Cantrell CPA Services, LLC

Federal Tax Withholding Problems Ahead - More Worries from the Expiring Bush Tax Cuts

Every day we seem to have more and more bad news for taxpayers regarding the coming expiration of the Bush Tax Cuts.  Another really worrisome part of the discussion that we will address today is the impact on Federal withholding tax on paychecks next year.  

The 111th Congress punted addressing any extensions of the Bush Tax Cuts until after the November 2nd election next week.  They planned either to debate the extensions in the lame duck session or pass them on to the 112th Congress next year.  The problem with this strategy is that it may offer aid to Americans for their 2011 income tax returns that are filed at the beginning of 2012, but it won't save American workers from increases in their Federal withholding on each paycheck next year until the extensions are passed.

A Bloomberg article today warned of reduced paychecks for American workers as the IRS adjusts the withholding tables for January.  The problem is that the IRS can't just wait until the Congress settles the issue and then prepare the adjustments.  They have to act now and go ahead and assume that the tax cuts are going to expire as planned.  So the IRS will start preparing the adjusted tables for submission to employers prior to January 1st.  At that point employees are going to immediately see a decrease in the amount of take home pay at every pay scale.  Bloomberg calculated that a married couple making approximately $80,000 per year could lose around $200 per semi-monthly paycheck to Federal withholding in January.  

It takes the IRS time to adjust these tables.  So, even if Congress passes the extensions around year end, it could take at least a month (or maybe two) for the new rate tables to be issued.  During that time, employees will see less cash in their pockets.  I guarantee this will result in a lot of phone calls to payroll preparers.  Most employees know what they should be receiving pretty close to the penny with each paycheck.  So when something this big happens to their net pay, they start looking for someone to blame.  Employers need to inform employees before the end of the year to expect this reduction in net pay.  This will help avoid some of the "sticker shock" when the first checks are issued.  You should explain to employees that the withholding tables may be slow to change after the tax cuts are extended.

A lot of employees live paycheck to paycheck.  This type of change will require these people to plan ahead to make sure they have adjusted their expenditures to handle whatever reduction in pay they will see.  Good luck to us all!

Tax Trouble Ahead for Families

Today, the national news is reporting that a deficit reduction panel is promoting the idea of removing or at least reducing two darling tax benefits for families - the Child Tax Credit and the Mortgage Interest Deduction.  Unlike many targeted credits and deductions that have limited impact on specific groups of taxpayers, these two tax incentives are very broad in their reach. 

The Child Tax Credit has been responsible for putting a lot of dollars in the hands of taxpayers around tax refund time.  The joy of this credit has been that it was not only refundable up to the amount of income tax shown on the individual tax return, it also refunded Social Security and Medicare tax up to $1,000 per qualifying dependent child on the return.  The impact has been huge across all income levels - talk about some serious stimulus payments.  But, the deficit reduction panel doesn't believe the government can afford this tax incentive.  The real question is can a dollar left in the hands of a taxpayer to spend on whatever they want generate more economic stimulus for the overall economy than a dollar paid to the Federal Government.  But, regardless, removing this tax credit will be a $1,000 per child tax increase for every family receiving the credit regardless of income level.  The Child Tax Credit is already going to be cut in half at year end if Congress and the President don't extend the Bush Tax Cuts.  This notice from the deficit panel may just be a shot over the bow to families that they may not get the extension; and this expiration may be the easiest way for them to at least get a reduction in the credit.

The Mortgage Interest deduction has been a bright star for the housing market for years.  The tax savings calculated for those taxpayers that itemize and can use the deduction have helped them afford their annual mortagage payments.  This deduction has always been critical for families that want to itemize at all.  Most families without home mortgage interest usually don't have enough itemized deductions to exceed the standard deduction that all taxpayers get.  So, without this deduction, the benefit of the other itemized deductions will be minimized and the standard deduction will be far more prevalent on tax returns.  Most people that itemize have, state taxes, mortgage interest, and charitable contributions.  These big three usually push taxpayers over the threshold for itemizing.  Remove one of them and the others don't usually cut it.  This is a big threat to the housing market at a very tenuous time.  Removing the deduction will simply result in one less incentive for a taxpayer to purchase or build a home.  The real estate market sure needs one more negative.

Whatever, your political take on these two tax incentives.  The reality is that they will impact families at all income levels.  That means we all need to plan for their impact financially on our own personal budgets.  This is definitely one threat from Washington that could get into every wallet.  The earliest that these reductions could take place is January 1, 2011.  So, understand that could me a substantial decrease in your tax refund in early 2012.  So don't run up some crazy amount of credit for Christmas next year and expect a big refund will pay it all off.  It may not.  Once again - Stay Informed so you don't get in trouble.

