Much has been written about the key to running a successful business. One of the most commonly identified methods, and probably the scariest to most business owners, is narrowing the company’s focus.

Why is this important? Consumers are bombarded with advertising messages every day of their lives. You cannot possibly own more than a small segment of their attention span. The key is your positioning in the prospect’s mind. Your position must be singular and set you apart from the competition.

Dominos® successfully owned one position in the pizza business: speedy delivery. They didn’t get caught up in trying to advertise the largest or freshest pizza or even promoting value. They were smart enough to look at the market and identify a position they could own. Federal Express® accomplished the same feat in the delivery business. They owned the “guaranteed overnight” status. These positions have become synonymous with the brands themselves.

If your business stands for one distinct thing, you will have the competitive advantage and own your position statement. While this is a simple strategy and used commonly by successful companies and even presidential campaigns, many business owners fear that they will lose business if they focus on one position.

Dominos® and Federal Express® obviously do not agree with that thinking. By focusing on one message, they came to own that position, but didn’t sacrifice other opportunities in international delivery or in delivering quality pizza. By narrowing their focus, they actually broadened their appeal. This same principle can work in your business. It can even help prioritize your resources and improve your marketing results by repeating the same message time and again.

This is a question we frequently encounter when deciding what to do with the old car when buying a new one. If your car is not used for business, there are two basic considerations that will affect your decision:

(1) The financial benefit of selling it as opposed to trading it in.
(2) The time and energy it will take to sell the vehicle on your own.

If the vehicle will be used for business purposes, there is a third and very important consideration that relates to taxes. If you trade in the vehicle for a new one, no tax gain or loss is realized in the transaction. Instead, the tax basis of the new vehicle is simply adjusted to account for the gain or loss from the business vehicle.

However, if you sell the vehicle, you will have a reportable gain or loss. This is best understood by example. Let’s say you purchased a vehicle three years ago for $15,000. The vehicle was used 100% for business, and over those three years, you took a depreciation tax write-off of $6,500. The vehicle is then sold for $6,000. Your tax basis in the vehicle is $8,500 (the purchase cost less the depreciation). The result is a $2,500 tax loss (sales price minus basis). Had you traded the vehicle in, you would not have realized that loss, because it would have been rolled into the tax basis of the replacement vehicle. Therefore, for tax purposes, it is better to sell a vehicle if the sale will result in a loss and to trade it in if a sale will result in a gain.

If the vehicle is partially used for business, you will need to prorate the potential gain or loss based on business use. If the standard mileage rate was used for reporting business vehicle expenses, then an allowance for depreciation is included in the mileage rate:

• 17 cents for every business mile traveled during 2005 and 2006;
• 16 cents for every business mile traveled during 2003 and 2004;
• 15 cents for every business mile traveled during 2001 and 2002;
• 14 cents for every business mile traveled during 2000;
• 12 cents for every business mile traveled from 1996 to 1999.

This may be quite complicated, so please give us a call before you sell or trade in your business car, or if you decide to lease a vehicle instead. We can discuss all your options.

In taxes, there is a saying: “Those who keep records win.” If you are an investor, you may have a variety of securities, including stocks, bonds, mutual funds, etc. When you sell those securities, you want to minimize your gains or maximize your losses for tax purposes. Gain or loss is measured from your tax basis in the investment (asset), which makes it important to keep track of the basis in all your investments.

What is Basis? Generally, your basis in an investment begins with the price that was paid to purchase the investment. However, that will not be the case if the investment was acquired by gift or inheritance. For inherited assets, the basis generally begins with the FMV of the asset on the decedent’s date of death or an alternative valuation date, if chosen by the executor of the estate. Assets acquired by gift actually have a basis for gain - the donor’s basis - and a basis for loss - the fair market value of the asset on the date of the gift. When an asset is acquired through a division of property in a divorce, the asset retains the basis it had when it was owned jointly by the couple.

Basis is not a fixed value; it can change during the time the asset is owned and is adjusted by certain events. For an investment asset, these events include:

• Reinvested cash dividends,
• Stock split and reverse splits,
• Stock dividends,
• Return of capital,
• Additional investments,
• Broker’s commissions,
• Interest previously taken into income under an election under the accrued market discount rules,
• Interest taken into income under the original issue discount rules,
• Attorney fees,
• Acquisition costs,
• Depletion,
• Casualty losses, etc.

