Deducting medical expenses and real estate taxes paid by someone else

If you read the IRS instructions for filing Schedule A form 1040, you’ll discover that you can only claim a deduction for medical expenses and real estate taxes you paid. In IRS publication 502, it says “You cannot include medical expenses that were paid by insurance companies or other sources.”

However, in a 2010 Tax Court decision, a daughter was allowed to deduct medical expenses and real estate taxes that her mother paid on her behalf. The daughter wasn’t eligible to be claimed as a dependent by her mother. The Tax Court ruled that the payments were to be considered as a gift made directly to the daughter, and then paid by the daughter to the medical service providers and County Treasurer. The facts of the case supported this treatment. For the complete article, including mention of the gift tax exemption and the Tax Court memorandum, visit this web page: 

Free Lunch - Deducting Expenses You Never Paid

Thus if someone is willing to pay your expenses in this manner, they're not just helping you meet your obligations. They're helping you save money by causing you to pay less in taxes, too.

Should you then decide to pay that person back, you should call it a gift, just because their payment was treated as a gift – it’s quite okay to exchange gifts. If you pay them their share of the tax savings too, that can be considered non-deductible personal interest. I recommend that if you pay them back, that you pay their medical expenses and or real estate taxes (if they have them), so that they’re able to deduct the payments and reduce their tax just as you did when they paid your expenses.

If, unlike in the example given above, someone who can claim you as a dependent paid your medical expenses or real estate taxes, they, not you, are entitled to the itemized deduction. In the above example, the daughter was entitled to the deduction; had her mother claimed her as a dependent, only the mother would've been entitled to it.

Be sure that transactions like these take place before the end of this year, so that you and your relative or friend can realize tax savings for this year.

An Embezzlement in McGuireville and How It Could’ve Been Avoided

The crime of embezzlement is a serious one that can harm not just organizations, but also communities. It’s important for an organization to take preventive measures in the form of fiscal safeguards, so that embezzlement has very little chance of occurring.

One such case of embezzlement is the one that was committed by Kala Pearson in McGuireville, AZ, a town in the Beaver Creek district where I lived from 2008 to 2013.

Kala was a resident of McGuireville. On December 20, 2012, she was arrested for the theft of $33,000 from the Beaver Creek Village Property Owners Association (BCVPOA), and charged with extortion. Reportedly, she admitted to the theft.¹  Kala had been the organization’s Secretary.

She withdrew money from BCVPOA’s bank account for personal use that had been pledged to pay for the building of a bridge over Beaver Creek. The purpose of the bridge proposal was to enable McGuireville residents to drive across the creek after it flooded. Moreover, she used the organization’s ATM card to purchase food at local markets for her own needs.

The news of Kala’s arrest came as a complete surprise to me, a resident of Rimrock in Beaver Creek, as I’m sure it was for many other Beaver Creek residents.  

I first met Kala in 2009 when I was inducted as a member of the Beaver Creek Kiwanis Club. Kala and her husband Frank were also members. She and Frank owned a bed-and-breakfast in McGuireville.

Kala came across to me as a local activist for community improvement. She was Chairman of the Beaver Creek Regional Council, a local planning organization. She organized the Ranch House Coalition (RHC) which purchased and restored the Ranch House Restaurant and Golf Course, two Beaver Creek landmarks, after the restaurant had fallen into disrepair. The Coalition’s major objective was to help the district’s economy. She helped organize and was President of the Beaver Creek Community Development Corporation (BCCDC), a private non-profit organization formed to develop and manage economic development projects for the sustainability of the Beaver Creek Community. RHC was one of those projects.

She led the effort to build the above-mentioned bridge over Beaver Creek in 2009, the year BCVPOA was incorporated. The road crossing the creek is the easiest means of access for residents wishing to enter and leave McGuireville. BCVPOA raised funds for the bridge construction and had the responsibility for maintaining McGuireville’s roads. A separate fund was established and maintained for that purpose.

What is remarkable about Kala’s story, in my opinion, is that she, as a person of color, has had so much influence over the Beaver Creek, AZ community, which is mostly white. She clearly represents how far the Black race has come in this country since the era of slavery. Yet Kala isn’t just an ordinary black person who has been accepted as an equal by our community. Kala achieved near-celebrity status here in a manner similar to the way Frederick Douglass became a celebrity in England during the mid-1840s, albeit on a smaller scale. Douglass was a former slave who gained his freedom, wrote a best-selling autobiography, and published abolitionist newspapers. Kala, like Frederick Douglass, has the gift of oratory and has used it as a powerful weapon to persuade people to join her causes. Or you could say that she has a talent for monopolizing a discussion and controlling it to her advantage. She has a keen political sense. 

  

From what Kala told me about her bed-and-breakfast, I was under the impression that it was doing well and that she was financially solvent. Thus I couldn’t understand why she stole the money from her own Property Owners Association. I decided to speak with Ellen, the President of BCVPOA and a resident of Rimrock, to learn more about why it happened.

