Author: Michael Siebert

Posted on by Michael Siebert

Personal Budgeting – Is it for You?

Photo by 401(K) 2013 at Flickr.com

 

Individuals and corporations (as well as income from estates and trusts and estate and gift transfers) are all subject to taxes pending the presence of taxable income. Among one of the numerous benefits with budgeting is planning for the impact of these taxes. But first let’s look into why certain entities do and do not budget.

 

In a corporate setting, budgeting is a necessary part of the accounting system and managers often receive pay increases if production is within budget. Also, budgeting is imperative in corporations in order to stay current with the ever changing government regulations and to keep up with the current industry competition.

 

What about the small business level? Do you like to stay up late and write up budgets and proforma financial statements? Not everyone does. And in my opinion, not everyone has to. Jan and I have seen many successful small businesses who do not write up formal budgets for their businesses. It’s your choice but I am not against them whatsoever. Of course, the bigger your company is getting, the more likely you will want or even have to start creating budgets.

 

And you? Do you have a budget? Not your small business, not your S Corp, not your partnership, but YOU? Personal budgeting for some can be worse than going to the dentist. If a template is all that is holding you back, we have a free one in this blog and in the downloads tab on top of the website. This budget template has a very clean presentation and is nicely detailed. I am certain that you will like it.
 

RTS Personal Budget – Click to Download

 

The RTS Personal Annual Budget is available for download from this blog or from the downloads tab near the top of the website.

 

My point with this blog was not to tell you that budgeting will solve all of your problems and that once you create the perfect budget, the weight of the world will be lifted off your shoulders—although for some people it will. Making a budget is not imperative for your success – many Americans alike get up and go to work everyday, make a modest salary, and support a family with discretionary income leftover all without ever touching excel. Where am I getting at? If you don’t have a reason for making a budget, then you simply won’t. Money is different things to different people – a blog post in its own—and some people do not care to know how much money they are making on a monthly basis.

 

However, what about the gentleman who finds himself with enormous tax debt and needing to do an offer in compromise with the IRS? To do that, he has to do a 433-A (OIC) which asks you to provide monthly income and expenses–essential a monthly budget.

 

Will creating a budget reduce my taxes? Not necessarily. Whether you make a budget or not, your income will always be subject to taxes. However, it does help plan your tax liability and gives you a more accurate picture of what your taxes and tax bracket could be given accurate estimates.

Posted on by Michael Siebert

Why Bank Reconciliations are Absolutely Necessary for Your Small Business

Great Depression Bank Runs

 

Why doesn’t my QuickBooks balance match my bank balance?

Whenever you issue checks to vendors, there is no saying how long it will take the vendor to deposit the check into their bank account.  This represents a “timing difference”.  For instance, if you issue a check on March 29th, and the vendor doesn’t deposit the check until June 29th (For whatever reason) there is a significant timing difference between when this check was entered into your accounting software and when it effectively hits the bank statement.  Timing differences are the main reason why your QuickBooks balance doesn’t match your actual bank balance and they happen quite frequently.

 

Your QuickBooks balance, assuming you are on top of your data entry duties, is a more accurate picture of your bank balance alone as it takes into account the floating checks and already subtracts that cash from the bank account balance. It also accounts for deposits in transit (deposits that have not yet hit the bank statement).  Timing differences won’t exist however, if your checks and deposits clear within the final days of the month.

 

The goal of a reconciliation is not to find the discrepancy between your accounting software balance and your bank balance because of timing differences.  These are normal discrepancies.  The goal is see if this discrepancy is a result of error from the accounting system or error from the bank (Yes-sometimes the banks screw up too!)

 

Think of it as a way to verify that your cash from your company books is consistent with your bank statement records.  Since the ability to acquire and obtain cash is the beating heart to any business, small or large, the cash account, or multiple cash accounts deserve specific attention.  The phrase “Cash is King” has been merited all these years with great reason.

