Try a Different Gift Idea This Year

Are you searching for gift ideas for the holiday season? It’s never easy, especially for older children and teenagers. They’re too old for toys, but do they really need another sweater or computer game?

Have you thought of giving financial gifts? They may sound less exciting, but in the long run they'll be much more appreciated. And financial gifts can grow in value over time.
Here are a few ideas you might want to consider.

• Fund a child’s Roth IRA. If your teenagers worked this summer, chances are they spent their earnings. But they can use your gift to open a Roth IRA, up to the amount of their earnings or the regular $5,000 limit. The IRA will grow tax-free, and by the time the teenager retires, your gift should have compounded to a substantial tax-free retirement fund.

• Fund a 529 education account. Anyone can contribute to a child’s Section 529 college savings plan, which accumulates savings for tuition and living expenses. There are no income restrictions on the donor, and few practical limits on the amount that can be saved. Your gift will grow tax-free in the plan.

• You could also make your gift to a Coverdell education savings account. These IRA-like accounts also grow tax-free, but there’s a limit on total contributions of $2,000 a year from all sources. The amount of your gift may also be limited, depending on your income.

• Consider this gift if you just want to encourage an interest in saving and investing. Buy a small number of shares in a mutual fund and package them with a book on basic investing. The child can watch the investment grow over time and can enjoy dividend payouts too. Modest amounts of investment income can be tax-free to children, although the kiddie tax may apply at higher levels.
  

Federal Tax Alert: Tax Advantages of Accelerating Purchases of Depreciable Assets Into 2009

This is the first of a series of blogs that discusses the tax advantages that may be realized by accelerating planned depreciable asset purchases into the 2009 calendar year to take advantage of bonus depreciation.

Buy Depreciable Property and Place it in Service This Year to Lock In Bonus First-Year Depreciation

Unless Congress acts, bonus depreciation deductions under IRC § 168(k) in the placed-in-service year equal to 50% of the adjusted basis of qualified property won't be available for most depreciable asset purchases made after 2009. Thus, enterprises planning to purchase new depreciable property in the 2009 calendar year or the 2010 calendar year should try to accelerate their purchases into the 2009 calendar year, if: (a) doing so makes sound business sense and (b) the tax advantage from increasing depreciation expense in 2009 is greater than the tax disadvantage of reducing the depreciation claimed in future tax years.

Caution: The highest individual income tax rate is scheduled to increase from 35% in 2009 to 39.6% in 2011. The higher tax rate decreases the tax advantage of accelerating purchases into 2009 because post-2010 deductions will reduce tax by a greater amount than will pre-2011 deductions.

Here's how the rules work:

The adjusted basis of qualified property is reduced by the additional 50% depreciation deduction before computing the amount otherwise allowable as a depreciation deduction for the tax year and any later tax year. If IRC § 179 expensing is claimed on qualified property, the amount expensed “comes off the top” before the additional 50% first-year depreciation allowance is computed. Then the taxpayer computes regular first-year depreciation (and depreciation for future years) with reference to the adjusted basis remaining after expensing and after the additional 50% first-year allowance. There is no AMT depreciation adjustment for property written off under IRC § 168(k).

Example: ABC, Inc, a calendar-year business, needs to buy $500,000 of five-year MACRS property. If it does so before Jan. 1, 2010, and places the property in service before that date, ABC may claim a first year depreciation allowance of $300,000 [($500,000 × .50 = $250,000) + ($500,000 − $250,000 × .20 = $50,000)]. If it waits until 2010 to buy the assets, and bonus first year depreciation isn't extended, ABC’s regular first-year depreciation allowance using the half-year convention would be only $100,000 (20%).

The bonus depreciation deduction is determined without any proration based on the length of the tax year.

How to qualify for bonus depreciation. In general, an asset purchased in 2009 qualifies for the bonus depreciation allowance if:

• it falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by IRC § 197; qualified leasehold improvement property; or certain water utility property;

• it is placed in service before Jan. 1, 2010. (Certain property with a recovery period of 10 or more years and certain transportation property may qualify if it is placed in service before Jan. 1, 2011); and

• its original use commences with the taxpayer.
  
  

The 50% additional first year depreciation allowance applies to qualified property unless the taxpayer “elects out.” The election out may be made for any class of property for any tax year, and, if made, applies to all property in that class placed in service during that tax year.

Caution: A taxpayer that “elects out” of additional first-year depreciation for a specific class of property is subject to the AMT depreciation adjustment for that "opt-out class."

Last Year for Extra-Generous Luxury Auto Depreciation Limits?

The first-year depreciation deduction for new vehicles that qualify for bonus depreciation is $8,000 more than the first-year depreciation limit that would otherwise apply.

For new vehicles bought and placed in service in 2009, and that qualify for bonus first-year depreciation, the boosted first-year dollar limit is $10,960 for autos (not trucks or vans), and $11,060 for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis). The regular first-year luxury auto limits (e.g., for used vehicles) are $2,960 for autos and $3,060 for light trucks or vans. The above boosted dollar amounts apply only for vehicles bought and placed in service before 2010. As a result, taxpayers thinking of buying a new auto, light truck or van for trade or business use should buy the vehicle and place it in service this year if they want to maximize first-year deductions.

Observation: Heavy SUVs—those that are built on a truck chassis and are rated at more than 6,000 pounds gross (loaded) vehicle weight—are exempt from the luxury-auto dollar caps because they fall outside of the definition of a passenger auto. Under IRC § 179(b)(6), not more than $25,000 of the cost of a heavy SUV may be expensed under IRC § 179. The balance of the heavy SUV's cost may be depreciated under the regular rules that apply to 5-year MACRS property (e.g., a 20% first-year depreciation allowance if the half-year convention applies for the placed in service year). However, with the 50% first year bonus depreciation available for qualified assets bought and placed in service in 2009 (in addition to the $25,000 expensing allowance and regular depreciation), taxpayers buying and placing in service new heavy SUVs in 2009 may be entitled to write off most of the cost of the vehicle.

