This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
Cash Flow - The Pulse of Your Business
Many small business owners do not fully understand their cash flow statement, This is a shocking fact considering that all businesses essentially run on cash, and cash flow is the life-blood of your business.
Some business experts go so far as to say a healthy cash flow is even more important than your business's ability to deliver its goods and services! You may find that perspective hard to swallow, but consider this - if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or your employees, you're out of business!
What Is Cash Flow?
Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow respectively. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.
Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes. Note: An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare, if needed, and explain where the numbers come from in your cash flow statement.
Cash Flow Verses Profit
Profit and Cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period of time, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.
Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more importantly, it is concerned with the times at which the movement of the money takes place.
Theoretically even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.
Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times you may even go bankrupt!
Analyzing Your Cash Flow
The sooner you learn how to manage your cash flow, the better your chances for survival will be. Furthermore, you will be able to protect your company's short-term reputation as well as position it for long-term success.
The first step towards taking control of, and properly managing your company's cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.
Some of the more important components to examine are:
Accounts Receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative affects there will be on your cash flow.
Credit terms. Credit terms are the time limits you set for your customers' promise to pay for the merchandise or services purchased from your business. Credit terms affect the timing of your cash inflows. One of the simplest ways to improve cash flow is to get customers to pay their bills more quickly.
Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy is necessary to ensure that your cash flow doesn't fall victim to a credit policy that is too strict or to one that is too generous.
Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable sometime within the near future, "near" meaning 30 to 90 days. Without payables and trade credit you'd have to pay for all goods and services at the time you purchase them. For optimum cash flow management, you'll need to examine your payables schedule.
Some cash flow gaps are created intentionally. That is, a business will sometimes purposefully spend more cash to achieve some other financial results. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.
For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.
Monitoring and managing your cash flow is an important task to perform in order to ensure the vitality of your business. The first signs of financial woe will appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps. With cash flow management and analysis, you will be able to plan on how you're going to direct your cash surplus with assurance that you will have adequate funds to cover day-to-day expenses.
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Planning Retirement Withdrawals
If you are thinking of retiring soon, or changing jobs, you may face a major financial decision: what to do about the funds in your retirement plan. This article will discuss partial withdrawals and full withdrawals.Note: As you will see, the rules on retirement withdrawals are quite complex. They are offered here only for your general understanding. Please call us before taking withdrawals or making other major changes in your retirement plan.
Take a Partial Withdrawal
Partial withdrawals are withdrawals that aren't the rollovers, annuities or lump sums. Because they are partial, the amount not withdrawn continues its tax shelter, see below.
A partial withdrawal will usually leave open the option for other types of withdrawal (annuity, lump sum, rollover) of the balance left in the plan.Note: Before retirement, partial withdrawals are fairly common with profit-sharing plans, 401(k)s, and stock bonus plans. After retirement, they are fairly common in all types of plans (though least common with defined-benefit pension plans). Tax Planning. A partial withdrawal is taxable (and can be subject to the penalty tax on withdrawals before age 59 1/2) except to the extent it consists of after-tax contributions, such as nondeductible IRA contributions. The withdrawal is generally tax-free in the proportion the after-tax investment bears to the total retirement account.
Example: Your retirement account totals $100,000, which includes an after-tax investment of $10,000. You withdraw $5,000. The withdrawal is tax-free to the extent of $500 ($10,000 / $100,000 x $5,000).
Note: The tax-free portion is computed differently for plan participants who were in the plan on 5/5/86
Preserving the Tax Shelter.
Your funds grow sheltered from tax while they are in the retirement plan. So the longer your financial situation lets you prolong the distribution - or the smaller the amount you must withdraw - the more your assets grow. Some taxpayers choose to defer withdrawals for as long as the law allows to maximize assets and shelter them for the next generation.
The law has specific rules about how fast the money must be taken out of the plan after your death. These rules curtail the ability to prolong a tax shelter which was intended to aid your retirement.
Withdrawal Before You Reach Age 70 1/2
Until the year you reach 70 1/2, you need not take your money out of your retirement account - unless your employer's plan requires this. In fact, there will usually be a 10% early-withdrawal penalty if you make withdrawals before age 59 1/2. This is on top of the regular income tax you will owe at any age on amounts withdrawn, though there's no tax on your recovery of after-tax contributions you made.
Once You Reach Age 70 1/2
Once you hit 70 1/2, withdrawals must begin. Technically they can be postponed until April 1 of the year following the year you reach 70 1/2 - say April 1, 2008 if you reach 70 1/2 in 2007. But waiting until April 1 means you must withdraw for two years - 2007 and 2008 - in 2008. To avoid this income bunching and a possible higher marginal tax rate, your tax adviser may suggest withdrawing in the year you reach 70 1/2.
The rules allow you to spread your withdrawals over a period substantially longer than your life expectancy. Under these rules the taxpayer (say, an IRA owner) first determines his or her retirement plan asset values as of the end of the preceding year. Then the owner takes the number for his or her age from an IRS table (the table is unisex). The number corresponds to the future period (at that age) over which the withdrawals may be spread. The owner divides that number into the retirement asset total. The result is the minimum amount to be withdrawn for the year.
