IRS reminds tax-exempt groups to stay out of politics

As the fall elections approach, tax-exempt organizations need to be aware that they are not permitted to engage in political campaign activities. The IRS stated in a news release that organizations that are tax-exempt under Section 501(c) of the tax code risk losing their exempt status if they endorse any candidate, make donations to campaigns, do fund raising, distribute campaign fliers, or take part in any other activity that is beneficial or detrimental to any candidate.

Recent laws have created the need to reevaluate some of the tried-and-true tax planning of the past. One common planning strategy involved tax-deferred exchanges, also known as like-kind exchanges or a 1031 exchange.

The like-kind exchange typically involves real estate where one property is traded for another and no tax is paid on the exchange. You need to meet certain deadlines, and usually a facilitator is involved to complete the exchange.

* Compare tax rates. A like-kind exchange, however, may no longer be the best alternative. Instead of deferring the tax, you may want to pay the tax now. The maximum long-term capital gains rate has been lowered to 15%, effective through December 31, 2008. In 2009, the rate is scheduled to go up to 20%.

* Compute depreciation. In an exchange, the basis (tax cost) of the old property must be carried over to the new property. If a large gain is deferred, the amount of depreciation on the new property may be significantly less (because your basis is lower) than if you made an outright purchase of the property at its fair market value.

An example. Let's say you have land worth $1 million that you originally bought for $500,000. You find an apartment building worth $1 million dollars that you would like to have instead.

If you could trade the land for the building using a like-kind exchange, you would pay no capital gains tax on the exchange. Your basis in the new building and land would be the same as your basis in the old land — $500,000. So your yearly depreciation on the new building would be about $14,500 (assuming 80% to building and 20% to land), giving you an annual tax savings of about $5,000 (assuming a 35% tax rate).

Alternatively, if you sold the land and bought the building, the capital gains tax would be $75,000 ($1 million selling price minus original cost of $500,000 times 15% tax rate). However, because you paid $1 million dollars for the apartment building and land, the annual depreciation would be twice as high (about $29,000) resulting in a tax savings of $10,000. The net tax cost in the year you sold your land for $1 million would be $65,000 ($75,000 tax minus $10,000 depreciation savings).

* Other considerations. There may be other reasons that a sale and purchase may be more advantageous than doing a like-kind exchange. For example, if you have capital losses that are being carried forward or that you realize in the same year you sell the land, you may be able to offset the gain on the sale of the property.

Each situation needs to be evaluated to see if exchanging or selling makes more sense. Before you do anything, consider the tax law changes. They have made planning more important than ever. Before you sign any documents, give us a call for assistance in checking the numbers on any proposed deal.  We can be contacted at (781)453-8700.

IRS issues new regulations on business vehicles

New IRS regulations will allow more business vehicles to be depreciated within the standard five-year period that applies to most business equipment.

The new IRS regulations exempt from the "luxury vehicle" depreciation limit business vans, delivery trucks, utility repair trucks, or any specially modified vehicle that is not likely to be used very often for personal driving. The rules even allow retroactive application. Amended returns can be filed on or before December 31, 2004, to claim any additional write-off in prior years.

Are you paying enough attention to cash flow in your business?

In assessing their business, most owners focus on growth in sales and profits. Yet these do not guarantee business health and success. Another important gauge is cash flow. Simply put, is there enough cash inflow to cover cash outflow? Cash flow needs change on a daily basis. The more you're aware of cash flow needs, the more control you'll have over your business.

* Calculating cash flow. Cash flow can be calculated by taking net profit, adding back depreciation and amortization (non-cash outlays), subtracting increases in accounts receivable and inventories during the period, and adding increases in accounts payable. Calculations can be done on whatever operating cycle time frame is most meaningful to you (monthly, quarterly, etc.). Best results are usually obtained by using monthly cash flow statements and projections based on prior experience.

* Using cash flow. Building a history of cash flow needs by using historical financial records will provide an invaluable tool for projecting the timing of receipts, expenditures, and financing needs. Periods of negative cash flow can seriously hinder expansion plans and may even lead to business failure. Cash flow statements and projections can forewarn you of cash needs and allow you to implement changes.

* Improving cash flow. Proper management of accounts receivable and inventory can strengthen cash flow. Review billing procedures to reduce lag time between shipping and invoicing. Reexamine credit and collection policies. Consider offering discounts for early payment and charging interest on delinquent balances. Review inventory levels. Be alert for stockpiles and excess inventory. Dispose of obsolete inventory by reducing prices or selling for scrap.

Effective cash flow management will permit better utilization of cash, generate additional funds from internal sources, and provide advance notice of financing needs. Knowing your cash flow requirements is imperative for business success.  Please give us a call if we can assist you in determining your cash flow needs.  We can be contacted at (781)453-8700.

Check your credit card fees

Credit card companies are making more money than ever from the fees they charge their customers. Six years ago, fees made up 18% of income for credit card companies; last year fees accounted for 35% of their income.

It's a compliment to your judgment and business skills to be named an executor of somebody's estate. Nonetheless, the job also means much work, possibly no pay, and the possibility of being sued for mistakes.

An executor is the person or legal entity that you appoint in your will to settle your estate after your death. The executor serves until an estate closes and is responsible for numerous tasks, such as filing returns for income and estate taxes. Your three major duties, however, will be identifying assets, paying claims, and distributing net assets.

Some assets will be easy to find, but you must also ferret out less obvious assets like securities, bank accounts, and proceeds of insurance policies. All of the estate's assets must be located, collected, and safeguarded until properly distributed.

Paying claims filed against the estate also requires care. Most states require you to give notice to creditors by publishing a statement of the death in the local newspaper. More may be required if a creditor is known. After paying all legitimate claims, you must carry out the distribution of remaining assets to the proper beneficiaries under the will.

A word of caution: As an executor, you can be held liable for mistakes in carrying out your duties. You can hire professionals (lawyers, accountants, etc.) to assist you. Such professionals may not relieve you of your liability, but they will certainly reduce the likelihood of making a mistake.