 

The Bank Statement Formula

Consistent with any bank statement is the formula used to determine how we get to the ending balance from the beginning balance.  The formula is stated below:

= Beginning Balance
+ Deposits and other Credits
–  Withdrawals and other Debits
–  Checks
–  Service charges
= Ending Balance

This is the formula that is being used to determine the reconciliation difference.

 

Reasons to do bank reconciliations

  1. Internal control – tracking the inflows and outflows of cash is crucial in determining if someone with check writing authority is abusing their power.
  2. Determining if there are missing transactions—the bank reconciliation helps determine that all of your cash transactions are in your accounting system.
  3. To see if companies are taking advantage of you—Sometimes humans make mistakes and might run your card twice on accident but sometimes it’s no accident.
  4. Discovering bank errors or accounting software data entry errors
  5. To give a true accurate depiction of the money in your bank account.  For example, take a property management company.  They may manage properties in Florida, California, Missouri, and Illinois.  With hundreds of checks being written and mailed, it is absolutely crucial to know what checks are still outstanding because these vendors can deposit the check at any time.  Some vendors take months to deposit checks (I’ve seen it before and I’ll see it again.)

So there you have it.  Now that you know why you should do a bank reconciliation, read my next post about how to do a bank reconciliation.

Posted on by Michael Siebert

Would You Like to Donate $3 to the Presidential Election Campaign Fund?

Busch Stadium St Louis

Photo by Robert Jackson at Flickr.com

 

***Roberg Tax Solutions congratulates the St. Louis Cardinals for making the 2013 World Series.  We have been having “Cardinal Apparel Day” every day this week.  As of now, the series is 1-1, game 2 was a Cardinals 4-2 win, and we are back on track after game 1’s ugly loss.

 

Let’s face it—this is the long lost question in the world of tax preparation.  You probably have a better chance of Miley Cyrus stealing your “Go Cardinals!” foam finger than you do of being asked about this inquiry.  This does not mean that people aren’t checking the box however.  In 2012, there has been about $37 million contributed up to July with a total fund balance of about $232 million.  Not a bad chunk of change.  During my time in the Volunteer Income Tax Assistance Program—commonly referred to as VITA—other volunteers and I routinely asked the question because it was part of our standard operating procedure.  I am not sure if the mainstream brick and mortar tax firms ask the question but I bet Jan knows.

 

Anyways, my point in this brief writing is to inform you about this tiny section of the 1040 series—the who, what, why, when, how, etc. of the presidential election fund or at least point you in the direction of knowing those questions.

 

2012 Form 1040 instructions page 12 states verbatim:

 

“This fund helps pay for Presidential election campaigns.  The fund reduces candidates’ dependence on large contributions from individuals and groups and places candidates on an equal financial footing in the general election.  If you want $3 to go to this fund, check the box.  If you are filing a joint return, your spouse can also have $3 go to the fund.  If you check a box, your tax or refund will not change.”


It is important to understand that that checking this box will not change your tax or refund.  So what is actually happening?  It means that you want $3 of tax dollars you already owe to the government to go towards the Presidential Election Campaign Fund (PECF).  When you check the box, the government has to allocate that $3 into the PECF.  So there is no tax incentive to check or not check this box.  This is a valid reason for self research about the fund to make a well informed decision and to support your reasons for doing so.

 

In 1975, the Federal Election Commission (FEC) was born to oversee the Federal Election Campaign Act (FECA).  This is the law that governs the financing of federal elections.  Obligations of this independent agency include the divulgence of campaign finance information, enforce limits and prohibitions on contributions, and become the all seeing eye of Presidential election public funding.

 

Furthermore, the agency is made up of six members that of which are appointed by the President of the United States and contingent upon Senate approval.  Each member serves a six year term.  Stated precisely from http://www.fec.gov/about.shtml, “By law, no more than three Commissioners can be members of the same political party, and at least four votes are required for any official Commission action. This structure was created to encourage nonpartisan decisions.”

 

It was that the check box used to be $1 dollar but increased to $3 in 1994 by Congress.  Extensive detail about the $3 check off can be found at http://www.fec.gov/pages/brochures/checkoff.shtml.  The information is well put, easy to read, and concise.