Although we hadn’t met before, Ellen was helpful about providing the information I was seeking. She said that despite the Coalition’s success at raising more than $300,000 to purchase the Ranch House and golf course, it was still short of funds needed to meet expenses. The restoration of the Ranch House was an enormous undertaking. It was a bigger project than Kala and other members of the Coalition anticipated.

Kala and her husband Frank weren’t doing as well financially as I thought. Frank lost his job as a computer technician. Ellen said that she learned that their bed-and-breakfast was struggling when she read that they applied for a zoning permit or variance for it, and their application was denied.

One of the first signs that there was wrongdoing on Kala’s part was when Ellen found out that Kala somehow came up with the money in August 2012 to pay the Restaurant’s payroll and other expenses. It turned out that Kala wrote a check for $20,000 from the BCVPOA and deposited it into the Ranch House Coalition account. Kala wasn’t authorized by the BCVPOA Board of Directors to take that action, according to Tom, BCVPOA’s Treasurer.

Kala was given access to BCVPOA’s bank account, even though she was only the organization’s secretary. I asked Tom about it. Apparently Kala intimidated him into giving her access. He said Kala and his nephew, who lived in McGuireville, had a dispute over a large rock owned by Kala that was partly on his nephew’s property. Tom’s nephew asked Kala to move the rock. She wouldn’t budge, and neither would the rock. Kala then harassed him. Tom knew that she plays hardball, i.e. that she’s vindictive so for his nephew’s sake he relinquished access to the organization’s funds to her. Tom didn’t try to challenge Kala. He didn’t want the hassle.  

Kala then managed to obtain a debit card in the POA’s name from Chase Bank, in which the POA’s funds were deposited, without any authorization from the other BCVPOA Officers or Directors. Chase Bank simply accepted Kala’s authorization as an officer of BCVPOA without question.

Ellen admitted to me that neither she nor the other BCVPOA Officers and Directors thought that Kala would steal from the organization. They were friendly with Kala and Frank, and they knew about Kala’s involvement in activities that strengthened the community. There didn’t appear to be any need to take precautions. Besides, only five checks were paid from the bridge fund since its inception.

Tom admitted, when I asked him about it, that Kala’s being black had something to do with the fact that the BCVPOA Board members trusted her with the organization’s funds.

When I first spoke with Ellen and Tom, they didn’t think that anything could’ve been done to stop Kala from stealing her organization’s funds. But then they agreed with me when I suggested that no one in a position of trust should be allowed unrestricted access to the organization’s financial assets without having safeguards. These precautions could’ve been taken to protect even a small organization like BCVPOA from embezzlement or extortion:

1)    Delegate the responsibility for check writing and cash transaction processing to no more than three people: the President, Vice President and Treasurer. The Treasurer should write the checks and maintain the accounting records. The President and perhaps the Vice President as well, should sign the checks. This approach results in a proper separation of responsibility which increases accountability and reduces the possibility of theft.

In general, a Secretary shouldn’t be given access to the organization’s bank account. The role of a Secretary doesn’t include management of the organization’s financial assets.

2)    Do a background check on individuals in sensitive positions or with considerable responsibility. It should be done not only when they’re considered for a position, but occasionally after they assume responsibility as well. This would alert the organization to financial problems an individual may be having, Kala in this case, that would tempt him or her to take resources from the organization to reduce their financial stress. For example, it might have shed light on Kala’s financial situation to learn about how the organizations she established were doing financially.  BCVPOA could also have found out whether Kala received a salary from BCCDC or RHC.

3)    Arrange to have risk management bonding coverage for individuals who have direct access to financial assets such as cash, ATM cards, and checks. This would reimburse the organization in the event of embezzlement.

4)    Hire an accountant to perform an audit or review of the organization’s financial records. Preferably, the accountant should be a CPA to ensure the highest quality of service.

5)    Make sure that your bank doesn’t allow someone to obtain an ATM card or any other form of access to your bank account without a corporate resolution officially approved of by the Board of Directors. For example, when my community’s POA, Montezuma Estates Property Owners Association, wanted to add a signer to its bank account, our bank, National Bank of Arizona, required that we provide a copy of the minutes from a recent Board of Directors meeting showing that the Board voted to approve the additional signer. If your bank doesn’t have at least a similar policy, take your banking business elsewhere.

6)    Corporate bylaws and LLC Operating agreements typically state the rights and powers of shareholders, directors and officers. As the provisions of these documents are often ignored or forgotten, it may be sensible for a director, officer or member to be given the responsibility for monitoring compliance with them.

7)    Don’t use signature stamps for checks. There’s a potential for misuse, especially if the stamp falls into the wrong hands. It’s safer to sign the checks with a pen instead. Better yet, avoid using checks and make payments online whenever you can. This avoids check-writing fraud, which has become a considerable problem due to the worsened state of the economy.

8)    Establish limits for ATM and credit cards, so that individuals may not spend the organization’s money beyond what is necessary for performance of their duties.

9)    Require that the Board of Directors approve all significant cash expenditures and new check signers.

