales price ($800 ÷ $1,000 = 80%). Paul's taxable gain in the year of sale is $320 (80% x $400 down payment). In each of the next six years, his gain will be $80 (80% x $100 annual payment).

  This example assumes that Paul is not a dealer in horses. Installment sales treatment is not available for sales of property normally considered inventory.

  An installment sale has the same tax characteristics as if the sale had been made for cash. If Paul's horse is a capital asset held for more than one year, each year's gain will be a long-term capital gain.

  The installment sales method cannot be used for either sales at a loss or for gains on sales of securities traded on an established market. Also, special rules apply to gains on depreciable property, to sales of interests in passive activities, and to sales between related parties.

  If your tax situation makes it more advantageous to report the entire gain from an installment sale in the year of sale, you may elect not to use the installment method.

  Installment sales rules are complex. Special provisions apply to many types of transactions. Reporting gain from a sale in installments can be a very smart tax move, but it's wise to work through the tax numbers before making the sale. For details or assistance, give us a call.

  New Business

  Know how to use e-mail in business

  E-mail is widely used for business communication, but unless you observe certain rules, you may find it more damaging than beneficial to your business. Some pointers:

  If you suggest that customers contact you by e-mail, be sure to respond quickly to the e-mail you receive from them. E-mail users expect a reply within hours or, at the very latest, within a day or two.

  Use a subject line that can't be mistaken for "spam," the term for junk e-mail. General tags like "hello" or "attention" might get your message deleted before it gets read.

  Don't put anything in e-mail that you would want kept private. As Microsoft is discovering, your e-mail can come back to haunt you.

  Avoid needless copying. Since it's easy to copy e-mail to an entire list of recipients, some e-mailers send their messages indiscriminately. It's a good way to annoy people, so send copies only to people who have a genuine need to see the information.

  Smart Business

  A strong employee training program pays off for a business

  For satisfied, productive employees, invest in a strong training program.

  If your business were run entirely by machines, you'd probably make sure that those machines were properly set up and maintained. But what if you have employees? Employees also need to be set up and maintained, although we don't often use those terms. Instead, we use words like "orientation," "motivation," and "training."

  * Orientation. An employee's first day on the job is an important experience, and it should be carefully planned. Try to have a senior executive welcome each new employee, and give each person ample opportunity to learn about your company's history, values, and mission. Consider pairing a new hire with an experienced employee who can serve as a mentor. Whenever possible, allow each new employee to personally experience your product or service.

  * Motivation. If you do a good job on the first day, your new employee should be motivated and ready to work. But eventually, almost everyone's motivation begins to lag. When it's time to energize your workers, remember that there are many ways to motivate people, and not all of them involve money or major effort.

  To keep morale and motivation high, establish two-way communication with your employees, and try to keep the channels open. Solicit suggestions, and take action on the best ones.

  * Training. Some people simply work better when they are given the opportunity to learn new skills and face new challenges. Of course, companies also need to train workers for very practical reasons, such as manufacturing a product more efficiently or adding a new product to the company's line. Many companies have even found that it is cost-effective to train employees in basic reading and math skills.

  If you initiate an employee training program, make sure that your objectives are clear and that results can be measured.

  What's New in Financial Planning?

  Retirement study reveals confusion about social security

  A recently released Retirement Confidence Survey shows that people are confused about social security benefits.

  42% of people surveyed expect to be eligible for social security sooner than they actually will be. A large majority still think full benefits will be available at age 65, but the fact is that starting next year, eligibility for full benefits will gradually move from 65 to 67.

  The Social Security Administration hopes to clear up the confusion by mailing out statements of estimated benefits every year to all workers age 25 and older.

  More information on the survey results is available at www.asec.org.

  Can you avoid risk in your investments?

  There are several different kinds of investment risk.

  To understand this concept, consider Bob and Martha. Bob hopes to avoid risk, so he invests in ultra-safe U.S. government securities. Martha is more adventuresome, so she invests in stock mutual funds.

  In the short run, the value of Martha's investment will probably bounce around more than Bob's investment. Most people would say that Martha's portfolio is "riskier" than Bob's, because Martha is subject to the ups and downs of the stock market.

  But in the long run, Martha's stocks are likely to be worth more than Bob's government securities. Based on history, Martha's investment also should grow faster than the inflation rate, even after considering taxes. Bob will be lucky if his investment even keeps up with inflation.

  The many kinds of risk

  The truth about investing is that every portfolio contains risk, although the nature of the risk varies. A portfolio that contains government securities, like Bob's, is subject to "inflation risk." A portfolio heavily invested in stocks, like Martha's, is subject to "market risk."

  What about a portfolio that holds corporate or municipal bonds? It is subject to inflation risk, and it's also subject to "default risk" -- the possibility that one or more of the bond issuers will fail to make an interest payment.

  Real estate investments historically have appreciated faster than the inflation rate, but real estate is subject to "liquidity risk" -- the possibility that nobody will want to buy your property at an acceptable price when you are ready to sell. Certain types of stock are also subject to liquidity risk.

  How to cut risk

  In a world where every type of investment is subject to risk, usually the best strategy is to spread those risks around. In other words, diversify.

  Younger people will generally want to tilt their portfolios toward stocks and stock mutual funds, but even retirees should consider owning some stocks to help offset inflation risk. On the other hand, young people shouldn't go overboard with stocks, since fixed-income investments can help balance market risk.

  You can't escape risk in the world of investments, but you should try to choose the investments that fit both your risk comfort level and your personal financial situation.

  Chuckle of the Month

  In comparing the computer industry with the auto industry, a computer techie said, "If the auto industry had kept up with technology like the computer industry has, we would all be driving $25 cars that get a thousand miles to the gallon."

  The auto maker's response -- "If automobile technology had developed like computers, we would all be driving cars with the following characteristics:"

  For no reason whatsoever, your car would crash twice a day.

  Every time they repainted the lines on the road, you would have to buy a new car.

  Occasionally, your car would die on the freeway for no reason, and you would accept this, restart, and drive on.

  Occasionally, executing a maneuver such as a left-hand turn would cause your car to shut down and refuse to start, in which case you would have to reinstall the engine.

  Only one person at a time could use the car, unless you bought "Car98" or "CarNT," but then you would have to buy more seats.

  The oil, water temperature, and alternator warning lights would be replaced by a single "General Car Fault" indicator.

  Every time a new model was introduced, car buyers would have to learn how to drive all over again, because none of the controls would be the same as the old car.

  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 planning tactics.

  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 planninginformation 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 planning strategies suited to your situation.

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Copyright 1998 Richard C. Woodbury P.C. CPA