These events can increase or decrease the tax basis in the investment, which makes adequate recordkeeping so important.

Another issue associated with basis is when a portion of the investment is sold. Let’s say 100 shares of a particular stock were purchased in 2001 at $10 a share and another 100 shares in 2003 at $20 a share. The investor plans on selling 100 shares of the stock at $30 a share. Using the general rule of “first in - first out,” there would be a $20 per share gain. However, if the investor can identify each specific block of stock sold, such as the 100 share block bought in 2003, there would only be a $10 per share profit. This is known as the “specific identification” method.

The following is a discussion of the more commonly encountered basis adjustments where recordkeeping is essential:

• Reinvested cash dividends – Investors are frequently given the opportunity to reinvest their dividends instead of taking them in cash. By participating in these plans, they are actually purchasing additional sales with their taxable dividends. Unless records are kept, the investor can’t prove how much he or she paid for the shares or establish the amount of gain that is subject to tax (or the amount of loss that can be deducted) when it is sold.
  
  
• Stock dividends – It is possible to receive both taxable and nontaxable stock dividends. Stock dividends that are taxable provide the investor with additional stock with a basis equal to the taxable stock dividend. If the dividends are nontaxable, the number of shares that are owned increases, but the basis remains unchanged. If the investor can associate the dividends with a specific block of stock, then the basis of that block can be adjusted accordingly. If not, the adjustment will apply to the entire holdings in that particular stock.
  
  
• Return of capital – A return of capital is a nontaxable return of a portion of the investment. Thus, a return of capital will reduce the investor’s basis in security. Suppose an investor has 100 shares of XYZ Corporation that cost $1,000 ($10 per share), and the corporation distributes to him a $100 nontaxable return capital. His basis in the stock is reduced to $900 ($1,000 - $100) or $9.00 per share. If, over a period of time, the return of capital exceeds his basis in the investment, then the excess becomes taxable because he cannot have a negative basis.
  
  
• Stock splits – Stock splits can be confusing if they are not tracked as they occur. Let’s assume that an investor owns 100 shares of XYZ Corporation for which he paid $2,000 ($20 a share). Later on, the corporation splits the stock 2 for 1. The result is that he now owns 200 shares, but his basis in each has been reduced to $10 per share (200 shares times $10 equals $2,000 – what was paid for the original shares). This generally occurs when the “per share value of stocks” becomes too high for small investors to purchase 100 share blocks. Also watch for reverse splits, which have the opposite effect.
  
  
• Stock spin-off – Occasionally, corporations will spin-off additional companies. The most classic example is the break up of AT&T some years ago into regional phone companies, who themselves later split into additional companies or merged with others. Each time one of these transactions take place, the corporation will provide documentation on how to split the prior basis between the resulting companies. Tracking these events as they happen is very important, as it may be difficult to reconstruct the information several years down the road.
  
  
• Broker fees – Although broker fees are a deductible expense, they are generally already accounted for in most stock and bond transactions. The purchase price of a block of stock generally includes the broker fees, and the sales price reported to the IRS (gross proceeds of sale) is the net of the sales costs.

Depending upon the investment vehicle, tracking the basis in an investment can be quite complicated. If you have questions, please contact this office.

The year’s end has historically been a good time to plan tax savings by carefully structuring capital gains and losses. Let’s consider some possibilities.


If there are losses to date - As an example, suppose the stocks and other capital assets that were sold already during the year result in a net loss and that there are other investment assets still owned by the taxpayer that have appreciated in value. Consideration should be given to whether any of the appreciated assets should be sold (if their value has peaked), and thereby offset those gains with pre-existing losses.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Keep in mind that taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income or AGI. Individuals are subject to tax at a rate as high as 35% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 15%.

All of this means that having long-term capital losses offset long-term capital gains should be avoided, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would not be wise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn’t want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains.

