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Tax Tips & Financial Newsletter


Alternative Minimum Tax ‐ Will it affect your 2010 income tax return?

Congress has failed to act this year to change the tax code concerning Alternative Minimum Tax (AMT) for tax years after 2009. For the past few years, Congress has passed legislation to temporarily extend on a year‐by‐year basis an exemption that was increased significantly from the early 2000’s. This could easily mean a 2010 tax increase of $2‐3,000 for some taxpayers. One study predicts that nearly every married taxpayer with income between $100,000 and $500,000 will owe AMT in 2010.

AMT is a flat tax that originated in the late 1960’s to prevent taxpayers with large incomes from not paying any tax. Certain items are added back into a taxpayer’s income and subject to a flat tax of 26 or 28 percent. Tax rates were cut to very low levels almost ten years ago and the AMT Exemption was increased to shield taxpayers from AMT. In 2010 this AMT exemption has dropped approximately $26,000 for married filing jointly and $13,000 for single taxpayers.

One area that makes a taxpayer more likely to owe AMT is deducting higher amounts of state income or real estate taxes. Also, larger families are more exposed to AMT due to the number of exemptions. Married taxpayers are more likely than single taxpayers to be subject to AMT.

From our analysis of the AMT problem, we have not been able to find a solution to help taxpayers. The only way we have been able to reduce AMT is to have a taxpayer’s income decline significantly. This is not a viable option.

We have developed a quick test to help identify taxpayers that may be subject to AMT, assuming that the taxpayer’s 2010 tax situation is identical to their 2009 tax return. If you are interested in finding out more about this, please contact our office. There is not a charge to run the test. Please note that this test is not reliable if there are significant changes in your situation.

If you desire a more complete analysis of your AMT situation, or if the quick test cannot be performed, we can utilize our tax planning software for you. This will require you to give us information about your 2010 income and deductions. Our fee for this starts at $150 and increases if we are requested to run more scenarios or explain the results more thoroughly.

Please note that your employer’s tax withholding or your estimated tax payments have NOT taken into account the AMT liability. You will owe the extra tax when you file your 2010 tax return in early 2011. Contact us now so we can give you the potential estimated amount you might owe this fall instead of surprising you on April 15th.


Helping You Make Better Business Decisions

As a business owner, it’s important to understand how your current financial condition will affect your growth and profitability. As a proactive effort to the current economic conditions, we’ve developed a method for analyzing your financial metrics in contrast to companies similar to your industry. Private Company Industry Data reports compare your business’ liquidity, profitability, and sales with trends of the same type of businesses. This will allow us to determine where and how we can save you money. Some questions you may or should be asking yourself:

  • Will cash‐flow be steady all year?
  • Am I budgeting properly to cover a decrease in revenue?
  • Who do I turn to for financial advice? Are they knowledgeable in my industry?
  • Can I keep my business afloat?
  • By analyzing your information we can provide a Financial Statement Analysis which will show a business’ liquidity or ability to meet obligations, profit and profit margin trend, growth of sales, borrowing and debt management, assets and utilization of those assets, and employee hiring and management.

    We will help you to make strategic, proactive decisions, which will directly affect your bottom line. We will give you detailed analysis of how you compare to your peers using industry‐specific metrics. This will allow you to address areas of weakness and improve the overall health of your business.

    We also have the ability to generate Business Projections reports which can allow us to project or forecast sales growth, profit and profit margins, overhead, accounts receivable, accounts payable, and inventory on a monthly, quarterly, or annual basis. We can also provide an informal value of your business today and in the future based on trends, scenarios and projections.

    By scheduling an annual Business Checkup, together we can determine your business’ strengths and weaknesses and devise a plan for improvement. Our Business Checkup will review the five most critical metrics for success; Liquidity, Profits & Profit Margin, Sales, Borrowing and Assets.

    We can also discuss how your business’ performance stacks up to your industry peers. We invite you to sit down with us to discuss your financial health. Provide us a copy of your current financial statements and we’ll design a report that will tell you how well your business is doing, and provide specific ways to improve.


Healthcare & HIRE Bills

In March 2010, President Obama signed two bills that give important credits to business owners. The credits offered in the Healthcare bill will be discussed first followed by the credits offered in the HIRE bill.

Healthcare Credit

The Healthcare credit is specifically targeted to help small businesses that primarily employ low and moderate‐income workers.

To be eligible for the credit, business owners have to pay at least half the cost of the health coverage for their employees in 2010.

For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers.

The maximum credit goes to smaller employers –– those with 10 or fewer fulltime equivalent (FTE) employees –– paying annual average wages of $25,000 or less. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part‐time help may qualify even if they employ more than 25 individuals.