10) Checks written for more than a certain amount should be countersigned by a Director or Officer. The identity of the counter-signer should be authorized in advance by the Board of Directors or the President.

11) Document all transactions involving significant cash receipts and disbursements, including the authorization of disbursement transactions. For example, a decision to give an officer check-signing authority could appear in Board meeting minutes.

12) Reconcile your bank statement to your checkbook at least monthly. This should be done by the Treasurer or someone independent of those having access to the funds.

13) Financial statements should be prepared and reviewed by the Board of Directors on a regular basis.

14) Have an accounting policies and procedures manual.

15) Have an organization chart that clearly defines the scope of each individual’s responsibilities.

16) Try to obtain the involvement of as many community members as possible. This would increase the amount of attention being paid to the organization’s activities, and discourage a dishonest Officer or staff member from stealing.

Organizations that had adequate safeguards were much less likely to be the victims of theft or fraud. Yet in small communities like Beaver Creek, organizations like POAs have taken few if any precautions. They may not have been aware that they needed to, or they were too trusting of their friends in management positions, or they were uncomfortable about taking such measures. In short, they weren’t business-minded enough.

McGuireville’s loss of $33,000 and the feud described above were just two unfortunate consequences of this crime. Another was the distrust it engendered within the Beaver Creek community: when I attended a Ranch House Coalition meeting in January 2013, I heard very little said about returning the money to its rightful owners.

The rapid manner in which Ellen spoke about what happened with Kala and the BCVPOA was an indication that she may have felt some regret in having to press charges against Kala.

Some people believe that Kala deserves to be excused from punishment due to her contributions to the community’s welfare. See the blog following the Camp Verde Bugle’s article dated December 24, 2012: http://www.cvbugle.com/main.asp?TypeID=1&ArticleID=36934&SectionID=1&SubSectionID=991&Page=1. Should leniency be shown to Kala? I believe that if she committed a crime she should be punished for it, or at least be required to make restitution to BCVPOA. Ellen agreed with me about that.

1     per the article in Sedona.biz 12/31/12

http://www.sedona.biz/verde-valley-news/beaver-creek-poa-secretary-arrested-for-theft

Timely tax-saving tips and strategies

Tax tip #4   

Section 179 expense election for certain real property

You can elect to deduct as expense certain qualified real property as section 179 property that you placed in service in a tax year beginning in 2010 or 2011. This includes the following real property, as described in section 168(e):

 

• Qualified leasehold improvement property
• Qualified restaurant property
• Qualified retail improvement property

The amount that may be expensed is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2011. The cost of eligible real property includes the cost of real property that couldn’t be expensed in 2010 because it exceeds your business income for 2010 (See Part I, line 11 of form 4562).

Instructions for making the election can be found on the IRS website at http://www.irs.gov/instructions/i4562/ch02.html#d0e439.

The election may be revoked by filing an amended tax return. Once made, however, the revocation is irrevocable.

This provision is one way that our government is attempting to stimulate the economy by encouraging investment in real estate. Unless Congress extends the provision, it’ll no longer be available after this year. In that case, the real property described above will be depreciated over 39 years on the straight-line basis.

Timely tax-saving tips and strategies 

Tax tip #5

Special depreciation allowance

You can deduct up to 100% of the cost of qualified property that you acquired after September 8, 2010, and place in service before January 1, 2012. For certain aircraft, and for certain property with a long production period, you have until December 31, 2012 to place the property in service.

If you acquire the qualified property after December 31, 2007, but placed it in service either before September 9, 2010, or after December 31, 2011 and before January 1, 2013, you’re eligible to deduct 50% of the cost of the property. The deadline for placing the property in service is December 31, 2013 for certain aircraft, and for certain property with a long production period.

To calculate the allowance, you first deduct subtract from the business or investment portion of the property’s cost any deductions or credits allocable to the property, like the section 179 expense deduction. That results in the depreciable basis. You multiply that amount by 100% or 50%, according to when you placed the property in service.

You then have to subtract the allowance from the depreciable basis to determine your regular depreciation or amortization.

You can elect not to deduct the special depreciation allowance for a class of property by attaching a statement to your tax return. However, it must be filed timely. You have until six months of the due date of a timely-filed return to make the election, by filing an amended return and writing “Filed pursuant to section 301.9100-2” on the amended return.

Note that the allowance is subject to recapture as ordinary income should the property be disposed of at a gain. That means you’d report ordinary income up to the amount of special depreciation allowance you deducted.

Also note that a corporation can elect to accelerate an unused minimum tax credit, from before 2006, instead of claiming the special depreciation allowance.

The definition of qualified property, and other information relating to the allowance, may be found in the IRS instructions for form 4562, and in IRS Publication 946.

Timely tax-saving tips and strategies

Tax tip #6

 

Reducing your payroll tax liability, while paying yourself “reasonable” compensation as an S Corporation stockholder

In the last issue of this newsletter, I discussed a way to reduce your payroll taxes if you’re an S Corporation shareholder, by deducting personal items tax-deductible items on your S Corp return. In this article I discuss another way you can reduce your S Corp payroll tax liability.

