May 28, 2013 Client Newsletter

I had lunch with a client a couple of weeks ago.  We were discussing how to recharge his business after having to take some time off recovering from an illness.  We talked a bit about the importance of raising his fees. Predictably he balked. The fear, of course, is that raising prices will send customers fleeing. While that can happen, many small businesses have raised prices and lived to tell about it. It is important that we pass on to our customers the value we provide. I call it what’s in it for them.

Reuben Schwartz of Upstream Commerce writes in his blog:

Service still counts, and it's still one of the ways to distinguish yourself from the competition.

Price isn't the only factor.  Don't compete for those customers who don't care about service. Someone can always offer “something cheaper.  Always use competitor “price monitoring” to know where your pricing stands in relation to your competitors at any given time. That means you have to set higher prices in line with what the customer was willing to pay.

It’s hard to be passionate about working for or buying from a company whose only goal is to provide the cheapest thing.

Nellie Alkap in her blog writes:

Price is not usually the most important factor in why people decide to buy from you (and many research studies have shown this). There are multitudes of complex factors that go into every customer’s buying decision, including convenience, value-added service, customer reviews and recommendations, prestige, the overall customer experience and the way your business makes customers feel about themselves. Think about your own life as a consumer: how often do you go into a store determined to buy only the lowest-cost options? When you’re hiring a contractor to work on your house, or hiring professional service providers for your business, how often do you hire the lowest bidders? If price were the most important factor, we would all buy only store-brand and generic products, and private colleges would go out of business because everyone would go to community colleges and state schools. Of course, this hasn’t happened – because lots of people are willing to pay more for higher-priced products and services, for a variety of complicated reasons.

Huge companies like Walmart can compete on price because they have massive buying power and sell a massive volume – enabling them to be profitable even with razor-thin margins. But most of us are not Walmart, and are never going to be (and don’t want to be). And even Walmart has had trouble competing on price in recent years – when price is the only reason for people to buy from you, you will lose your customer loyalty and find yourself constantly fighting for scraps. Discount retailers like Walmart are serving a certain segment of the market, but not everyone wants to compete (or needs to compete) in that same space. Many customers don’t want the “big chain store experience” of understaffed stores, overworked employees, crowded aisles and drab surroundings. If your small business can give customers a better experience and better value for the money, they will gladly pay more than they would pay at the “Walmarts” of your industry (whichever industry that might be).

Setting prices is not just about maintaining profit margins, it’s about sending a message to your customers. Higher prices often are a “signal” of higher quality in your market. Do you want to be a “cut-rate” option, or a “premium” option? Do you want to be a fast food place, or a gourmet restaurant? Do you want to be a “base model” car or a Lexus or BMW? There are customers who want to know that they’re buying the “right” product or hiring the “right” service provider – and paying a higher price is a way to signal to these customers that you are one of the best options on the market. Another reason not to cut your prices is that you’re surrendering your profit margins even when people might have willingly paid more – cutting your prices might result in leaving money on the table!

Show your customers the value that you provide. Overwhelm them with fantastic customer service. Help them understand why your business is the right choice to help them with their needs. When customers love your business and appreciate the value that you deliver for them, they won’t feel the need to haggle over price.

Want more customers?  Raise your prices.

The IRS has been much in the news lately.  I sure your have heard about the “extra scrutiny” IRS  has given certain nonprofit 501 C 4 organizations. Although the IRS principally focused on “tea party” and other conservative name sounding organizations, other nonprofits, including liberal leaning ones, were also subject further scrutiny. Somehow, someone (everyone in charge whether it is the White House or the IRS right now seems to be in the I don’t know who or how this happened mode) decided that using the name of the organization or its policy position as a basis for them to be targeted have led to where we are today.  

The Obama administration isn’t the first administration to face criticism for using the very considerable power of the IRS against their political enemies.  Presidents Calvin Coolidge, Franklin Delano Roosevelt, John F Kennedy and of course Richard Nixon have all been implicated in one way or another directing the IRS to use its powers against so called political enemies.

We deal mainly with the worker bees IRS employees.  And I can tell you that our discussion about the IRS nonprofit scrutiny are extremely skeptical about the Cincinnati office, which handles the nonprofit certification process, acted without some sort of direction from the leadership in Washington.

Finally I have to pass on this one quote from a front page article in the Sunday, May 19, 2013 New York Times,  “The I.R.S. is pretty dysfunctional to begin with, and this case brought all those dysfunctions to their worst,” said Paul Streckfus, a former I.R.S. employee who runs a newsletter devoted to tax-exempt organizations. “People were coming and going, asking for advice and not getting it, and sometimes forgetting the cases existed.”