Example: Joe reaches age 70 1/2 in October of this year. Retirement plan assets in his IRA totaled $600,000 at the end of last year. The IRS number for age 70 is 27.4. Joe must withdraw $21,898 ($600,000/27.4) this year.Example: Two years from now Joe is 72 and his IRA was $602,000 at the end of the preceding year (when Joe reached age 71). The IRS number for age 72 is 25.6. Joe must withdraw $23,516 ($602,000/25.6) when he's 72.
The distribution period in the IRS table in effect assumes distribution over a period based on your life expectancy plus that of a beneficiary 10 years younger than you. Only where your designated beneficiary is a spouse more than 10 years younger than you is his or her actual life expectancy used to figure the withdrawal period during your lifetime.
Caution: You can always take out money faster than required--and pay tax on these withdrawals. However, the tax code is strict about minimum withdrawals. If you fail to take out what's required, a tax penalty will take 50% of what should have been withdrawn but wasn't.
Required Minimum Distribution
The IRS requires that you withdraw at least a minimum amount - known as a Required Minimum Distribution - from your retirement accounts annually, starting the year you turn age 70-1/2. Determining how much you are required to withdraw is an important issue in retirement planning.
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Credit Reports: What You Should Know
How do lenders determine who is approved for a credit card, mortgage, or car loan? Why are some individuals flooded with credit card offers while others get turned down routinely? Because creditors keep their evaluation standards secret, it is difficult to know just how to improve your credit rating. It is important, however, to understand the factors and to review your credit report periodically for any irregularities, omissions or errors. Reviewing your credit report annually can help you protect your credit rating from fraud and ensure its accuracy.
Credit Evaluation Factors
There are many factors that go into determining your credit. The following list includes of some of the major factors considered:
- "Authorized User" Payment History
- Checking And Savings Accounts
- Child Support
- Closed Accounts And Inactive Accounts
- Payment History
- Recent Loans
- Collection Accounts And Charge-Offs
- Cosigning An Account
- Credit Limits
- Credit Reports
- Debt/Income Ratios
- Department Store Accounts
- Payment History/Late Payments
- Finance Company Credit Cards
- Income/Income Per Dependant
- Revolving Credit
- Number Of Credit Accounts
These factors may be used, and weighted, in determining credit decisions. Credit reports contain much of this information.
Obtaining Your Credit Reports
Credit reports are records of consumers' bill-paying habits collected, stored and sold by credit bureaus.
Credit reports are also called credit records, credit files, and credit histories. Under Federal law, you are allowed access to free credit reports. There are three major credit bureaus and thousands of smaller ones where you can obtain a credit report.
These credit bureaus offer the free credit reports and monthly credit reports and services for a fee.
Experian Credit Bureau: 888-397-3742 (Cost: Free or $14.95 monthly)
Equifax Credit Bureau: 800-685-1111
Trans Union: 877-322-8228 (Cost: $11.95 monthly)
If you have been denied credit, you can request that the credit bureau involved provide you with a free copy of your credit report, but you must request it promptly. Otherwise each of the bureaus will provide you a copy of the report for a fee. You can request a copy from their web sites (see links above) or 800 numbers (also listed above).
Disputing Errors In Your Credit File
The Fair Credit Reporting Act (FCRA) protects consumers in the case of inaccurate or incomplete information in credit files. The FCRA requires credit bureaus to investigate and correct any errors in your file.Tip: If you find any incorrect or incomplete information in your file, write to the credit bureau and ask them to investigate the information. Under the FCRA, they have about thirty days to contact the creditor and find out whether the information is correct. If not, it will be deleted.
Be aware that credit bureaus are not obligated to include all of your credit accounts in your report. If, for example, the credit union that holds your credit card account is not a paying subscriber of the credit bureau, the bureau is not obligated to add that reference to your file. Some may do so, however, for a small fee.
Fair Credit Reporting Act (FCRA)
This federal law was passed in 1970 to give consumers easier access to, and more information about, their credit files. The Fair Credit Reporting Act gives you the right to find out the information in your credit file, to dispute information you believe inaccurate or incomplete, and to find out who has seen your credit report in the past six months.
Understanding Your Credit Report
Credit reports contain symbols and codes that are abstract to the average consumer. Every credit bureau report also includes a key that explains each code. Some of these keys decipher the information, while others just cause more confusion.
Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor.
If the report includes accounts that you do not believe are yours, it is extremely important to find out why they are listed on your report. It is possible they are the accounts of a relative or someone with a name similar to yours. Less likely, but more importantly, someone may have used your credit information to apply for credit in your name. This type of fraud can cause a great deal of damage to your credit report, so investigate the unknown account as thoroughly as possible.Note: An annual review of your credit report is recommended.
It is vital that you understand every piece of information on your credit report in order that you be able to identify possible errors or omissions.
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Paying Off Debt the Smart Way
Being in debt isn't necessarily a terrible thing. Most people are in debt between mortgages and car loans and credit cards and student loans. Being debt-free should always be a goal, but you should focus on the management of it, not the presence of it. It'll likely be there for most of your life, and if you handle it wisely, it won't feel so much like an albatross around your neck.