If there are no net capital losses so far for the year – If a taxpayer expects to realize such losses in subsequent year well in excess of the $3,000 ceiling, consider shifting some of the sales and resulting excess losses into the current year. That way, the losses can offset current year gains, and up to $3,000 of any excess loss will become deductible against ordinary income in the subsequent year.

For the reasons outlined above, paper losses or gains on stocks may be worth recognizing this year in some situations. But if the stock is to be repurchased, it cannot be repurchased within a 61-day period (30 days before or 30 days after the date of sale) under the “wash sale” rules. If it is, the loss will not be recognized and will simply adjust the tax basis of the reacquired stock.
Careful handling of capital gains and losses can save substantial amounts of tax. Please contact this office to discuss year-end planning strategies that apply to your particular situation so as to maximize tax savings.

>> back to top

On the other hand, if you don’t have the funds to pay the amount owed before the due date, you will be subject to a ½% per month (maximum 25%) interest penalty on the balance due. When you compare the interest penalty that will apply once the due date is missed, paying by credit card may be a viable option.

Whatever you decide to do, don’t put off filing your return because you can’t pay off the balance. Be sure to file your return or obtain an extension, because the failure to file a return on time results in a 5% per month penalty on the balance due (25% maximum). Don’t tap into your retirement funds either, especially if you are under the age of 59-1/2 because the taxes and early withdrawal penalties can eat up a substantial portion of the withdrawal.

For 2006, the Internal Revenue Service has expanded the credit card tax payment options with certain business tax payments being allowed. The following is a summary of Federal tax payments that can be made by credit card:

• Individual Tax Returns - Form 1040 (all types) including prior tax years
• Balance Due Notice
• Estimated Tax Payments - Form 1040ES
• Automatic Extension Payments - Form 4868
• Installment Agreement Payments - Form 1040
• Employer's Quarterly Federal Tax - Form 941
• Employer's Federal Unemployment (FUTA) Tax - Form 940

Visa, MasterCard, Discover, and American Express are currently accepted. Business tax payments are limited to only two credit card payments per year for the 940 liability and two credit card payments per return for the 941 liability. Federal tax deposit payments using a credit card are not allowed. Business taxpayers can deduct the 2.49% convenience fee as a business expense.

The two authorized providers of this service are:

Link2Gov Corporation
(888) 729-1040
https://www.pay1040.com

Official Payments Corporation
(800) 272-9829
https://www.officialpayments.com/index.jsp

Another option is to request an installment agreement with the IRS if you cannot pay the balance due. However, there is a $43 set-up fee, and the IRS will apply the ½% per month late payment charge and interest to the balance due. Please call this office for assistance.

Your parents are getting older with each passing day. Soon enough, they will be unable to take care of themselves. If you have a parent who will be entering a nursing home, there are things to consider, including but not limited to:

Deductibility of Long-Term Medical Care Services - The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent that they, along with other medical expenses, exceed 7.5% of your adjusted gross income. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, as are maintenance or personal care services required by a chronically ill individual provided under a plan of care presented by a licensed health care practitioner.

Deductibility of Premiums Paid for Qualified Long-Term Care Insurance - Premiums paid during the tax year for a qualified long-term care insurance contract are deductible as medical expenses (subject to an annual premium deduction limitation based on age, as explained below) to the extent that they, along with other medical expenses, exceed 7.5% of the year’s adjusted gross income. A qualified long-term care insurance contract is one that provides coverage only for qualified long-term care services, doesn't pay costs that are covered by Medicare, is guaranteed renewable, and doesn't provide for a cash surrender value. A policy isn't disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred during the specific payment period. Qualified long-term care premiums are includible as medical expenses up to the following dollar amounts: for individuals between 60 and 70 years old, the 2006 limit on deductible long-term care insurance premiums is $2,830; for those who are over 70, $3,530.

Deductibility of Amounts Paid to the Nursing Home - Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is for medical, as opposed to custodial, etc., care. If a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill, all of the individual's qualified long-term care services, including maintenance or personal care services, are deductible.

Including Medical Expenses You Pay for Your Parent as Part of Your Deductible Medical Expenses - If your parent qualifies as your dependent under the rules discussed below, you can include any medical expenses incurred for your parent, along with your own, when determining your medical deduction. If your parent doesn't qualify as your dependent only because of the gross income or joint return test ((b) and (c), below), you can still include these medical costs with your own.