Healthcare Reform - Presentation Notes

 A lot of people were apparently interested in the information in my podcast entitled - Healthcare Reform - What's actually in that bill?!? .  So I thought I would provide a pdf copy of the presentation that I gave on the healthcare bill in Shreveport in August.  I hope you all find this info useful.  It was really a blast presenting it at the Summer Institute for LaHFMA.  A special thanks to that wonderful organization for all their support and the opportunity they provided to speak at the conference.

Download PPACA of 2009

What Happens When the Bush Tax Cuts Expire - Podcast Episode 5

In January 2011, the Bush Tax Cuts from 10 years ago are set to expire.  This will result in some significant potential tax increases for all American next year.  In this podcast I will discuss a few of these issues that will affect the most taxpayers.  The following is a summary of the topics in the podcast:

• The tax rates revert back to rates that were in effect prior to the Bush Tax Cuts.  The 10% bracket will return to 15%; the 25% bracket will increase to 28%; the current 28% bracket will increase to 31%; the 33% bracket will increase to 36%; and the highest tax bracket will rise from 35% to 39.6%.
• The marriage penalty will return resulting in married taxpayers having a reduced standard deduction and lower income levels taxed at higher tax rates than would be paid by two single taxpayers.
• The cap on capital gains income rises from 15% to 20%.  The 15% cap on dividend income is eliminated.  So dividend income will be taxed once again at the highest tax rate for a taxpayer.
• The 55% "Death Tax" returns for estate value over the $1 million Federal exemption amount.
• The child tax credit will be cut in half.  The credit for each child is reduced from $1,000 to $500

The sunset of these sections of the tax code could have dramatic effects on the tax bills of most Americans.  So it is very important that we all inform ourselves and plan for their effects.  Have a great day!

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Doing It Right the First Time

This last weekend I finished the few remaining odds and ends of the floor replacement that I did on my back porch. When we built the original porch floor just three years ago, we chose the easy quick route. We simply put down plywood and painted it with porch paint. This was our attempt at a "creative" way of throwing down a floor without having to go through all that boring research into what works best and avoids all the hidden problems. Well that worked ok for the first couple of years. But, over the last year with periods of extended heavy rains, it began rotting away. It was a lot harder tearing it all out and doing it right the second time.

I am reminded of a recurring problem that I have seen with my small business clients. Most small business owners know all the ins and outs of their business' operations. But they couldn't care less about the tedious bookkeeping chores that seem to be daily burdens. So the either just leave those jobs for someone else or they approach the job with the "lick and a promise" mentality. The post some checks and other bank activity and never get around to others. The don't find the time to reconcile the bank account. They run into problems and set them aside. Then they get to the end of the year with a mess that they turn over to somebody to turn into compliant tax returns or financials that a bank will accept.

The missing or half-recorded transactions originated months (or years) ago. The owners have an impossible task of explaining in detail events that happened way in the past. This usually results in "ripping up" the general ledger just like I did my floor and trying to put it right. It takes twice the work and is usually very expensive.

So do as I say not as I did. Take the time to do the tedious hum-drum work as you go along. It is a lot cheaper to call your CPA when you are confused about how to deal with a transaction than to pay them to sort it out eight months later. Good luck!

End of Tax Season Musings

The October 15th individual deadline tolled the bells for the official end to the 2009 tax year.  It is sort of funny that we are only about two and a half months from starting up with 2010.  Each year, I start really looking forward to the beginning of tax season.  It offers me a great opportunity to catch up with my clients and friends.  I have a number of clients from various parts of the US and world and it gives me a chance to get back in touch with them all.  I get to find out who had babies and who's just gotten married.  It gives me a chance to talk to my small business owner clients and friends (these are pretty much always the same) about what worked and what changes could help make next year more profitable and more efficient. 

This tax season will mark my 4th since I started my own firm in 2007.  I describe myself as a one man CPA band.  My staff consists of myself and some part-time filing help from my 15 year-old, Noah.  But, we get what we need to done.  It has been a wonderful 3 and a half years so far.  The personal relationships that I have been able to build with my clients have been so rewarding.  And I can never overstate how much it has meant to my family for me to be available to them when they need me.  I am a firm believer that all business is personal.  It is those strong relationships that help me understand my clients - where they come from and what they are really trying to do in their lives.  From there, I am a better CPA because I have a deep concern for their well being and a sincere desire to see them all succeed and reach each and every goal they have.  My pet peeve of all pet peeves is hearing someone say "no hard feelings it's just business - nothing personal."  It is all personal.  We relate with each other as humans not machines. 