 

The Federal Election Commission has charted the Fund since its 1976 inception.  The most recent chart can be found here: http://www.fec.gov/press/bkgnd/pres_cf/PresidentialFundStatus_September2012.pdf.

 

If the candidates decide to use the fund money, they must agree to a spending limit.  In the 2012 election, neither Barack Obama nor Mitt Romney used the Presidential Election Fund resulting in a very expensive election.

Posted on by Michael Siebert

Time Value of Money and Taxes

Photo by Brian Mooney at Flickr.com

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

-Albert Einstein

_______________________________________________________________________

You probably have come across time value of money in one your finance classes or at least have a basic understanding of the idea.  Time value of money, as defined by Investopedia.com, is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”  Basically, money is worth more now than it is later.  This idea would not exist however, if there was no concept of “interest”.

 

There are two types of interest – simple and compound.  Simple interest is interest paid on a beginning principal balance only.  If you are receiving monies, the interest earned in a given period is not added back to the principal and then applied the interest rate again and appears perfectly linear on a graph.  Compound interest is interest paid on a beginning balance and any interest that has accumulated in given a period of time.  On a graph compound interest appears with a geometric (or exponential) growth pattern.

 

The present value of a future sum is the core formula for the time value of money.  All time value of money equations are based off this formula so it is extremely important to review.  It is expressed as such:

 

PV = FV / (1 + i)^n

Where

PV = Present Value
FV = Future Value
i = interest rate
n = number of periods

 

The future value of a present sum is expressed as FV = PV * (1 + i) ^n.  We won’t discuss perpetuities or annuities in this post nor will we execute any actual calculations with the TMV formulas.

 

So how can we use this time value of money concept for tax optimization and more importantly, individual wealth?

 

Retirement Planning:  We have all seen the example where Johnny starts an IRA at age 35 while Susie starts one at 21 and the amazing difference of the account values when they both reach age 59 and a half.  This is because Susie’s IRA endured 14 more years of compounding.  The choice between a roth and a traditional IRA has important tax implications and time value of money has some influence in the decision.  With a Roth IRA for example, the taxpayer can receive tax free distributions of earnings at age 59 and a half while with a traditional IRA, the taxpayer receives an above the line deduction on IRA contributions – given that AGI thresholds are not crossed – and is taxed on the distributions.  If your income is expected to increase as you get older and your marginal tax rate is also expected to increase, then a Roth IRA makes more sense – naturally.  Do the immediate tax savings of traditional IRA contributions outweigh Roth IRA tax free distributions?

 

Tax Planning: Accelerate deductions, postponing income recognition.  This concept goes hand in hand with the time value of money concept – money today is worth more than money tomorrow.  By accelerating deductions you essentially reduce your taxable income and end up with a bigger refund or smaller balance due.   Some examples include prepaying your home mortgage interest in a given year, making an alimony payment in December as opposed to January, and writing off an asset using section 179 expensing or bonus depreciation as opposed to depreciating it over several years.  The amount of tax savings probably doesn’t have enough compounding power for individuals to make a huge substantial presence but for well established businesses it most definitely does.  Examples of postponing income are increasing your retirement plan contributions to a 401(k) plan, legally deferring compensation, and delaying the collection of any debts you are owed.

 

Investment Planning:  Younger people can be more aggressive because they have more time to make up for their losses.  A younger person’s portfolio can afford more risky securities such as stocks.  As one gets older, the switch to dividend producing stocks and bonds usually happens because the “interest rate” is more stable.

 

With time value of money, the uncertainty of the interest variable is the most difficult to tame.  Those who can predict its patterns the best, tend to make the most money.