I mentioned that you’re required to pay yourself a reasonable salary if you withdraw funds from your S corporation, and you’re an officer of the corporation. An officer is defined as an employee, according to IRC section 3121(d).

On the IRS website at http://www.irs.gov/newsroom/article/0,,id=200293,00.html, “Wage Compensation for S Corporation Officers”, the reasonable compensation requirement is described in some detail. The salary level must be “reasonable and appropriate”. The article lists some factors used by the courts in determining reasonable compensation, such as training, experience, responsibilities and payments to non-shareholder employees. The determination is made on a case-by-case basis.

Unlike the net income of sole proprietorships and partnerships, which is subject to the self-employment tax, S Corporation net income is exempt from it. The SE tax rate is 15.3%, which can be substantial for a small business owner. The objective of the IRS requirement is to increase the collection of payroll taxes, that can’t be collected based on S Corp net income, by requiring the payment of a salary subject to payroll taxes. That makes it more difficult for S Corporation shareholders to simply distribute corporate funds to themselves tax-free, considered a return of capital, as a means of withdrawing money from the corporation. 

A good way to determine what level of salary is “reasonable and appropriate”, is to determine what the value of the officer’s, i.e. your services are to the corporation, and then compensate yourself based upon that value. If your contributions to the corporation’s success are important enough, you should expect to be paid a significant share of its revenue or profits. How much of a share can be determined by (a) reference to financial ratios published in Risk Management Association (RMA) and industry publications, and (b) comparing the salary level with that paid by similarly sized companies within the same geographic region.

So how do you minimize the amount of payroll taxes you pay to the Government? You could provide fewer services to your corporation. By not serving as an officer, for example, you probably wouldn’t have as much responsibility for its success. You can hire someone to serve as an officer, such as a spouse or other relative. That person would be accountable to you. The corporation would then be run like a larger corporation with a more formal structure. Your role could be limited to providing freelance services as an independent contractor. Your compensation would then be based on the market value of your services, which would be less than if you were functioning as an officer with broader responsibilities.

If the combined value of your services and the officer’s services are less than what the value of your salary as an officer would be, you can justify paying less in compensation and therefore less in payroll taxes. As long as these transactions are conducted at arm’s length, you should have no difficulty having the deductions accepted by the IRS.

Certifying a Section 1603 Grant Program Application at a Moment’s Notice

By Gary Krupa, CPA

In my accounting career, I’ve come across a few clients who truly put my skills to the test. I’m about to describe one for whom I recently performed a Section 1603 Grant Program certification for specified energy property. It’s safe to say that this client needed my services at least as much as I needed to provide services to his company. 

About four and a half months ago, the Director of a Solar Energy installer in Phoenix, AZ, sent me an e-mail expressing interest in my services concerning the preparation of an Agreed-Upon Procedures (AUP) report for a grant application. He had completed a 500kW Photovoltaic system (PV), involving the installation of solar panels, for a commercial client in New Jersey, and was applying for a U.S. Treasury grant for less than $1 million on the client’s behalf. The eligible cost basis was more than $500,000.

According to the Treasury Department’s 1603 program website, an Agreed-Upon Procedures report is required for that kind of project. It’s a type of attest engagement. For this project, my responsibility would be to perform certain required procedures in order to determine whether the project’s eligible cost basis as entered in the accounting records is in accordance with the cost basis for Federal Income Tax purposes.

The alternative form of certification is an examination, which would be required if an applicant requests a grant of $1 million or more. An examination would involve more extensive evidence-gathering procedures than would an AUP engagement (see the brief list of AU procedures below), and may include testing of the client’s accounting system and receiving confirmations from third parties. The accountant’s opinion on compliance with the Federal income tax cost basis would be required in the examination report.

My client’s Director, whose name is Timothy, arranged a meeting with me at his office in Phoenix. During that meeting he emphasized how difficult it was to complete the NJ client’s installation. That was because it snowed heavily in that part of NJ while his company was installing the PV system. We didn’t discuss my credentials at all. Instead, I explained to Timothy what would be involved in an Agreed-Upon Procedures engagement. He asked me to send him a proposal.

I then sent him a list of all the documents I’d need before I could submit the proposal to him. He didn’t respond so I called him. He said he was involved with a project involving a large military organization client and simply didn’t have the time to respond to my e-mail. The NJ client’s project would have to be put on hold. I didn’t expect anything more to come of my relationship with Timothy.

One month and one week later, in early October, much to my astonishment, Timothy called me early in the morning on my cell phone. He said he very much needed my help because his NJ client was demanding that he provide the accountant’s certification needed to complete their Section 1603 Grant application. What was at stake was a grant of more than $700,000. Apparently Timothy was behind schedule in completing the application, even though the official U.S. Treasury Department deadline for submitting it isn’t until October 1, 2012 -- almost one year later. He needed for me to complete the certification, which was at least a three or four day job, by the next day!

