Consider the time value of money in making business decisions

Suppose you’re selling your business, and it’s worth $400,000. You’re offered $210,000 down and lump sums of $100,000 at the end of year one and year two. Should you take the offer?

Most people know that $1,000 now is worth more than $1,000 a year from now. Here’s why:

1. Inflation: In a year, a dollar will buy less than it would today.

2. Risk: Over time, the risk increases that some of the money owed you will not be paid.

3. Opportunity loss: Funds on hand could be invested and earning more money.

Present value analysis attempts to quantify these variables. It discounts the value of future funds by estimating inflation rates, risks of loss, and rates of return from alternative investments.

Assume you could earn 2% by investing in a $100,000 CD. Disregarding compounding, in a year your investment would be worth $102,000. Conversely, if you postponed receipt of $100,000 for a year and inflation eroded the principal by 3%, you’d receive the equivalent of $97,000 in today’s dollars. (Note that with 3% erosion, even the $102,000 CD proceeds would be worth only $98,940 in today’s dollars.)

In the opening example, your proposed “investment” (a two-year $200,000 note receivable) would be far riskier than a CD. To compensate, you might decide not to accept anything less than an 8% return. A present value table indicates that at 8%, the discount factors for one and two years are .926 and .857, respectively. $100,000 times .926 is $92,600; $100,000 times .857 is $85,700.

Thus, in today’s dollars, the buyer is offering $388,300 ($210,000 down payment plus $92,600 plus $85,700). Since your business is worth $400,000, you would be selling for $11,700 less than full value.

A similar analysis can be applied to any business transaction involving future payments. For help with the calculations or assistance with any of your business needs, call us for an appointment.

Maris & Associates CPA's

10512 19th Ave SE #101

Everett, WA 98208

www.mariscpa.com

425-338-0414

Plan for a Smaller Refund

Did you receive a big refund check from last year’s taxes? If so, you’re not alone. Many of us deliberately pay extra taxes throughout the year so we can enjoy a nice bonus early the next year. Sometimes it’s insurance against having to come up with extra cash when you file your return. That’s a valid concern. But sometimes it’s just a form of enforced saving. Or perhaps you’ve simply never bothered to adjust your withholding. Those aren’t such good reasons. After all, when you overpay your taxes, you’re making an interest-free loan to the government.

Should you adjust your withholding? Reducing your withholding is as simple as filing a new Form W-4 with your employer. The form comes with a worksheet to figure out how many allowances you should claim. Don’t forget to allow for your other taxable income besides wages, such as dividends or investment gains.

If you’re worried about underpaying tax, there are a couple of rules you should know. Generally, you’ll escape a penalty if you pay, through withholding or quarterly estimated payments, at least 100% of last year’s taxes (110% if your adjusted gross income is over $150,000), or if you pay at least 90% of what you owe for this year.

If you reduce withholding, here are some ideas on how to use your extra take-home pay.

* Contribute more to your employer’s 401(k) plan, especially if your company matches contributions. You’ll enjoy a double benefit because the extra contributions will reduce the tax on your wages as well as provide tax-deferred savings.

* Pay down balances you’re carrying on your credit cards. That’s equivalent to earning interest on your extra payments, often at double-digit rates.

* Put the money in a tax-favored Coverdell IRA or Section 529 plan for your child’s education.

Contact our office if you’d like help figuring out your withholding level for 2011.

Maris & Associates CPA's

10512 19th Ave SE #101

Everett, WA 98208

www.mariscpa.com

425-338-0414

Business Tax Planning

There’s a new twist on an existing option for accelerated write-off of assets you purchase from September 9, 2010 through December 31, 2011. You can choose to expense 100% of the cost of new equipment, such as machinery, some vehicles, and computers under expanded “bonus” depreciation rules.

While this sounds similar to Section 179, which also allows immediate expensing of assets you’d otherwise have to write off over several years, differences between the two methods exist. For instance, the amount of Section 179 expensing you can claim may be limited by your income. In contrast, bonus depreciation can create an operating loss that you may be able to carry back to prior years to generate a refund. Also, bonus depreciation is available only for new assets; Section 179 expensing applies to both new and used assets.

And what about the rules for Section 179? The expensing limit was increased to $500,000. Your deduction begins to shrink if you buy more than $2 million of assets.

Another depreciation break was also extended: the 15-year life for certain leasehold and retail improvements and restaurant buildings and improvements. These assets will no longer qualify for 15-year depreciation after 2011.