The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011.

HIRE Credit

Employers who hire unemployed workers this year (after February 3, 2010 and before January 1, 2011) may qualify for a 6.2‐percent payroll tax incentive, in effect exempting them from the employers share of Social Security taxes on wages paid to these workers after the date of enactment through the end of 2010. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2‐percent share of Social Security taxes, as well as income taxes.

Medicare taxes are not affected.

New hires filling existing positions also qualify, but only if the workers replaced left voluntarily or were terminated with cause. Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a W‐11 form from each eligible new hire certifying that he or she worked fewer than a total of 40 hours during the 60‐ day period, prior to the hire date.

Employers claim the payroll tax benefit either on the form 941 or 944, depending on their filing requirements with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.

In addition, for each new worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.


Three Key Decision Factors for IRA Conversions

It’s an overall belief that most investors should consider including a Roth IRA as part of their overall retirement savings plan. If you have already started saving in another retirement account, converting to a Roth IRA may help you minimize taxes and maximize your retirement savings. The decision to convert should be made with thoughtful consideration and a consultation with Kruger & Clary before you make a final decision.

Consider these three key factors to help you make your decision:
  • Taxes - If you anticipate a higher tax rate in retirement or plan to leave your savings to your heirs, you may want to consider a Roth conversion. You may pay lower taxes now with a conversion than if you wait to pay taxes in retirement.
  • Time - Generally, if you have 10 years or more before you begin to take withdrawals, a conversion is likely to benefit you. Some investors with a shorter time horizon may also benefit based on other considerations.
  • Cost - Can you cover the cost of the taxes you'll need to pay with cash or other non-retirement savings? If not, it might not be advantageous to convert.

The rules are changing in January 2010

Before January, single investors and married investors filing jointly with modified adjusted gross incomes greater than or equal to $100,000 (as well as married investors filing separately) were ineligible for a Roth conversion. In 2010, the conversion income limit will be removed. Every investor will be able to convert to a Roth IRA (the annual contribution income restrictions will still apply). Investors who convert in 2010 have the option to spread their tax liability by including half of the conversion in their 2011 tax return and half in their 2012 tax return. In subsequent years, they will have to pay all taxes the year they convert


The Importance of Buy - Sell Agreements

Any business with two or more partners or shareholders should create a buy-sell agreement. Despite their name, buy-sell agreements are probably better titled buyout agreements, as they establish the terms and conditions of a future sale between owners. A buy-sell agreement specifies events that would trigger the buyout of one owner's portion of the business, such as an owner's death, disability, retirement or bankruptcy. A buy-sell agreement also details the method of establishing a purchase price, terms of payment, types of allowable (and prohibited) ownership transfers and many other crucial items.

Why are these agreements so important? Because without a buy-sell agreement in place, a change in ownership could be devastating to a business. If one owner files for bankruptcy, the business could get tied up in bankruptcy court. If an owner dies suddenly, the remaining partners could wind up with an unsuitable replacement partner (such as the deceased owner's relative). Or if an owner wishes to retire, disputes may arise between owners as to a fair purchase price and ideal timeline for such a buyout. Addressing these types of scenarios before they happen will help you avoid unnecessary headaches and legal issues and ensure a smooth transition of ownership.

There are two common types of buy-sell agreements, both which are activated by a partner's death or disability and typically use insurance to fund the purchase of ownership interests. In a cross purchase plan, each business owner buys a life insurance policy on the other owners. That way, if an owner dies, the surviving owners will use the life insurance proceeds to purchase the deceased owner's share of the business. In a stock redemption plan, the business agrees to purchase an owner's shares upon their death with the proceeds from the life insurance policy that the company owns on the shareholder's life. Whatever buy-sell agreement you choose, be sure that it adequately covers a wide range of events, not just death or disability.

A good buy-sell agreement will help ensure continuity of your business and most importantly, give you as a business owner peace of mind. If you would like to learn more about creating the right type of buy-sell agreement for your business, contact Kruger & Clary today.


Other Newsletters

September 2010 Newsletter
June 2010 Newsletter
January 2010 Newsletter
October 2009 Newsletter
June 2009 Newsletter
January 2009 Newsletter
September 2008 Newsletter
June 2008 Newsletter
January 2008 Newsletter
September 2007 Newsletter
June 2007 Newsletter
January 2007 Newsletter
September 2006 Newsletter
July 2006 Newsletter
January 2006 Newsletter
August 2005 Newsletter
January 2005 Newsletter

Certified Public Accountants Serving all of the Northern Colorado Front Range Cities including Fort Collins, Loveand & Windsor