I had another engagement of a personal nature that day, but cancelled it and agreed to meet Timothy for lunch at a Wildflower Bread Company much closer to my office in Rimrock, located about forty minutes south of Sedona, than his. Timothy was that eager to get the certification project underway. After hastily preparing an engagement agreement, I set out to meet him. Somehow we got our signals crossed; we each went to a different Wildflower Bread Company, 63 miles apart from each other, and had lunch. We called each other on our cell phones and arranged to meet at a Denny’s even closer to my office an hour later.

When I arrived at the Denny’s, I found Timothy fully prepared with the reports and other documents I had requested in my e-mail. He read my engagement agreement within two minutes, signed it, and gave me a check for nearly 60% of the engagement fee. He answered my questions regarding the documents and the solar installation as best he could. Then he said he had to leave because he had to attend to his beloved dog that was ill.

The fee that I charged Timothy’s firm was somewhat higher than what he originally expected to pay; nevertheless it was reasonable given the nature of the engagement.

I worked until fairly late that evening (about 11 pm) and the entire next day on the project. Timothy called me every few hours the next day to check on my progress. He was concerned that I wouldn’t complete the engagement by the deadline for submitting the certification to the Treasury Department online, which was between 3:00 and shortly after 5:00. Fortunately, after applying every ounce of intense concentration I had at my disposal, I completed the Agreed-Upon Procedures Report and Statement of Findings by shortly after 5:00. Some documents were still needed to provide substantiation for the project’s cost basis. Timothy said he’d provide those.

Briefly, the procedures that I performed were these: 
 

• Tested cost eligibility, e.g. verified project location, determined 1) that the mark-up over cost, 18%, was reasonable according to Treasury Dept. benchmarks, 2) compliance with Sec. 1603 guidelines, and 3) that the cost basis was in accordance with the cost basis for Federal Income Tax purposes.
• Tested costs – for accuracy, completeness and reasonableness. Essentially I agreed the invoices as listed in the accounting records to transaction source documents, and then agreed the invoices to the NJ client’s “detailed calculation of cost basis”, taking into account material invoices.
• Concluded that there were no material potential discrepancies.
• Obtained a representation letter signed by Timothy regarding information I obtained and oral representations he made during the engagement. 

My report on Procedures and Findings accompanied the Agreed-Upon Procedures Report.

I was paid me the balance of my fee within a week. I followed up with the client’s Controller within two weeks and performed testing on the remaining items needed for substantiation of the project’s cost basis. The results were consistent with the findings in my report.

Please be aware that this program will expire at the end of this year, unless Congress extends it, so don't delay in applying or encouraging your clients to apply! It's an excellent program for helping to fund renewable energy projects, and the requirements are relatively straightforward. Also note that the deadline for starting construction on Section 1603 grant property is December 31, 2011.

For more information:
 

Agreed-Upon Procedures (AUP) engagements 
http://garykrupacpa.com/commercial.html#other_attest 

Alternative energy grants
http://garykrupacpa.com/solar.html#alt_energy

The U.S. Treasury Department’s Section 1603 Program
http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx

My anti-spam policy

Most people don’t like to receive junk mail, whether by postal mail or on their computers as spam e-mail. It’s for that reason that I work so hard to ensure that this e-newsletter isn’t spam. With every issue I strive to create something that’s original, that’s filled with sage accounting, tax and technological guidance, and that’s interesting to read. I can honestly say that this newsletter is truly useful to many of those who take the time to read it, especially if they’re too busy with other matters to research those topics themselves.

Nevertheless, there will always be those who perceive the newsletter as spam and delete it. It goes with the publishing territory. You can’t please everybody. I might say to the person who receives my e-newsletter and doesn’t wish to continue receiving it, “Cheerio my good man (or woman)!”, similar to what Clarence Oddbody, ASII* (Angel 2^nd class) said to the incredulous Tollhouse Keeper in the film It’s a Wonderful Life.

I know how much I don’t like to receive spam. I’ve received many e-mails every day that aren’t spam, but that I don’t want to take the time to read. Much of it is political in nature. Even though I believe in the causes promoted in these messages, I have so much else to do that I consider more productive that it becomes burdensome to read them after awhile. I can easily understand why someone else wouldn’t want to receive spam.

The idea of spam is consistent with the lack of consideration many people have for each other nowadays. Many businesses send spam or junk mail to people without asking them if they want to receive it. If the business would just send the prospect a postcard, before sending an entire catalog or graphically bloated e-mail, they’d be able to gauge the prospect’s interest before investing more time and money on soliciting the prospect.

Since I need to send unsolicited newsletters to increase circulation, I’ll at least contact the recipients first to let them know I’ll be sending them the newsletter. They’ll be given the option to unsubscribe or tell me that they’d prefer not to receive it. They’ll then be removed from my mailing list permanently.

Unlike with other e-mail newsletters I’ve received, I plan to contact every person I send this newsletter to and ask them if they want to continue receiving it, or how they like it. It’s not enough for me to give them the opportunity to simply “opt out”. Nor will I send it to someone just because I met them or spoke with them by phone. Anyone wishing to receive the newsletter has to subscribe or at least consent to receiving it.