I think when the dust is settled the reason for the delays and scrutiny will be more the cause of ineptness and less of political conspiracy.  

After much delay, two years in fact, our new small business website thesmallbizwiz.com appears to finally ready to debut. What has been holding us up has been the harder than expected to put together podcast show.   We anticipate a beta version being up and running mid June.  We will keep you posted.

Help us do a better job.  If you receive a notice from the government please forward it to us as soon as you receive it.

Speaking of raising your prices, last year after much deliberation and thought we decided not to pass on the fee increase from our Paycyle payroll service provider.  However, after announcing yet another fee increase we have decided that we will pass on the small increase to our clients.  You will notice a small increase in the monthly debit from your account next month.  

Laurie Elzerman I will be out of the office May 31- June 10 taking a well deserved vacation.  I will be out of the office June 12-17 for my son’s wedding.

The demand for our services drops dramatically after April 15th.   We are open from 9 to 3 Monday through Friday and at any time you call and make an appointment. 

May 2013 Client Newsletter

After every April 15th we kind of shake our heads and wonder why.  How can really smart people, our clients, do such stupid things to their taxes.  Each year we compile of list of mistakes our clients made with one purpose in mind.  Don’t make the same mistake. Learn from their lessons.

Here is our current list of things to avoid this year.

1.    Take money out of their IRA or pension plan and don’t have any money withheld for taxes. Still the number one offender and the cause of more heartache is early distributions from sheltered plans. If you have to take money out of your tax sheltered plan don’t forget that there is a 10 percent penalty in addition to Federal tax owed on the distribution if you are under age 59 1/2.  Don’t ever take money out of these plans without having the most Federal tax withheld from the distribution.  Call our office. We can help.

2.    Take money out of their IRA or pension plan or 401 K and not roll it over to another tax deferred plan.  Back on this subject again. Leaving your job usually means cashing in a pension plan or 401 K.  We understand that sometimes the money is needed to pay for day to day activities until you can find a new job.  But if you don’t need the money don’t spend it, roll it over. We can help you if you don’t know what to do.  We can refer you to very competent people that can help with the rollover.  Taking the money if you don’t need it means additional tax liability.

3.    Don’t keep any records. Records are very important in our imaginary tax world.  Especially for business tax deductions like car expenses. Jotting down on a daily basis in a daily planner or pocket calendar is all you need.  Keep a file nearby for tax deductible receipts.  Better yet get a credit card that you use only business tax deductions.  That way you all the receipts organized for you.  Your credit card along with your milage calendar is all you need to make April 15th very less taxing.

4.    Not taking advantage of certain tax strategies for medical expenses.  Paying for medical care becomes harder every year.  The recent healthcare reform act improves coverage and extends it to more Americans, but actually makes it harder to deduct unreimbursed expenses.  (Formerly, you could deduct medical expenses exceeding 7.5% of your Adjusted Gross Income.  Under the new law, starting in 2013, that floor has risen to 10%.)  It also limits contributions to employer-sponsored flexible spending plans to $2,500/year.   

If you're free to select your own coverage, consider choosing a "high-deductible health plan"  and opening a Health Savings Account.  These arrangements bring down premium costs and use pre-tax dollars for out-of-pocket costs, bypassing the floor on AGI.  If you're self-employed, consider establishing a Medical Expense Reimbursement Plan, or MERP.  These plans let you pay family medical expenses with pre-tax business dollars.  They may even help you avoid self-employment tax.

5.    Give charitable deductions, especially non cash and don’t make an attempt to value the donation.  A note about the date and time of your deduction and a short list of the description of the deduction in your tax deduction file is all you need.

6.    Not filing your taxes because you don’t have the money to pay. Always file, even if you do not have the money to pay the taxes you owe. The IRS considers not paying on time and not filing as two separate issues, and a penalty is involved for each. When you file your tax return, you have several options. You can apply for an "offer in compromise," make monthly payments through an IRS installment agreement, or temporarily delay paying. Whichever is best for you, we will help you contact the IRS right away to let them know you cannot pay. You should pay as much as you can when you file because the IRS assesses penalties and interest on the amount not paid.