Posted on by Michael Siebert

Qualified Plug-in Electric and Electric Vehicle Credit

Chevy Volt

Photo by John Biehler at Flickr.com

 

Thinking about purchasing an Electric Vehicle (EV) or a Plug-In Hybrid Electric Vehicle (PHEV)?  The Federal government and many states offer incentives to people who do.  Currently, the Chevrolet Volt is the highest selling Plug-In Hybrid vehicle in the United States followed by the plug in Toyota Prius and the Nissan Leaf.  Many taxpayers are making the switch to reduce what is commonly referred to as their “carbon footprint.”  Plus, these cars do actually look like normal cars and are less toxic to the environment.  They do not need oil changes—they don’t even have an engine!

 

www.pluginamerica.org, whose mission is to “accelerate the shift to plug-in vehicles powered by clean, affordable, domestic electricity to reduce our nation’s dependence on petroleum and improve the global environment” is a 501(c)(3) public charity dedicated to this purpose.  Visit their website at www.pluginamerica.org for more information and help.

 

The tax credit for purchasing a plug-in hybrid or electric car is $2,500 to $7,500.  The amount depends on the size of the battery.  The credit was created in the American Recovery and Reinvestment Act—aka the stimulus package. There is a phase out after an automaker sells 200,000 vehicles that are eligible for the credit.  If you are curious about the quarterly sales, the IRS has posted that information for some automakers: http://www.irs.gov/Businesses/IRC-30D-%E2%80%93-Plug-In-Electric-Drive-Motor-Vehicle-Credit-Quarterly-Sales.

 

There are state incentives as well.  For example, In Arizona, there are reduced license fees and tax credits for installing EV charging stations.  To check your state incentives, visit http://www.pluginamerica.org/incentives

 

Also, taxpayers often get insurance discounts for purchasing an electric car.  Check with your insurance provider to see if you qualify for any breaks.

 

Where is the credit reported?  Use Form 8936

 

Form 8936—Qualified Plug-in Electric Drive Motor Vehicle Credit (http://www.irs.gov/pub/irs-pdf/f8936.pdf)
Use this form for all electric vehicle types purchased in 2012 or later.    For example, if you purchase a Chevy Volt it would go on the 8936.
Also, new qualified two or three wheeled plug in electric vehicles would go on the 8936.  However, if it was acquired before 2012, report it on Form 8834.

 

How does the Government know you’re making a legitimate claim?  The forms ask for the Vehicle Identification Number or (VIN) which has all of the information they need to prove your claim.

 

Not sure if your vehicle qualifies or how much of a credit you should get?  Check out http://www.irs.gov/Businesses/Qualified-Vehicles-Acquired-after-12-31-2009.  Take the Chevrolet Volt for example.  Click on General Motors and you can see the 2011, 2012, 2013, and 2014 Volts all have a credit amount of $7,500.  Most of the vehicles do in fact have a credit amount of $7,500.

 

There is no phase out of the credit based on your income.

 

Imagine a highway of all electric cars.  What would it sound like?

Posted on by Michael Siebert

Schedule R – What is the Schedule R Anyway?

Photo by Jen Ren at Flickr.com

Schedule R is Credit For the Elderly or the Disabled.  It’s purpose is to provide a measure of financial relief for low-income senior citizens and taxpayers who are unable to engage in any kind of gainful employment as a result of their disability.

 

You may be able to take the credit if you are 65 or older.  If you are under age 65, you must be permanently and totally disabled, receive taxable disability income for 2012, and on the first day of the tax year you did not reach mandatory retirement age.

 

As with all tax credits, there is a set of income limitations that may or may not qualify you for the credit.  It is posted below:

Then you generally cannot take the credit if:

If you are…

Then amount on Form 1040A, line 22, or Form 1040, Line 38, is… (AGI)

Or you received
Single, head of household, or qualifying widower $17,500 or more $5,000 or more of nontaxable social security or other nontaxable pensions, annuities, or disability income
Married filing jointly and only one spouse is eligible for the credit $20,000 or more $5,000 or more of nontaxable social security of other nontaxable pensions, annuities, or disability income
Married filing jointly and both spouses are eligible for the credit $25,000 or more $7,500 or more of nontaxable social security or other nontaxable pensions, annuities, or disability income
Married filing separately and you lived apart from your spouse for all of 2012 $12,500 or more $3,750 or more of nontaxable social security or other nontaxable pensions, annuities, or disability income

 

Figuring the credit is a little tricky but the IRS can figure the credit for you if you are doing everything by hand.  If you are filing Form 1040, check box c on line 53, and enter “CFE” on the line next to the box.  Attach Schedule R to your return.