Check out this tax break if your business has fewer than 25 full-time employees: You might qualify for a tax credit of up to 35% of employer-paid health care costs.

We can help you with your tax planning. Please give us a call and see us on our website at www.mariscpa.com. Thanks for reading.

Maris & Associates CPA's
10512 19th Ave SE #101
Everett, WA 98208
425-338-0414
info@mariscpa.com

How to improve your credit score

The days of easy credit, offered to anyone who can breathe, are history. In this sluggish economy, lenders want to know whether borrowers are likely to stay current on their loans, mortgages, and credit card accounts. Banks and other lending institutions are looking more closely at credit scores, the numbers that (in theory at least) predict the likelihood that a borrower will default on his or her outstanding debts. As a result, knowing your score and ensuring that it's climbing toward the upper percentiles should be a part of your regular financial planning.

The most commonly used credit score is the FICO, developed by Fair Isaac Corporation. FICO scores range from a low of 300 to a high of 850 and may be obtained (for a fee) at myfico.com. The score is considered a predictor: the higher the score, the more creditworthy the consumer. Not so long ago, a score that just nudged the 700 mark would bring lenders to the table with their lowest interest rates. Over the last few years, however, higher scores are often required to get premium rates.

About 35% of the FICO score is derived from your payment history, and another 15% comes from the length of that history. Ten percent of the score is based on the types of credit you use—credit cards, retail accounts, and other types of loans. Another 30% takes into account the amounts you owe as a fraction of your available credit. These numbers and others are fed into the FICO calculator to determine your overall score.

To raise that score, focus on the numbers that matter most:

* Avoid late payments. If you must juggle payments because of cash flow problems, try to limit the number of past-due accounts. A history of late payments on several accounts will hurt your score more than delinquencies on a single account.

* Mix it up. Spread your debt over several types of accounts: installment loans, credit cards, and accounts with retail merchants.

* Curb spending. Keep your outstanding balances to less than 50% of your available credit.

* Check your credit report regularly. By law, you're entitled to a free annual credit report from the three main credit-reporting agencies. Check the report for errors, and follow up to ensure that problems get fixed. One vendor's erroneous reporting can tank your score.

Good credit is a valuable commodity. Guard it carefully.
 
Maris & Associates CPA's
10512 19th Ave SE #101
Everett, WA 98208
425-338-0414
info@mariscpa.com

Choose the right filing status

While gathering information to complete your income tax return, you may give little thought to your filing status. But there's a reason "filing status" choices appear at the beginning of tax forms: They're important.

Why? Because filing status can impact exemptions, reportable income, deductions, credits, tax rates, liability, the type of form you file, and whether you need to file at all. In addition, some states require that you use the status reported on your federal return, which can affect the amount of state tax you pay.

Here are facts to consider when determining filing status:

 1. Your status generally depends on whether you're married or single on the last day of your taxable year (typically December 31). In cases of divorce or separate maintenance decrees, the laws of your state determine whether you're considered married or single. Same-sex marriages are not recognized for federal income tax purposes.

 2. As a married couple, you can choose joint or separate returns. When you file separately, you can change your mind later and amend your return to file jointly. However, you can't switch from joint status to married filing separately after the due date of the original return.

 3. If you were widowed during the year and have not remarried, you have the option of filing jointly with your late spouse. When you're widowed and have dependent children, you can continue to use joint tax rates for two additional years following the year your spouse died.

 4. Head of household status is intended for single taxpayers with dependent children. It may also be available when you're single and maintaining a separate household for a parent - including one living in a nursing home.

If you need more information or if you have questions about your filing status please contact us.

Thanks for reading, 

Maris & Associates CPA's

10512 19th Ave SE Suite 101

Everett, WA 98208

425-338-0414

info@mariscpa.com

Overview of Key provisions in the 2010 Tax Relief Act

Here’s an overview of the key provisions in the law:

 

Tax rates. The existing tax rates established in the 2001 and 2003 tax laws will continue for all taxpayers through 2012. This means the top tax rate for 2011 and 2012 will remain at 35% instead of reverting to 39.6% as it would have done had the 2010 Tax Relief Act not passed.

Capital gains and dividends. The top rate for long-term capital gains will remain at 15% for taxpayers in all but the two lowest ordinary income brackets; those taxpayers will continue to have a 0% rate on capital gains. Dividends will continue to be taxed at the 15% and 0% rates instead of reverting to ordinary income rates as high as 39.6%.