Claiming a Parent Confined to a Nursing Home as a Dependent - You may be able to claim your parent as a dependent, thus qualifying for an exemption, even though your parent is confined to a nursing home. To qualify: (a) you must provide more than 50% of your parent's support costs, (b) your parent must not have gross income in excess of the exemption amount ($3,300 in 2006), (c) your parent must not file a joint return for the year, and (d) your parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Since your parent is related to you, your parent can qualify as your dependent even though your parent doesn't live with you, provided the support and other tests mentioned above are met. Amounts you pay for qualified long-term care services required by your parent, the eligible long-term care insurance premiums discussed above, as well as amounts you pay to the nursing home for your parent's medical care, are included in the total support you provide. If the support test ((a) above) can only be met by a group (you and your brothers and sisters, for example, combining to support your parent), a multiple support form can be filed to grant one of you the exemption, subject to certain conditions.

Qualification for Head-of-Household Filing Status - If you aren't married and are entitled to claim a dependency exemption for your parent, you may qualify for the head-of-household filing status, which is more favorable than the single filing status. You may be eligible to file as head-of-household even if the parent for whom you claim an exemption doesn't live with you. Generally, in order to qualify for head-of-household status, you must have paid more than half the cost of maintaining a home for yourself and a qualifying relative for more than half the year. In the case of a parent, however, you may be eligible to file as head-of-household if you pay more than half the cost of maintaining a home that was the principal home for your parent for the entire year. Thus, if your parent is confined to a nursing home, you are considered to be maintaining a principal home for your parent if you pay more than half the cost of keeping your parent in the nursing home.

Qualification of Gain on the Sale of Your Parent's Home for $250,000 Exclusion - If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In most cases, the seller, in order to qualify for this $250,000 exclusion, must have: (a) owned the home for at least two of the five years before the sale, and (b) used the home as his or her principal residence for at least two of the five years before the sale. However, there is an exception to the two-of-the-five-years use test under (b) if the seller becomes physically or mentally unable to care for himself or herself at any time during the five-year period.

Your parent can qualify for this exception to the use test if, during the five-year period before the sale, your parent: (1) became physically or mentally unable to care for himself or herself, and (2) your parent owned and lived in the home as his or her principal residence for a total of at least one year. Under this exception, your parent is treated as using the home as his or her principal residence during any time during the five-year period in which he or she owns the home and resides in any facility (including a nursing home) licensed by a state or political subdivision to care for an individual in your parent's condition.

Exclusion for Payments Under Life Insurance Contracts - If your parent is terminally or chronically ill and is insured under a life insurance contract, he or she may be able to receive tax-free payments (accelerated death benefits or so-called “viatical” payments) while living. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. These lifetime payments can be used to help pay the costs of your parent's nursing home.

Reverse Mortgage as an Alternative to a Nursing Home - It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than to enter a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. Many states permit a reverse mortgage loan, which is designed to permit elderly persons with limited income to remain in their homes by borrowing against the value of their homes.

If you wish to discuss your situation or a specific issue, please call our office for a consultation.

When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your business. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.

Standard Mileage Rate Method: The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. For 2006, the standard mileage rate is 44.5 cents per mile. In addition the cost of business-related parking and tolls is deductible. Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years. If in a subsequent year you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.

Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. How ever, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.”
The depreciation deduction for luxury vehicles has an annual limit which generally changes for each tax year. For vehicles placed in service during 2005, the first-year limit is $2,960, the second year is $4,700, the third year is $2,850 and for all subsequent years, the limit is $1,675. The limits for 2006 had not been released at the time this article was posted, but will be very similar to the 2005 values. 2004 is the last year that the bonus depreciation is available. Therefore, for years 2005 and after, only the lower limit will be available.

In an effort to reign in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit, effective for purchases after October 22, 2004, applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less.

Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver's seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

We realize that a mid-year review of your tax situation may not be at the top of your “to-do” list, but think of it this way: devoting a few minutes now could save you big bucks at tax time.