 

How does the IRS determine what is permanent and total disability?

  1. You cannot engage in any substantial gainful activity because of a physical or mental condition
  2. A qualified physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.

 

Taxable Disability Income is the total amount you were paid under your employer’s accident and health plan or pension plan that is included in your income as wages instead of wages for the time you were absent from work because of permanent and total disability.  This is different from Social Security Disability which is never taxable.

 

After you have reached mandatory retirement age, disability income does not include any money received from your employer’s pension plan.

 

Also, you may need a physician statement located in the Schedule R instructions.  This to certify you were permanently and totally disabled on the date you retired.  This is not filed with the tax return but is to be kept with your records.  You don’t need a physician’s statement if you filed one for 1983 or an earlier year, or you filed for tax years after 1983 and the physician signed on line B of the physician statement.  Line B reads “There is no reasonable probability that the disabled condition will ever improve…..”

 

The Department of Veterans Affairs can certify that people are permanently and totally disabled.  If this be the case, you can use VA Form 21-0172 instead of a physician’s statement.  The form must be signed by a VA authorized person.  Visit your local VA regional office for the form or to ask questions.

 

Remember, the IRS can figure the credit for you, or your software can.  If you are inclined to do it by hand, just make sure to read every line carefully and include all of the amounts in question.  It is one of the more complicated credits to compute.  The amount of credit can be reduced if you received certain types of nontaxable pensions, annuities, or disability income.

 

The amount of credit you can claim is generally limited to the amount of your tax. Use the Credit Limit Worksheet in the Instructions for Schedule R to determine if your credit is limited.

 

So how does a taxpayer end up in the situation to be able to claim a Schedule R credit?  It’s very rare, but if you have taxable disability income, be sure to check in case you do qualify.

 

 

___________________________________________________________________________________________
Below are some links that may help:

http://www.irs.gov/pub/irs-pdf/f1040sr.pdf
http://www.irs.gov/pub/irs-pdf/i1040sr.pdf
http://www.irs.gov/publications/p524/index.html
http://www.irs.gov/pub/irs-pdf/p554.pdf

Posted on by Michael Siebert

Some Hidden Truths About the Standard Mileage Rate

Lego 4996 with Yellow Car

Photo by Yul B Karel at Flickr.com

Hello again.  Mike here.  Today I am going to discuss some issues regarding automobiles.  Don’t worry—I won’t get too crazy with the details as one could write an entire novel on this subject.  It will be rather minor things that can have a big impact on your tax return.  Also keep in mind that this is geared towards self employed taxpayers who use their auto for business and report income and expenses on Schedule C and not necessarily employees who use their vehicle for business and report it on a Form 2106.

 

Let’s get started with some numbers.  The 2012 Standard mileage rate is 55.5 cents per mile.  It is expected to be 56.5 cents per mile in 2013.    A taxpayer can either deduct actual costs incurred by the taxpayer’s automobile, or use the standard mileage rate method to calculate the amount deductible by business use.

 

Most people use the standard mileage rate for whatever reason – it produces more of a tax benefit or he or she has not been keeping track of actual expenses.  What makes up this seemingly arbitrary 55.5 cents(2012) or 56.5 cents (2013) per mile anyway?  The IRS says that depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees all make up this cents per mile figure.

 

Where most people jump off the diving board too early is figuring the costs NOT included in the standard mileage rate.  These are costs IN ADDITION to deducting the standard mileage rate and it is applied using the business percentage of the vehicle.  Parking fees and tolls are applied 100%.