7.    Ignore those letters from the IRS. Do not ignore mail from the IRS. If you owe taxes, the IRS will collect. Persons who do not communicate with the IRS about inability to pay can expect a "Notice of Federal Tax Lien" to be filed against their property. In lien terms, this is a lien about the size of Alaska. Few carry more weight. The lien attaches all your property, including your house, car and any future property you might obtain. A levy, which is a legal seizure of property to satisfy a tax debt, is another legal means the IRS can use to collect taxes. This means the IRS can seize your car, boat or home and sell it to satisfy your tax debt or it can place a levy on your wages. More good news is that these liens often stay on your records long after the issue has been resolved or until the IRS gets around to removing it. So it's also the gift that keeps on giving!

8.  Home office expenses are often an overlooked source of valuable business deductions. Many business owners don't claim them because they fear (incorrectly) that home offices are an audit "red flag," or because the recordkeeping is a pain. (Form 8829, which helps calculate the deduction, includes 43 lines and asks you to "see instructions" 17 times.) But now the IRS has released a "safe harbor" method that may make home office deductions more accessible.

The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space. You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual. But you won't have to calculate any actual expense or depreciation deduction for the space. On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction.

You can determine year-by-year which home office deduction method to use. You don't have to elect one and lock yourself into it for the future.

Do you have a space in your home that you use "regularly and exclusively" for business, but don't specifically deduct it as such? To see if the new safe harbor makes sense for you, call us.

9.    Big refunds.  Isn’t that the point of filing? Big refunds. In fact some clients rate the expertise of their tax preparer with the size of their refund.  The bigger the refund the better the tax preparer.  Nothing can be farther from the truth.  Refunds are nothing more than interest free loans of your money, even earned income credit which can be advanced to you from your employer throughout the year, to the government.  Then you have to go through the expense and the wait of getting your refund when you file your taxes. Extra withholding doesn’t benefit you, only the government. Don’t stand for big refunds.  Stand for bigger paychecks.  Your goal should be break even on April 15th.

10.    Assuming the wrong filing status.  Single taxpayers should be singled out for assuming that they should file as single taxpayers when in fact they qualify for the much-more-favorable head-of-household (HOH) filing status. Say you're single and your non-adult child lives with you and pays for less than half of his or her own support. If you pay more than half the household's costs, you qualify. You may also qualify if you are still married and lived with your child but apart from your spouse for at least the last half of the year. Finally, if you are single and can claim your parent as a dependent, you can probably file as HOH. This is true even if your parent has his or her own place. You are the HOH if you pay more than half the cost of your dependent parent's home.  This year we also had a number of clients for whatever reason decided to file separately from their spouse.  Married filing separately is the highest tax rate, period.  You lose certain deductions and credits when you file separately.  All too often one spouse will itemize deductions, taking all the mortgage interest and real estate taxes, leaving the other spouse who is forced to itemize with no deductions. 

March 2013 Client Newsletter

Last year I wrote the one thing I learned many years ago living in our imaginary tax world is that nothing is black or white only gray. Deductions can happen or can’t.  Credits are available and sometimes not.  Income is taxable and then it isn’t.

Most of my small business clients file their taxes as either a small business corporation or sole proprietor.  In both cases the draw that you take from your business is not taxable.  In both cases you are taxed on the net income of your business.  You have what we call basis in that money you draw out of your business.   In other words you are going to pay taxes on that money already, so you are entitled to take it out of your business.

Small business corporations have a little more complicated rules.  Essentially you are allowed to take money out of your corporation up to your investment, adding your income, subtracting your losses, subtracting your draws (we call them distributions other than dividends) and adding a Heinz 57 list of additions before paying any tax on the money you draw from your business. The bottom line is that with a few exceptions....the gray...you do not have to pay taxes on the money you draw out of your business.   

The due date for your 2012 corporate tax return was March 15, 2013.  Clients who did not file by the due date can relax.  We filed an automatic six month extension for you. 

Tax Season update.

It is a very challenging tax season. Delayed refunds seem to be the norm right now.

Frustration is my middle name.  I am not the only one.  In an unusual posting, the IRS alerted taxpayers and professional practitioners last week that the Where's My Refund? feature and other related applications may not be available due to the extra-high volume of inquiries during the Presidential Day holiday. To avoid disruptions, the IRS requested that taxpayers check on their refund status only once a day.  It didn’t matter.  Their website was down most of the weekend and remains an unreliable source of refund information. The warning is now a permanent posting on their website.  What was once touted as an improvement appears to nothing but wishful thinking on their part. As a side we can access our own internal database for you to check on the status of your tax return with apparently more reliability than you can through the IRS website.  