Itemized deductions and personal exemptions. Higher-income taxpayers will not have their itemized deductions limited and their personal exemptions phased out.

Education tax breaks. The law extends the American Opportunity Tax Credit through 2012. The income exclusion for up to $5,250 of employer-provided education assistance to employees is continued for two years. The higher contribution limit of $2,000 and other enhancements to Coverdell Education Savings Accounts were extended for two years.

Alternative minimum tax (AMT). The AMT was given another “patch” for 2010 and 2011, a move that will keep the tax from hitting millions more taxpayers. For 2010, the exemption amount is $47,450 for individuals and $72,450 for married couples filing joint returns. For 2011, the exemption is $48,450 for singles and $74,450 for couples. Without this adjustment, the exemption amounts for 2010 and 2011 would have been $33,750 for singles and $45,000 for couples.

Payroll tax. A new tax break is created for workers who pay social security taxes. For 2011, the employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. Self-employed individuals will pay 10.4% on self-employment income up to $106,800. Employers will continue to pay 6.2% on employee wages. This payroll tax rate cut does not affect the Medicare portion of payroll taxes for either employees or employers.

Extenders. Tax breaks that have come to be called “extenders” because they’re typically extended retroactively every year, but just for a year, are again extended by the new law.

Effective for 2010 and 2011 returns, taxpayers have the option of deducting state and local sales taxes instead of state and local income taxes. The deduction for up to $4,000 of higher education expenses and the deduction for teachers who buy classroom supplies are extended. Those age 70½ or older may again contribute up to $100,000 tax-free from an IRA to a charity. Note that the deduction for real estate taxes paid by nonitemizers was not extended.

Business provisions. The law extends the research tax credit for 2010 and 2011, and it extends the work opportunity tax credit through 2011. Bonus depreciation is increased from 50% to 100% for qualified business purchases made from September 9, 2010, through December 31, 2011. 50% bonus depreciation will be available in 2012.

Estate tax. The estate tax was perhaps the most contentious issue in the law, and it came close to unraveling the deal. The compromise that was agreed upon restores the estate tax retroactive to January 1, 2010, and continues it through December 31, 2012. It establishes a top rate of 35% and an exclusion amount of $5 million ($10 million for married couples). Estates of persons who died in 2010 have the option of applying the estate tax and receiving a step-up in basis on property passing to heirs or having no estate tax but using a carryover of the decedent’s basis in property.

The 2010 Tax Relief Act also provides an additional 13 months of benefits to the unemployed.

Most of the provisions in the new law will probably go unnoticed by the majority of taxpayers since the law basically keeps things as they were for another two years. However, there are several significant changes that are likely to affect you or your business. For more information and planning guidance as you begin sorting out your tax situation for 2011, contact our office.

Maris & Associates, CPA's 

10512 19th Ave SE #101

Everett, WA 98208

425-338-0414

www.mariscpa.com

http://www.facebook.com/pages/Maris-Associates-CPAs

There's still time to make 2010 tax-free gifts

The tax code allows you to give away up to $13,000 each year to as many people as you want, without triggering gift tax. If you and your spouse "split" your gifts, you can double this $13,000 annual gift-tax exclusion and give $26,000 per recipient.

If you're thinking of sharing your wealth, here are some important gift-giving considerations.

* All gifts during the year, including birthday and holiday presents, count toward the $13,000 (or $26,000) annual gift tax exclusion. For example, say you give a $500 birthday present to your grandchild. You may give another $12,500 to that grandchild during the year without triggering the need for a gift tax return.

* A gift made by check isn't complete until the recipient actually deposits or cashes the check. Plan accordingly when making year-end gifts, especially if you want such gifts to be counted toward this year's gift tax exclusion.

* For a gift to be valid, you must part with ownership. Pay special attention to gifts of stock in the family business or gifts of your personal residence.

* Three types of gifts are exempt from the $13,000 limit. You can make unlimited gifts for tuition expenses or medical expenses on behalf of any person, provided you make the payments directly to the educational institution or health care provider. You can also make unlimited gifts to your spouse.

If you would like to discuss the benefits of making tax-free gifts, please contact our office.

Maris & Associates, CPA's

10512 19th Ave SE #101

Everett, WA 98208

425-338-0414

info@mariscpa.com