 

These costs include:

Interest Expense
Personal Property Taxes
Parking Fees
Parking Tolls

 

Let’s do a quick example to demonstrate your tax savings.   A single, self employed individual (we’ll call her Mary) makes $50,000 doing a catering business.  Her cost of goods sold is $25,000 making gross income $25,000.  She records 20,000 business miles out of 25,000 miles for the year.  The overall balance due for this taxpayer is $2,061.  Keep it simple here; don’t worry about dependents, adjustments to income, credits, etc.

 

She just records her mileage and nothing else because that is what she has been doing for years.
However, after talking to her astute accountant, she later points out that she paid $100 parking fees, a few tolls at $50, $300 in interest on the car, and paid considerate personal property taxes of $308.

 

The parking fees and tolls get added dollar for dollar to the standard mileage rate calculation.  The interest and the personal property taxes are added by the business percentage or 80% (20,000 business miles/25,000 total miles).  This “extra” $636 ($100 parking fees + $50 tolls + (80% * $300 interest) + (80% * 308 personal property tax)) is added IN ADDITION to the business mileage calculation.
After adding to additional information to the automobile, her balance due becomes $1,922.

 

Her tax savings are $139 ($2,061 – $1,922).

 

Happy Savings!

 

-Michael

 

P.S. Attached is a 2012 auto expense worksheet that will help you organize your automobile expenses and help you decide whether to do the standard mileage rate or actual expenses method.
2012 Auto Expense Worksheet

Posted on by Michael Siebert

A Great Time in Chicago! – The 2013 Midwest in Motion Seminar

Photo by Michael R. Siebert

Hello everyone.  Mike here.  On the way up from the elevator to our office, I overheard two young ladies conversing about their trip to Atlanta over the weekend.  Later on in the day, a CPA on our floor told us about his upcoming vacation to the Philippines—certainly a fun time to be desired.  Near the end of the day, Jan told me she was going to Florida on a business trip with her husband.  At this point, I’m thinking in my head “Oh come on!  Everyone is leaving Missouri except me!”

 

Fortunately in the mail we received an invitation to the 2013 Midwest In Motion Education and Networking For Tax Professionals hosted in Chicago and sponsored by the Illinois and Indiana Societies of Enrolled Agents.  In need of a small vacation, and especially in need of a grasp on the Patient Protection and Affordable Care Act, I went up to Chicago for the two day symposium (Ok you got me, I also needed continuing education credits).

 

Upon my arrival, I was the only RTRP (Registered Tax Return Preparer) in the room full of Enrolled Agents; I felt like a fish out of water at this point.  But as I settled in and conversation naturally bloomed, I could not have felt more comfortable.  Everyone was extremely nice and friendly and I felt like I belonged in the tax industry.

 

The two speakers, James R. Hasselback, PhD, and Robert E. McKenzie, JD, EA, were great and very articulate.  They discussed such topics as the healthcare act, cancellation of debt, bankruptcy, audit reconsideration, and Schedule C hotspots.  It’s hard to stay attentive at an all day seminar and they made it easy.

 

But the real fun was after the seminar.  Karen Miller of Eberhart Accounting Services, P.C. located in Bolingbrook Illinois was kind enough to show me around Chicago.  We took a walk along Lake Michigan and snapped a few pictures.  What a beautiful city.

 

Furthermore, we went to the Navy Pier and rode the big Ferris Wheel.  This was certainly a “Kodak Moment” as the dusking sun created some nice illuminations off the city skyline.

 

For someone who doesn’t get out as much as I should (because I’m too busy reading tax law I guess), a change in scenery was definitely in order to expand my horizons.  I am very young to be in this industry—as I write this I am 24 years of age—and I plan to get my Enrolled Agent license by the end of December 2013.  This event sparked this notion and I am truly grateful to have been a part of it.

 

Thank you again to the Illinois and Indiana Societies of Enrolled Agents and a very special thanks to Karen Miller of Eberhart Accounting Services, P.C.  I would also like to thank Ana G., Bill B., and Jeff S. and the speakers, James Hasselback and Robert McKenzie.