Archives for September 2015

ANNUAL PHYSICAL INVENTORY REQUIREMENT

September 29, 2015 by Frank

When working with clients on tax preparation and tax planning, one of our focuses is to minimize the likelihood of an Internal Revenue Service (IRS) audit. It is surprising how many business owners do not take precautionary steps to minimize the odds that their company is selected for an IRS audit examination. For example, although the IRS requires businesses which maintain inventories to physically count the inventory on hand every year, far too many business owners claim they don’t have the time to take a physical inventory or do not see the benefit of an annual physical inventory. These business owners simply report the same inventory balance on their books every year.

It can be time-consuming to conduct a physical inventory. There are essentially three steps involved in taking a physical inventory:

Count—first you count all of the items in your inventory
Identification—next you choose a method of identification which basically means how you match the inventory items to the cost. Common methods include the Specific Identification Method (used when you can match the actual cost of each item individually), FIFO (first-in first-out) or LIFO (last-in last out) methods
Valuation—finally you need to value the inventory and this is an area that can have the greatest impact on calculating your taxable income. Commonly used methods include the actual cost you paid for the items and the lower of the actual cost or the current market value

Once the physical inventory is taken and valued, the inventory balance shown on the books as of the date of the physical inventory is increased or decreased and an offsetting entry is recorded to the cost of sales (COS) (or cost of goods sold). The change to the COS will impact the company’s taxable income which is why the IRS is concerned about physical inventories. Remember this simple formula: Beginning inventory + purchases – ending inventory = COS.

If audited by the IRS, the business owner will be asked to produce [Read more…] about ANNUAL PHYSICAL INVENTORY REQUIREMENT

TAX PROBLEMS OF ACCIDENTAL AMERICANS

September 22, 2015 by Frank

A tax attorney recently shared this story with us. It illustrates the complexity of the Internal Revenue Code and how ignorance of the tax laws can be devastating for someone who doesn’t use a tax professional for tax preparation or tax planning.

The client consulted with this tax attorney about an issue that was totally unrelated to a much bigger tax issue. During the discussion of the client’s initial tax question, the attorney learned that the client’s father worked in the USA decades ago and that his son (the client) was born while the father worked in the USA. That made the son a US citizen. US citizens are required to file an annual Form 1040 tax return and report their world-wide income to the IRS. In addition, if a US citizen holds bank accounts, investment accounts, retirement accounts, and cash value of permanent life insurance policies and the cumulative value of those accounts total $10,000 or more on any day during the calendar year, the US citizen has to report those accounts to the U.S. Treasury (often referred to as FBAR or FinCEN filing requirements). Failure to file US tax returns and the disclosures regarding the ownership of foreign accounts can result in VERY SIGNIFICANT and ONEROUS penalties. The client, a citizen of India, never gave any thought to his US citizenship and was thus [Read more…] about TAX PROBLEMS OF ACCIDENTAL AMERICANS

IS YOUR FINANCIAL ADVISOR WORKING IN YOUR BEST INTERESTS . . . OR HIS?

September 15, 2015 by Frank

Do you know if your financial advisor is working for you? Before you assume that is the case, do you understand the difference between “fiduciary” and “suitability standards”? The Obama Administration has proposed and the U.S. Department of Labor has held hearings about the “fiduciary rule”. President Obama wants financial advisors to be governed by the fiduciary standard. In other words, he feels that stockbrokers and others should be required to put their customers’ interests ahead of their own (i.e., earning higher commissions). Is the President saying that stock brokers are putting their financial interest before yours? The answer to that is “YES!”

Most financial advisors who work for the major stock brokerage firms are governed by the suitability standard. As the current law provides, broker dealers, insurance sales persons and advisors who operate under the “suitability standard” are merely required [Read more…] about IS YOUR FINANCIAL ADVISOR WORKING IN YOUR BEST INTERESTS . . . OR HIS?

PROFIT MOTIVE NEEDED TO DEDUCT TAX LOSSES

September 8, 2015 by Frank

If you are using your tax professional only for tax preparation services, you are short-changing yourself. An experienced tax professional is an excellent resource for tax planning strategies. One such case in which an experienced tax professional may be of a significant benefit is when an individual begins a new business venture. Often times the new venture experiences losses in the early years. If the business owner fails to comply with the factors that the IRS uses, the business may be denied its tax deductions because the IRS finds that the activity was not engaged in for profit. To make matters worse, the IRS may impose penalties on the taxpayer.

In the case of Strode v. Commissioner, TCM, Dec. 60,333(M), an attorney conducted an international consulting business from his home. The IRS determined that the consulting activity was not engaged in for profit and, therefore, was not a trade or business. As a result, all expense deductions related to the activity were disallowed by the IRS. The factors favoring the IRS were [Read more…] about PROFIT MOTIVE NEEDED TO DEDUCT TAX LOSSES

PROCRASTINATION – PROBLEMS ARISE WHEN FILING FORM 1040 LATER RATHER THAN SOONER

September 1, 2015 by Frank

When working with clients on tax preparation and tax planning, we recommend that our clients file their individual tax return, Form 1040, as early as possible. The due date for filing Form 1040 is April 15, and taxpayers can avail themselves of an automatic six-month extension of time to file, allowing them to timely file Form 1040 on or before October 15.

There are some taxpayers who are waiting for a partnership K-1 or a Form 1099-R to be received, and then there are those brokerage statements which are issued, amended, and amended again. These individuals have a good reason to delay the filing of their tax returns. However, there are procrastinators who have received all of their tax documents and could file, but for whatever reason, put off until tomorrow what they could do today.

Let’s look at some of the potential problems that could arise when the filing of a Form 1040 tax return is delayed. [Read more…] about PROCRASTINATION – PROBLEMS ARISE WHEN FILING FORM 1040 LATER RATHER THAN SOONER