It may take me awhile to contact everyone on my newsletter mailing list in a personal way. Nevertheless, it’s important that I do this. In a cold, impersonal world, a high regard for the needs of others and a cordial approach will do much to improve the business climate. Another of my goals is to inspire others to become more community-minded. If this newsletter accomplishes that it’ll be an even more worthwhile activity.

One final note: Anyone who engages me to provide professional services will receive even more attention from me, of the most helpful kind!

* Clarence now holds the rank of ASI (Angel 1^st Class), as he was promoted upon receiving his wings at the end of It’s a Wonderful Life.

Why It Makes Dollars and Sense to Hire an Accountant to Do More Than Just Prepare Your Tax Return
 

by Gary Krupa, CPA


When embarking on a voyage into unknown territory, it makes good sense to avail oneself of the services of a guide or sherpa. This is someone, usually a native of the territory, who understands the local customs and geography, and who possesses the skills necessary to help the traveler successfully navigate the territory by avoiding serious mishap. A sherpa, according to Your Dictionary.com, is "a member of a Tibetan people living on the slopes of the Himalaya Mountains in Nepal, known for their endurance at high altitudes and often serving as guides for foreign mountain climbers."

Indian guides were common when the first white settlers arrived in America. If you’re familiar with the story “The Last of the Mohicans”, by James Fenimore Cooper, you probably remember the character of Hawkeye, otherwise known as Nathaniel or “Natty” Bumppo. Although of the caucasian race, Hawkeye is perhaps the embodiment of the ideal guide: someone who has easily adapted to the wild frontier, is highly skilled with a rifle, and has earned the confidence of both the Indian and the White Man. He escorted Cora and Alice, the daughters of the British Colonel Munro, through hostile Indian territory. He was about as cool-headed as anyone charged with such a dangerous mission could’ve been.

In today’s business world, an accountant is especially well equipped to play a similar role. An accountant can help an organization succeed by applying his or her skills and experience to its financial management. Accountants have savoir-faire, or expertise, when it comes to objectively analyzing their client’s financial affairs and taking effective action. Another strength that accountants and bookkeepers have is the ability to organize financial records in the most meaningful way. These qualities can be invaluable to a small organization seeking to become a bigger one, or to one struggling just to maintain solvency in the troubled economy we find ourselves in.

Yet except for engaging an accountant to prepare their income tax return, or helping to minimize their tax liability, many owners of small businesses and directors of non-profit organizations don’t perceive any tangible benefit to hiring an accountant. An accountant doesn’t generate revenue the way a salesperson or the owner can. An accountant doesn’t produce the products or services sold by the organization. Nor does an accountant provide the business with office space or the ability to make telephone calls, the way a property owner and the telephone company can, respectively.

As for financial management, in rural areas business owners and organization directors think that hiring a trained professional to help improve the bottom line is an expensive luxury they can't afford. The owner or director believes they can do the bookkeeping themselves when funds are limited, or that they can hire a friend or relative whom they don’t have to pay much money to. Or they’ll hire an accountant to do mostly bookkeeping work.

Put briefly, the owner or director reasons that hiring an accountant to do accounting work, outside of tax season, would only be a waste of money that the organization can spend productively elsewhere.

To be sure, accountants are usually the best qualified to prepare tax returns and reduce a client’s tax liability. Nonetheless, there are some other important ways that an accountant can help increase profits or net revenues, generate positive cash flow, and reduce operating costs.

The business owner or director of an organization should meet with the accountant at least a few times a year, even if the only services they require are tax planning and return preparation. This is because the accountant can better advise their client regarding tax saving strategies if the client makes the accountant aware of their financial situation on an ongoing basis.

Accountants are superbly trained to create and maintain business systems, especially accounting systems. This provides an organization with a solid financial foundation. Think of the footing laid by a mason when building a retaining wall. The footing prevents the wall from collapsing in a monsoon, or when mud places pressure against the wall. In much the same way, an accounting system is an important element of a good system of internal control, which makes financial reporting more reliable, and minimizes the possibility of theft or collusion.

The management of an organization, especially one that's expanding, depends upon their accountant to help them interpret the raw bookkeeping data in a meaningful way, so that the management will be better able to make sound business decisions.

It also helps to understand what prevents many small organizations from achieving their potential, to understand the full value of an accountant to an organization.

First, because many owners and directors are preoccupied with increasing revenues or managing their staffs, they neglect to make detailed plans for their financial success. “Be Prepared” is the Boy Scout motto, and it applies equally to business planning. Such a plan requires making informed decisions based on knowledge of market conditions, the organization’s recent financial history, and the organization’s financial goals.

One of the tools used by accountants to develop a financial plan is a projection. This is an estimate or set of prospective financial statements prepared using one or more assumptions. A similar tool is the forecast, which presents the entity’s expected financial position, results of operations, and cash flows.