We continue to encounter rejected e filed returns for no reason. Just last week IRS allowed us to file personal returns with education credit forms.  However, as quickly as they announced the acceptance of these returns, they then emailed me to announcing that additional time will be required to process these returns as they work out the bugs.  They fixed it last week finally.

Forms required to file your business return appear to be almost ready to be ready to be released to file by IRS. The AICPA trade group just released an open letter to the IRS concerning “the impact the delays in forms releases will have on the processing of partnership, S corporation, C corporation and other business returns due on March 15.”  They have requested an elimination of late filing penalties.  Perhaps responding to the growing pressure from the tax practitioner community the IRS has finally announced that they will be giving us a go ahead to file returns that contain the delayed forms sometime this week.     

Despite the problems we are steadfast in our commitment to ensuring that through this unusual, time-challenged tax season, we will continue provide you with the high-quality product and service you expect.

Important information about your Corporate Income Tax Return.  The due date for your corporate 2012 is March 15, 2013.  My office will file an automatic six month extension on your behalf prior to that date.

If you haven’t started assembling your 2012 tax information now is probably a good time to get started April 15th is closer than you think.  Back in October I wrote “corporate extensions ended last month and I spent the last few weeks preparing and filing returns for the remaining stragglers.  I have to tell you how amazed I was to find people starting to organize last years’ figures, some that were incurred more than 19 months ago.  I don’t think I can remember what I spent last week let alone more than a whole year and an half ago.  In the old days we built our business on bookkeeping....an era before desktop computers and the internet.  Nowadays the computer has revolutionized your small business recordkeeping.  Here are three options, all involving computers, you can try to make things a little easier.  Don’t struggle.  Don’t miss out valuable deductions.  Make record keeping part of your daily routine.”

If you are looking for some help putting together your business information I strongly suggest that you check out our blog post from October 1, 2012.  I will post a link to that post again on our blog.

One additional note we anticipate a big crunch this year come April 15th.  We appreciate your patience and understanding.

Our office hours remain extended until April 15th.  We are open Monday-Thursday 9-7, Friday 9-5, Saturday and Sunday 10-1.  Weekend hours are subject to change based on workflow.

Even more information about form 8867 isssues

Here's yet another version of what we might be on our collective horizons. This is a cut-&-paste from the Refund Advantage website. (If this has already been posted, a thousand pardons.)   February 17, 2013 - IRS Delaying Refunds for Some EITC Taxpayers

Last week, the IRS reported that a large number of tax returns containing Form 8867 (Paid Preparers Earned Income Credit Checklist) were submitted with "incomplete" information, particularly during the first week of the filing season. There appears to have been confusion in the opening days of the season as to the exact requirements of this form and of the IRS. This caused confusion for the tax software companies and EROs. In the last few days, the IRS has apparently now begun sending letters to taxpayers in cases where the Form 8867 was not completed to the satisfaction of the IRS. In these letters, the IRS notes that some of the required entries on lines of Form 8867 were missing. What is confusing for the taxpayer is that these lines are supposed to be completed by the tax preparer (not the taxpayer). For example, line 24 is a question to the preparer that asks the preparer "Did you ask this taxpayer any additional questions that are necessary to meet your knowledge requirement?" The letters from the IRS instruct the taxpayer to provide answers to certain questions on Form 8867. The letters go on to tell the taxpayer that if they do not respond to the letter, their refund may be reduced. And, if they do respond, their refund will be issued in about 6 to 8 weeks from the time the taxpayer provides "responses" to the requested lines on Form 8867. The IRS allows taxpayers to provide responses by fax or by mail. Blog posts at various web sites reveal that this problem has affected many preparers nationwide. In these posts, preparers appear frustrated that the IRS has delayed these refunds and sent letters to their taxpayers that seemingly serve to confuse the taxpayers. In most cases, taxpayers receiving the IRS letter mentioned above will have their entire refund temporarily held by the IRS. But in other cases, the IRS may pay the non-EITC portion of the refund, and have delayed only the EITC portion of the refund.

Where's my refund?

February 20, 2013 - Form 8867 Earned Income Credit Checklist (updated)

Early in the filing season the IRS accepted a large number of returns containing Form 8867 (Paid Preparers Earned Income Credit Checklist) even though the Form 8867 contained incomplete information. Refunds related to these returns have not yet been released by the IRS.

In a number of these cases, the IRS has inadvertently mailed the taxpayer a letter, asking the taxpayer to provide the IRS with Form 8867 by fax or mail. The IRS has indicated that these letters were mailed to taxpayers in error, and it is believed that taxpayers DO NOT need to reply to these letters in order to have their refund released by the IRS.