So my goal for the next tax season (and pretty much for my firm in general) is to be a better friend and CPA for all my clients.  Hopefully, I can continue to earn the awesome trust they have shown towards me these few years.  Thanks to you all and God Bless!

Healthcare Reform - What's actually in that bill?!?

In March, President Obama signed into law the Patient Protection and Affordable Care Act.  This legislation sparked a firestorm or controversy for a year before it was finally passed.  But, even as we sit here almost seven months after its passage, most Americans only have a faint idea of what is really in this bill.  In today's podcast episode, I have attempted to shine the light on a few points of interest.  I hope this will assist you in gathering the information you need to make decisions for your families and businesses.  This podcast will be available on iTunes as soon as I have completed the transfer of my feed to a different hosting service where I can get more memory and offer more podcasts at a time on iTunes.  But, until then, please enjoy right here!

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Lifting the Veil on Financial Statements - The Income Statement - Podcast Episode 3

This episode will continue my explanation of the two basic financial statements of any business - the balance sheet and income statement.  In this episode I explain the income statement and how the information can be used to increase the efficiency and profitability of your business.Episode3-CantrellCPAServices

This and all episodes are also available on iTunes in the podcast section.  However, only the three latest episodes are kept on iTunes due to space limitations at this time.  But, all episodes can be downloaded from this website at any time.  Good luck and happy listening!

Pitfalls in Purchasing a Business

Sometimes it feels like opportunity just falls right out of the sky and right in your lap. You are approached by an acquaintance that runs a business that you have been interested in for years. This person is ready to get out and sell and approaches you to see if you might want to take over. At this point, your excitement at the prospect takes over. You begin dreaming about all the exciting ideas you have had in the past and how you can make them all come true in this new venture. But it is very important to stop, take a breath, and spend some time making sure that you are making the right decision and avoiding the many pitfalls lurking just around the corner. I want to throw out a few issues to consider to help with this discernment process.

First, never just leap into a purchase without looking at some historical financial information. This will help you get a feel for the cash flow ability in the operation. From this you can prepare some realistic operating income and cash flow projections. These projections are not only for your potential lenders. They are very important for you to decide whether you have the capital necessary to survive. So always make sure that all your estimates are as realistic as possible. Historical information in the form of tax returns and financial reports is the best place to start in building your projections.

When you request information some items to include might be the following:

1. Income Tax Returns for last three prior years.
2. Year-end financials for those same years.
3. A customer list and sales history report for the top ten customers. This will help you get an idea if what type of customer base you are inheriting.
4. An aged list of receivables. This will give you an idea of the average number of days the business carries a receivable before it turns into cash. Remember you are going to need sufficient operating capital to keep everything running until your receivable are collected.
5. Request a list of any actual or potential or actual tax liens attached to the property you are buying.
6. Request an employee list with job titles and rates of pay. Payroll costs are almost always at the top of the list of expenses. So you must use everything you have to make sure these costs are managed in the most efficient way possible.

 

This list is by no means all you will need. But it is a great starting point. This list is intended to help you identify the areas of greatest risk in the business so you can put together a plan that works or decide if the business is viable.

Any discussion of purchasing a business must include debt and how to avoid getting killed by it. Before signing any purchase agreement, you must put together a financing plan for the acquisition.

Once you have an idea of how much capital you will need to maintain operations and cover all the costs you will incur until the business starts generating enough cash to stand on it's own feet, you will need to look for a financing source. Banks like lending money to small businesses with hard assets and property as collateral. It is rare - very rare - to find a lender that will loan money based on potential future earnings.

But, it isn't enough to be able to get a loan. You must be able to make the payments. Your business will need to have enough profits to pay for all the principal payments as they come due. Careful preparation of amortization schedules based on information obtained from discussions with lenders is critical.

The overriding theme in this article is the importance of having sufficient cash resources before making any commitments. Cash is the life's blood of every business venture.

The excitement that comes from owning your own business is only matched by the fear that you won't make it. But the best cure for this fear is information. Good luck with all your business adventures.

Podcasting on iTunes

I am very proud to announce that my podcasts are available on iTunes.  They can be downloaded and dropped on your iPod or iPhone for your easy listening pleasure.  I hope they can be both informative and entertaining - at least as entertaining as any accounting and tax podcast could be.  Just search for Cantrell CPA Services on the iTunes store and hopefully you will find subscribing to the feed worth your while.  Thanks to all!