These reports, in addition to financial statements prepared on a historical basis, help not only with decision-making, but also when applying for outside financing, such as with a bank loan. They help the organization’s management know what to expect well in advance of important developments, whether positive or negative. The management is then better prepared to take effective action to increase revenue, reduce costs, reduce taxes, or avoid costly financial setbacks.

The budget is another useful planning tool. This enables the organization to achieve its goals by knowing what they are and documenting them. The budget gives an individual or organization the best chance to achieve its goals by setting realistic targets concerning revenues and expenses, and then comparing the actual results with the desired or expected results, on a regular basis. The budget also helps the organization maximize its revenues and spend its money more productively.

Organizations and individuals usually don't prepare or maintain budgets because they don't want to know the details of their finances. They believe that a budget will reveal to them how little money they have and depress them. This was the reasoning given by Oprah Winfrey when Suze Orman appeared on Oprah on October 13, 2008 to give budgetary advice to Oprah's guests. However, unless someone maintains a budget, they're not in a good position to make sure that their expenditures don't exceed their income.

A second reason that many small organizations don’t realize their potential is that many owners and directors of these organizations make business decisions based on subjective motivating factors such as emotion, politics, fear or personal enrichment at the expense of the organization. Failure to prepare and maintain a budget, as explained above, is one example. This is where an accountant can be an important ally. The accountant’s objectivity and sang-froid (composure) can help the organization set or maintain a sound financial course.

The economy of the Verde Valley in Arizona, where I have my practice, is made up of several large companies and many small mom-and-pop-type companies. For the small companies, there’s a serious need for more financial wisdom and sophistication, so that they’ll find it easier to become big companies. The big companies usually have entire accounting staffs. Yet even they sometimes need help from an outside specialist.

What other qualities does one find in a good accountant? A good accountant listens to his or her client, and thereby understands what their needs are and how best to serve them. A good accountant remains aware of new developments or methods that may benefit the client. Such a person is both perceptive and analytical. And a good accountant remains dedicated to helping his or her client succeed. One doesn’t need to be gifted to be a good accountant, but one should at least have a talent for it.

How much does it cost to hire an accountant, and how good of an investment is it?

Depending upon the area the accountant’s practice is located in, the demand for their services, and the nature of the services needed, one can expect to pay between $50 and $100 per hour. The client may not realize a benefit commensurate with their cost right away. The value of engaging an accountant will become apparent when the client embarks upon a new venture, such as the opening of a new store, launching of a new product line, or investment in another company. The accountant can prove invaluable when the client applies for funding.

And as stated above, an accountant can help the client achieve their financial goals more easily, and save money by means of financial and tax planning. The accountant will also save the client money, or help the client obtain financing, by being knowledgeable about the client's business and finances, and suggesting strategies based on the accountant's knowledge and experience.

Here are some examples of how I've helped my clients and employers:

As the controller of a real estate company, I discovered, by reference to its amortization schedule, that it had been overpaying interest on its mortgage loan for several periods. I then contacted the lender and arranged to have the overcharge credited to the company and to correct the amount of each loan payment.

I prepared and submitted an offer in compromise for a disabled individual to the IRS. The client owed many thousands of dollars in income tax, and was having much difficulty paying what he owed. I represented the client before the IRS in the matter. This action resulted in the client's offer being accepted by the IRS and all but a small percentage of the tax liability was eliminated.

I helped a start-up leasing company obtain about $0.5 million in loan financing by presenting their financial data in a manner that was more appealing to the lender.

I helped a spa company client avoid having to pay approximately $58,000 in sales tax deposits, due to my timely and accurate filing of its sales tax returns.

For a non-profit organization client, I helped it apply for and obtain tax exemption status with federal, state and county governments.

Here's a video showing what it can be like when you don't plan ahead, or when you make unsound business decisions. Or you can watch it when you want to have an idea of what it feels like to be on a classic roller-coaster ride:

(See first paragraph above re: the definition of a sherpa.)

Here's what the experience of having peace of mind can be like:

How to attract, retain and motivate enthusiastic volunteers

 
By Gary Krupa, CPA and Roger Wyer

Part I of a two-part article

Organizations know that volunteers won’t work for them indefinitely, just as employees won’t. The organization needs to continue to create the environment that originally attracted the volunteer to provide service. If moral declines, if the organization falters in its attempts to achieve its purpose, or if the volunteer simply perceives that the experience of working for the organization isn’t as rewarding as it was when he or she first joined the organization, the volunteer will leave. Volunteers can thus serve as a “barometer” for how well the organization succeeds in achieving its purpose. The quality and quantity of volunteers it attracts and how long the volunteers stay will depend upon:

• how stimulating the environment is
• the organization’s concern for the volunteers’ well-being
• how well-managed the organization is
• how meaningful the organization’s mission is
• how sincere the organization is about achieving its mission and
• whether or not the organization is achieving its mission.

Other factors will have an influence over the duration of a volunteer’s term of service, such as the volunteer’s need to either spend more time on their studies or pursue a paying job. These factors are beyond the organization’s control, so the volunteer’s supervisor should inquire about the volunteer’s plans and availability before giving the volunteer a long-term assignment.