There are alternatives to shelling out your hard-earned money for exorbitant interest rates, and to always feeling like you're running behind and on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay it off faster.
Know Where You Are
First, assess the depth of your debt. Write it down, using pencil and paper or computer software like Microsoft Excel or Quicken. Include every financial situation where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.
Record the day the debt began and will end (where possible), the interest rate you're paying, and what your payments typically are. Add it all up, painful as that might be. Try not to be discouraged; you're going to break this down into manageable chunks while finding extra money to help pay it down.
Identify High-Cost Debt
Yes, some debts are more expensive than others. Unless you're getting payday loans (which you shouldn't be), the worst offenders are probably your credit cards. Here's how to deal with them.
Don't use them. Don't cut them up, but put them in a drawer and only access them in an emergency.
Identify the card with the highest interest and pile on as much extra money as you can every month. Pay minimums on the others. When that one's paid off, work on the card with the next highest rate.
Don't close existing cards or open any new ones as it won't help your credit rating.
Pay on time, absolutely every time. One late payment these days can lower your FICO score.
Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club that you've never used? Looks for line items you don't need.
Call your credit card companies and ask them nicely if they would lower your interest rates. It works sometimes!
Save, save, save
Do whatever you're able to do to retire debt. If you take a second job, earmark that money strictly for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.
Bag Unnecessary Items to Reduce Debt Load.
Do you really need the 800-channel cable option or that dish on your roof? You'll be surprised at what you don't miss. How about magazine subscriptions? They're not terribly expensive, but every penny accounts. It's nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.
Don't ever, ever miss a payment.
You're not only retiring debt, but you're also building a stellar credit rating. If you ever decide to move or buy another car, you'll want to get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.
Do Not Increase Debt Load.
If you don't have the cash for it, you probably don't need it. You'll feel better about what you do have if you know it's owned free and clear.
Shop Wisely, and Put the Savings on Your Debt
If your family in large enough to warrant it, invest $30 or $40 and join a store like Sam's or Costco. And use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride: Use coupons religiously. Calculate the money you're saving and slap in on your debt.
Each of these steps, taken alone, probably doesn't seem like much, but learn to adopt as many of them as you can and you'll be able to watch your debt decrease every month.
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Tax Benefits for Job Seekers
Many taxpayers spend time during the summer months polishing their resume and attending career fairs. If you are searching for a job this summer, you may be able to deduct some of your expenses on your tax return.
Here are six things you need to know about deducting costs related to your job search.
In order to deduct job search costs, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.
You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.
You can deduct amounts you spend for preparing and mailing copies of a resume to prospective employers as long as you are looking for a new job in your present occupation.
If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
You cannot deduct job search expenses if you are looking for a job for the first time.
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What to do if You Haven't Filed Your 2008 Return
The failure to file a federal tax return can be costly - whether you end up owing more or missing out on a refund.
There are several reasons taxpayers don't file their taxes. Perhaps you didn't know you were required to file. Maybe, you just kept putting it off and simply forgot. Whatever the reason, it's best to file your return as soon as possible. If you need help, even with a late return, the IRS is ready to assist you.
Here are some things to consider:
Failure to File Penalty. If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the "late filing" penalty, and interest charges. The longer you delay, the larger these charges grow.
Losing Your Refund. There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. The deadline for claiming refunds is three years after the return due date.
EITC. Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file.
Whether or not you must file a tax return will depend upon a number of factors, including your filing status, age, and gross income.
Please call us for more information on how to file a tax return for a prior year.
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Basic Hints to Help New Small Business
One of the biggest challenges facing people who are starting their own small business is understanding and meeting the tax filing requirements. It can be an overwhelming experience to learn about federal tax responsibility and to avoid common pitfalls.
The following is a list of the basic tips offered by the IRS to avoid potential problems:
Classify workers properly as employees or independent contractors as determined by law, not the choice of the worker or business owner;
Deposit federal employment taxes, called trust fund taxes, according to the appropriate schedule;
Start making estimated quarterly payments to cover your own income tax and social security self-employment tax liability;
Keep good records to protect your personal and financial investment and to make tax filing easier;
Consider a tax professional to help you with Schedule C;
File and pay your taxes electronically; it's fast, easy, and secure;
Protect financial and tax records to ensure business continuity in the event of a disaster.
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Seven Tips for Students with a Summer Job
Many students get a summer job during their time off from school. Here are seven things everyone should know about income earned while working a summer job.
Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the Withholding Calculator on IRS.gov.
Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.
Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.
If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay - such as pay received during summer advanced camp - is taxable.
Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:
Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.
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Tax Due Dates for August 2009
Employers - Social Security, Medicare, and withheld income tax. File form 941 for the second quarter of 2009. This due date applies only if you deposited the tax for the quarter in full and on time.
Employees who work for tips - If you received $20 or more in tips during July, report them to your employer. You can use Form 4070.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in July.
Employers - Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July.
Employers New York State sales tax due for monthly filers.
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