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Tax Tips Newsletter
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August 2010 - Vol 5, Issue 7
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Buried in the depths of the health care bill that was just passed was a new regulation requiring much more extensive filing of 1099 forms for all businesses (this includes rental properties and trusts). As I am writing this, there are measures being proposed to eliminate or scale back this provision. However, if you are a business owner you need to be aware of the fact that you may have to file many more 1099 forms for the year 2012 if this law is not changed.

I suggest that you get a completed W-9 form from all of your vendors. It never hurts to have their information on hand. In addition, get this information before they are paid. Some fly-by-night vendors seem to forget their Social Security Number or Federal ID number as soon as they know that you will be filing a 1099 for them. There are penalties for not filing 1099s or for filing incomplete 1099s.

If your business return is on extension, and have not yet gotten your information to us, please do so by August 15th so that we can complete your returns by September 15th.

The office will be closed on September 6, 2010 for observance of Labor Day.

Tax Deadline
It's time to do a midyear review of your business tax planning. Here are five ideas to consider.

* Hire your kids. If your child is under age 18 and works for your unincorporated business, there are no social security or Medicare taxes on the child's pay. Wages paid to the child are also deductible. Just make sure the compensation is reasonable for the work actually performed.

* Track your business driving. For 2010, the rate for business-related mileage is 50 cents per mile, and you can deduct actual costs for parking fees and tolls in addition to mileage. Keep detailed records to substantiate your deduction.

* Deduct equipment purchases. You can expense up to $250,000 of business equipment purchased this year.

* Check your benefits. If you offer health benefits to your employees, look into tax-advantaged plans such as health savings accounts, flexible spending accounts, or health reimbursement arrangements. These plans can reduce your taxes and help control your benefit costs.

Also, check the new tax credit for health insurance you provide to employees. You must meet certain requirements to qualify.

* Establish a retirement plan if you don't already have one. Examining the choices now gives you time to select the best plan for your business and to get the paperwork completed. Then you'll be set to make contributions as your cash flow allows - and to take the deduction on your 2010 tax return. Another plus: You may be able to claim a credit on this year's tax return for the costs of establishing the plan.

To discuss the tax-saving ideas best suited for your business, give me a call.
Golden Egg

The new, less restrictive rules in effect this year for Roth conversions may have you pondering whether now's a good time to convert your traditional IRA funds to a Roth IRA. While your decision involves many factors, one wrinkle to consider is the five-year holding period for converted assets.

The time limit has nothing to do with distributions of regular contributions from your Roth. As you know, you can withdraw regular contributions at any time, tax- and penalty-free, no matter your age. That's because you deposit those amounts into your Roth using money on which you've already paid income tax.

Rather, the five-year holding period comes into play when you're under age 59½ at the time you make a Roth conversion. In that case, you'll generally have to wait five years (or until you turn 59½, whichever comes first) before you can pull the "conversion assets" out penalty-free.

When you fail to meet the five-year rule, the penalty is the same 10% you'd pay if you took an early withdrawal from your traditional IRA. That's the purpose of the five-year rule - to discourage premature distributions from retirement accounts.

Once you reach age 59½, the 10% penalty disappears, though the five-year holding period for converted assets may still apply. For example, say you use the conversion to fund an initial Roth. During the first five years your new account exists, you'll pay ordinary income tax on withdrawals of the income earned from the converted amounts.The five-year holding period can also affect your beneficiaries. For instance, if you had no prior Roth account before making a conversion, your beneficiaries will pay ordinary income tax on distributions of earnings. However, they can withdraw converted amounts with no federal income tax or penalty.

Give me a call to discuss this and other Roth conversion rules.
Flag & Eagle
The Tax Tip of the Week discusses a new type of retirement plan caled at DB(k) plan, but also check out last week's tip regarding the complex question for business owners as to what is a reasonable wage to pay yourself.

The Business Tip of the Month discusses the opportunities for those planning to start a business in the current economy. There are benefits even in a down economy for those willing to take the leap.

The Financial Tip of the Month. Shopping at warehouse stores can be fun but does it really save you any money? Read on and see if you're saving or over spending.

The Fraud Alert: Seniors - are you thinking of doing a reverse mortgage? Beware of the scams involved in many of these plans.

Photos © Bigstockphotos.com, istockphoto.com, Felix Orona

Sincerely,
Linda Heineman
Linda L. Heineman, CPA

phone: 626-577-0979
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