By following these tips, you can possibly reduce your taxes for the year and even increase the after-tax return on some of your investments:

1. Anticipate distributions from declining funds - Since mutual funds are required to distribute capital gains to shareholders, you might receive a taxable distribution even though there was a decline in the share price of your fund this year. By preparing yourself and setting aside cash, you can avoid scrambling to pay taxes in April.

2. Purchase shares after the next scheduled distribution - Don’t buy a mutual fund shortly before a capital gains distribution since a portion of your investment will almost immediately be handed back to you. This will have you owing tax on the distribution with less money to reinvest.

3. Be prudent with “tax-exempt” investments - Although the income from “tax-exempt” investments is generally nontaxable, funds will sometimes throw off capital gains distributions. This happens when the fund managers sell bonds, which can produce a taxable capital gain, and then buy other bonds. This can aggravate fund investors who don’t expect to pay taxes on these types of investments.

In addition, if you want the income to be tax-exempt for state income tax purposes, you need to make sure the fund is invested in your resident state muni-bonds since most states treat as taxable muni-bond interest derived from other states. Another common mistake is failing to change funds when you move from one state to another.

If you are subject to the alternative minimum tax (AMT), be aware that interest from “private activity” muni-bonds is tax-exempt for regular tax purposes but not for AMT purposes.

4. Time your fund transfers wisely - Frequently, people sell one bond fund to buy another as a way of rebalancing their portfolio. However, for tax purposes, that represents a sale of a security and the purchase of another. Thus, you will need to account for the gain or loss from the fund sold on your tax return. This is generally an unpleasant surprise to those unaware of this rule, especially if there is significant gain to report on the sale. If there is a loss, selling it during the current year will allow you to utilize the loss now. However, if there is a gain, consider waiting until just after the first of the year so that you can defer the gain.

5. Contribute the maximum - If you maximize your retirement plan contributions, it will help maintain your current lifestyle years from now. In addition, it may also reduce this year’s taxable income.

6. Sell a loser - There probably isn’t a stock market investor who isn’t holding a stock that is worth less now than when it was bought. Selling a loser in a taxable account can save you money and free up cash for investments with more potential. This is because the IRS allows investors to offset realized gains with realized losses. In addition, $3,000 in additional losses can be used to reduce your taxable income. Don’t sell for tax reasons alone, especially if you are confident that your dogs will turn into dream stocks. Just keep in mind that if a stock has dropped in price by 50%, it will need to gain 100% in order to break even.

7. Be aware of the limit on losses - If you are thinking of cashing in all your dogs, consider that losses are limited to offsetting realized gains and up to $3,000 in ordinary income. Although losses higher than this amount can be carried over for use in the future, they would be of no benefit to you this year.

8. Stay away from wash sales - If you would like to offset gains with losses, try and avoid “wash sales” since the IRS doesn’t allow you to recognize the loss on such sales. A wash sale occurs when a security is sold at a loss and then repurchased within 30 days before or after the date it was sold.

Don’t fret. One way you can realize losses and keep your portfolio balanced is to sell and buy back a security 31 days after the sale. Individuals who cannot wait for that period of time should purchase a similar security (not identical) to the one that was sold.

9. Check your cost basis when you sell - Although most people remember to include commissions on trades or mutual fund transaction fees when calculating cost basis, many fail to consider the dividend money that has automatically been reinvested, which results in taxpayers overpaying on taxes. Most commonly dividend reinvestment occurs with mutual funds but some companies also have dividend reinvestment plans for individual stockholders. Reinvested capital gains and dividends can add quite a bit to cost basis and make gains much smaller.
Review all your purchases when it comes time to sell. You will have a smaller taxable gain and a much better idea of your actual return on a fund.

As an investor, you want what’s best for your money. Be prepared and avoid the unnecessary headache at tax time. If you have specific concerns regarding your investments, please call our office so we can discuss them in detail.

>> back to top

For the second time, a Circuit Court has ruled that the lump sum payment taxpayers receive in exchange for their future lottery winnings payments is ordinary income and not a capital gain (Lattera v. Comm., CA 3, 97 AFTR 2d 2006-506).

>> back to top