For the above-stated reasons, it would be sound policy for the volunteer’s supervisor, Board member or other superior who works with the volunteer to meet with the volunteer periodically to determine the volunteer’s level of satisfaction. The superior can then take steps to address the volunteer’s concerns. If the volunteer feels that the organization isn’t making enough progress in realizing its mission, it may indicate a need for the organization to be more pro-active in achieving its goals.

Habitat for Humanity (HFH) is a very good example of an organization that has been successful in attracting enthusiastic volunteers. It’s a worldwide Christian non-profit organization that creates decent and affordable housing for those in need. Volunteers are drawn to help the organization accomplish its humanitarian mission.

Two local Habitats for Humanity have engaged my services to perform their annual financial audits. Both have a policy of using volunteers when possible. Debbi Grogan, the Executive Director of HFH of Northern Arizona, in Flagstaff, AZ, has made it exciting for volunteers to be involved with her organization. Her background as an event planner has proven invaluable in that regard. Even members of the Board of Directors have risen to the occasion and have undertaken some fund-raising tasks.

Yet Debbi has had difficulty finding qualified volunteer staff members to help with administration on an ongoing basis. Consequently she’s had to do clerical work, including filing and bookkeeping. I asked Debbi about that. She replied that if a volunteer has another priority, such as wanting to take a vacation, the volunteer is likely to take time off or leave. An employee would have to give adequate notice or comply with company policy if the employee wants to keep his or her job.

Debbi agreed with me, however, that volunteers may have a moral commitment or spiritual connection to the organization they serve. That would cause a volunteer to be at least as reliable as an employee. The lack of spiritual connection may explain why the officers of my Property Owners Association used to excuse themselves from service to the organization due to family or other personal concerns. HFH volunteers feel a spiritual connection to HFH due to its Christian mission.

Gary Krupa is a CPA in New York and Arizona, with more than twenty-five years experience providing accounting, tax, audit and computer services to small and medium-size organizations. He’s especially attentive to the needs of his clients. He moved to Rimrock, Arizona in late May 2008. He has offices in Rimrock and Peoria, AZ. His e-mail address is gkcpa@q.com and website URL is http://garykrupacpa.com.

 

Roger Wyer is a management consultant and grant writer who’s also on the Board of Directors of the Verde Food Council in Sedona, AZ. You’re likely to find him a seasoned and friendly business consultant with a passionate approach to his work. His specialty is non-profit organizations. His e-mail address is rog@BizWorksStudio.com. More information about his services may be found on his website at http://bizworksstudio.com.

Timely tax-saving tips and strategies

Tax tip #3

Deducting personal expenses on S Corporation return instead of on 1040
 

If you deduct some personal expenses on your S Corporation tax return instead of on your individual tax returns, you can reduce the amount of salary you’d have to pay yourself as an employee-owner of the corporation. This in turn will reduce the amount of FICA tax you’ll have to pay.

As an officer, you’re required to pay yourself a reasonable salary if you pay yourself from the corporation. What’s considered reasonable varies according to several factors. Read the document [link: http://www.irs.gov/newsroom/article/0,,id=200293,00.html] Wage Compensation for S Corporation Officers on the IRS website for more information.

By reducing your S Corporation income by deductible personal expenses, you can pay yourself a reasonable salary from the remaining income. The salary would then be subject to FICA. However, the amount of salary subject to FICA will be less than if you paid it from the entire corporate income. In this way you’ll pay less FICA tax. And the personal expenses that you deduct won’t be subject to FICA.

For example, let’s say your S Corporation net income for 2011 is $100,000 before paying the shareholder-employee wages, and the corporation pays the following personal expenses on your behalf (which aren’t included in calculating the $100,000 net income):
 

• Health insurance          $10,000
• Self-employed SEP          5,000
• Donation to charity         5,000

Total                             $20,000

After deducting the $20,000 from the $100,000 net income, the corporation can pay you wages of up to $80,000 without incurring a loss. If the above expenses weren’t deducted by the corporation, but on your personal tax returns, you’d have to pay yourself wages of up to $100,000 to cover the $20,000 in personal expenses deducted on your personal returns. The additional FICA tax you’d have to pay would be $2,260 ($20,000 x .0565 x 2).

Note that contributions to your IRA by the S Corporation can only be deducted as salaries and wages. You’d then have to pay FICA tax on that amount, so you wouldn’t be saving money.

This is an idea that I learned about from reading an article by Stephen L. Nelson, CPA called “S Corporation Tax Saving Tips” at http://stenel.wrytestuff.com/swa439273.htm. 

Please be aware that this strategy shouldn’t be abused by paying non-deductible personal expenses with corporate funds and deducting them on the S Corporation’s tax return. I’ve seen small business owners commingle funds in this manner. It can cause you to have to pay interest and penalties should the IRS audit your tax returns. It can also result in your business being valued for less money should you wish to sell it. If the corporation pays such non-deductible personal expenses, such as for transportation and rent, you should reimburse it as soon as possible, preferably within the year the payments are made.