Negotiate Value - Not Fees

How many times do you meet with a prospective client and they say your fees are too high? How many of your current clients are asking for a fee reduction because of the recession or they just do not have the budget for your services? Most of the time you respond, "What can you afford or what is your budget for this project?"

If this is the case, you just set yourself up for a downward fee negotiation! The problem with this type of conversation is you are relying on the buyer's presumed budget and not the buyer's overall budget in terms of value.

Buyers will justifiably seek to get the best deal. (Think how you approach buying a new car.) While they are eager to reduce fees, they are not so eager to reduce value. "Over servicing" is not uncommon in the PR industry. When you over service you provide greater value and do not get paid for the value that is provided! Try this conversation with a general contractor building your new home. You quickly learn the term "change order."

You may hear from the buyer that ABC, PR is willing to do the project at the lower price. Let them! Did you ever win a RFP and really lost? By this I mean the fee was so low you could not make money? Let another PR firm lose money and drain resources. I have only one exception to saying no: Intellectual Capital. The most important asset you have is your people and the intellectual capital they acquire. I may take a project at a lower fee or even lose money (I try and at least break even) if I am gaining intellectual capital for the firm.

So how do you respond to the lower fee request? "Of course fees can be negotiated. What value would you like to remove from the project?" Once you agree to a lower fee without a quid pro quo, you will be expected to do this every time. Walk away!

Next month: "Provide the Customer with a "Choice of Yeses"

Renting Out a Home Office to Your Company

Believe it or not, questions on deducting a home office are still one of the most frequent questions I get. The ability to deduct a home office is tough even if you are the owner of the company. Even if you can qualify for the deduction, itemized deduction limitations and/or the alternative minimum tax may eliminate any tax benefit.

The best strategy to deduct a home office is to rent the office to your company. The company can deduct the rent payments as a business expense. True, you as the owner/employee must still pay income tax on the “net” rental income, but no employment taxes are owed. In some jurisdictions such as New York City, there may be even greater tax savings.

The reason this works is because regular or “C” corporations are not subject to the home office deduction rules. Caution: this will not work if you are the owner/employee of an S corporation. A pass-through entity can’t deduct rent paid to an owner for a home office (an S corporation is a pass-through entity).

Here is one possible way of working around the above rule:

1. Have the S corporation require the owner/employee to provide office space as a condition of employment. (Yes, it seems like a “sham” but it needs to be done).

2. Establish an accountable expense reimbursement plan to reimburse you for costs incurred for work.

3. Submit adequate documentation for these costs.

4. Have your S corporation reimburse these costs.

Result: the S corporation reimbursement is a deductible business expense and you have no income recognition or other tax reporting.

Life Insurance Settlements

Besides providing loved ones with a source of funds for income replacement in the event of an untimely death of the family's breadwinner(s), people buy life insurance for a variety of reasons:

· To fund a buy-sell agreement or key person insurance for a business.
· To satisfy a lender's requirement when a loan was made.
· To fund expected estate taxes that might have decreased since the policy was taken out.

Whether it was one of these needs or something else, circumstances change and sometimes people find that they no longer need, or perhaps, can no longer afford, policies that were taken out several years ago.

If this describes your situation, before you allow a term life policy to lapse (or turn in a whole life policy for its cash surrender value), I recommend that you consider whether it might be more beneficial to sell the policy. Known in the industry as a life settlement, selling a policy can sometimes net the policyholder a sufficient sum that's far in excess of a whole life policy's cash surrender value or a term policy's unearned premium.

Although such arrangements are still fairly new, the IRS recently released guidance on the tax results of such a transaction. If you have an unneeded policy that you're thinking about getting rid of or just letting it lapse, I would be glad to talk to you about whether it might make sense to try to sell it instead.

The Service Guarantee

When pitching new business, consider a service guarantee. By this I mean an unconditional money back guarantee. The guarantee should be “If for any reason you are not satisfied with our services, you will receive a 100% refund of the price.” Why do this? There are several advantages: (1) It gives the client/customer an incentive to complain, since 96% of customers will not share their gripes-they will simply switch firms. You should encourage complaints in order to improve your service delivery. (2) This will commit your entire firm to delivering “Total Quality Service” because your money is on the line. And (3) it informs your customer how much better you are then the competition because you are willing to back your promises. Why should the customer bet on you if you won’t?

All things being equal, services with a 100% guarantee will command a higher price than those without. Whether you realize it or not, you are probably doing this already! If one of your customers complained loudly enough, you would most likely refund or not collect the fee. Why not take this covert policy and put it into your agreement so the customer can perceive a higher value in dealing with your firm.

Some PR Value

If you are a PR agency or other service business, here are some thoughts on maximizing your fees in today’s tough economic times.


Premise: Value is based on worth!

Some keys:

1. Fees should be based on fulfilling value, not tasks. Tasks make you a commodity.
2. Value is in the eyes or your client.
3. Billing in units is sure to make you a commodity and less profitable. You will never capture consumer surplus.

Some rules:

Always quote "project" fees not an hourly rate. It opens doors for client discussion. Clients feel they are not always on the clock and this can lead to new work. Project fees are an agreed-upon investment in return for a agreed-upon result. Don't be afraid of using the "change order." The construction industry does it all the time.

Billing rates should be used to measure client profitability, not how you determine value. If a client asks for your billing rates tell them you don't use them to determine price (use the word "investment" instead of price.) Tell them you quote project fees based on many different criteria. If a client has a crisis, are you going to quote them an hourly rate?