The IRS is working on resolving this problem, and has indicated that refunds which have been delayed by the IRS due to this nationwide problem should be released soon, possibly within the next week.

The IRS has reminded EROs that they should keep a completed copy of Form 8867 for each taxpayer claiming EITC. But, taxpayers or EROs do not need to fax or mail copies of this form to the IRS in order to have their refund released.

More importantly...

We continue to work closely with the IRS on the issues related to Form 8867 with missing information on lines 22 and 23, e-filed before February 8th.  The IRS is working around the clock and making great progress processing returns with Form 8867.  They are working on processing and refunding all impacted returns on a "first in, first out" basis, starting with returns filed on January 30th and then moving on to those filed in early February.

We know that the timing of your clients' refunds is extremely important. Based on the latest information available, the number of these returns being refunded by the IRS will continue to accelerate over the next several days. The IRS has stated that they plan to process all remaining affected returns that were filed between January 30 and February 7^th by the end of this week.

Februrary 8, 2013 Client Newsletter

I started writing this newsletter right at the end of December 2012.  And then the crush of the workload in January got in the way.  January is the second busiest month of the year for your tax guys. We have prepared, filed and sent to our clients hundreds of W-2, quarterly taxes, and 1099 forms last month. We sent out most forms to our clients earlier than ever this year.  Not to say that this is a surprise.  It’s not.  I have doing this stuff for more than 30 years but this seems to be a little more difficult this year.  The IRS is the culprit of course.

You may have heard about the major delay in starting tax season this year.  Traditionally the start of tax season is January 15th.  But with the last minute “Fiscal Cliff” tax legislation IRS arbitrarily pushed back the day it would start processing “some” tax returns to January 30, 2013. It then announced that it will no longer tell us when refunds would be deposited in a client’s checking account substituting a three tiered notification system found on the internet that seems to be offline more than it is online.  

Virtually every business return that we will prepare has some sort of depreciation calculation.  IRS will not start accepting 2012 tax returns with depreciation until late February, 2013 or even worse March, 2013.  

Instead of encouraging you to bring your tax information in early as we have done in the past,  you hang on until we learn when the IRS will begin accepting them.  We will keep you posted.

My wife Cindy and I flew to Florida on Southwest Airlines last December.  On the back of our boarding pass jacket was printed “We do things differently  (aka better) at Southwest Airlines.”  I liked that slogan so much that I stole it for us to use.   

Southwest Airline success in an industry filled with bankruptcies and failures is truly amazing.    As Warren Buffett once wrote in a letter to shareholders, “If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”  Since the late eighties, every major airline in the country has gone bankrupt—except one, Southwest. As the United States' largest (in terms of domestic originating passengers carried) low-fare, high frequency, point-to-point carrier, year end financial results for 2011 marked Southwest's 39th consecutive year of profitability.

Other airlines have been jealous of Southwest's success and its relationship with its customers and employees for years. And no one seems to be able to get to the bottom line of what they do operationally and financially that makes them a success. Maybe there is nothing more, it's all just a matter of operating efficiently and keeping employees and customers happy. In fact, many start-up airlines now use Southwest as their template for operating their airline.

What are the ingredients that have made Southwest Airlines such a consistent success story? This is an airline that has defied industry norms of either red ink on the bottom line or very low profit margins of 1-4 percent. The airline invented its own business model avoiding the usual management fads such as business process re engineering, total quality management, change management and balanced business scorecard, among others.

The one thing that Southwest has done that has made them stand out in the airline industry was not to charge a checked bag fee.  This one brilliant decision has made them stand out from their competitors. With the perception that airlines are just a commodity business, not charging for bags has made a tremendous difference in their bottom line.  In fact not paying for three check bags was the basis for our decision to fly Southwest in a completely filled airplane, on an itinerary that took us first to Baltimore and then to St. Louis instead of their competitors.  

Small business owners struggling to establish their businesses under the weight of ridiculous laws and red tape and big businesses that seek to reap monopoly or oligopoly profits will take comfort from the realization that with persistence, perseverance, determination, self-confidence, hard work and the desire to provide exceptional services to customers using dedicated and motivated workforce, they will always win in the end.

And that’s Southwest's recipe for success in a very tough business world.  When was the last time you read a tweet, facebook update or blogpost about someone being happy about paying $25 dollars for their luggage to fly with them. Being different is better.