Buying A Business Creates Tax Issues

August 15, 2011

Since there are no federal income taxes imposed on the purchase of a business, as the buyer of an existing company your focus may be on other areas, such as obtaining credit or valuing inventory.

Yet tax issues can impact your to-buy-or-not decision. Here are two examples.

Outstanding tax liabilities. It's generally true that when you buy the assets of a business (as opposed to the capital stock), you're not liable for prior debts. However, depending on the laws of your state, you could be responsible for unpaid sales, excise, or payroll tax.

Steps to protect yourself include a signed statement by the seller about pending or ongoing tax disputes, notifying the appropriate state office of the purchase, and requesting a certificate or other verification from the state regarding investigations or delinquencies.

You can also ask the seller to provide Form 8821, "Tax Information Authorization," so you can check tax records with the IRS.
Allocating the cost of assets. When you buy the assets of a business, you may be required to file Form 8594, "Asset Acquisition Statement," in the year of the purchase. Form 8594 shows how the sales price is split up between various types of assets.

Why does it matter? Because different assets are treated differently on your new business's tax return. For instance, inventory can be written off as you sell goods, while noncompete agreements have a longer life.
Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com before you finalize that business purchase. We can help you structure the deal to your best advantage$

Add to your retirement plan vocabulary

Add to your retirement plan vocabulary
The definition of retirement may be in flux, but the vocabulary describing your retirement plans remains the same. Here are three common terms.

Catch-up contributions. When you're age 50 or older, you can choose to make additional contributions to your retirement plans above the usual annual limits.

For 2011, maximum catch-up contributions are:
$5,500 when you participate in a 401k, 403b, 457b or SARSEP.
$2,500 for your SIMPLE IRA or SIMPLE 401(k).
$1,000 for traditional or Roth IRAs.
Hardship withdrawals. The IRS defines a hardship as an immediate and heavy financial need such as medical or funeral expenses, and your retirement plan spells out if and when you can take hardship withdrawals.

Remember, the amount you withdraw is not a loan, so you won't be able to pay the money back into your account. Instead, hardship distributions are income to you, and can be subject to a 10% early withdrawal penalty. In addition, you may be barred from making contributions to your account for six months after taking a hardship distribution.
Rollover. A rollover is a transfer of assets from one retirement plan to another. To keep the transaction tax-free, you generally must deposit the assets into the second plan within 60 days.

Note that not all withdrawals are eligible for a rollover. Hardship withdrawals are an example of rollover-ineligible funds.
Are you uncertain of the meaning of some of the terms in your retirement plan documents? Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com We're here to answer your questions with plain-English explanations$

Should I buy or rent a house?

August, 2011
From articles in respected financial journals to spots on late-night television, real estate hawkers and investment gurus have touted the benefits of homeownership. "Don't throw your money away on rent," they admonish. "Interest rates are headed up. Now's the time to buy." "After all," they suggest, "buying a house is a surefire way to build wealth."

Unfortunately, millions of Americans whose homes are now in foreclosure have learned — the hard way — that in the real world, nothing is surefire. While it's true that buying a house has been a great way to build wealth for many people, homeownership isn't for everyone. For some folks, continuing to rent an apartment or house may be the wiser choice. Renting isn't always a bad idea.

Here are three questions to consider when evaluating whether to rent or to buy a home.

How long will I live there? If flexibility is an important consideration, think twice before taking on a mortgage. As a rule of thumb, expect to live in a home for at least five years to break even. Of course that calculation depends on the term of the mortgage, closing costs, and the size of your down payment. But if your short-term plans include moving — even across town — renting may be a better option.
How much can I offer as a down payment? If at all possible, you want to avoid the requirement for private mortgage insurance or PMI. To get that break, you'll need a down payment of at least 20% of the purchase price. If that percentage isn't feasible for you, shoot for a down payment of at least 10%. The higher the down payment, the smaller the mortgage, the faster you build equity.
Can I afford the monthly payments? Some lenders, especially prior to the housing meltdown of 2008, were notorious for offering mortgages at the very limits (and sometimes beyond) of a family's ability to pay. If you're considering homeownership, take a hard look at whether you can cover the costs — month in and month out — of mortgage principal and interest, utilities, maintenance, taxes, insurance, and all the other costs for which you'll be responsible. In general, expect about 80% of your monthly payments to cover interest alone in the first five years of a 30-year fixed rate mortgage. That's money you'll never see again, like rent.
Contact our office at (949) 453-1521 or taxalert@maxwellcompany.com if you'd like more details about this or other financial planning matters$

Charitable contribution reminders

December 20, 2010

Are thoughts of charitable contributions dancing in your head this holiday season?

If you itemize, you may also be thinking of tax deductions. Here are tips to make the most of your generosity.

Choose a qualified charity. To be eligible for a deduction, the organization you contribute to must be qualified. In general, that means charities established for religious, charitable, scientific, literary, or educational purposes. For example, nonprofit hospitals and volunteer fire departments are qualified organizations, while your homeowner's association generally is not.
Decide what to give. You can donate cash (including checks and charges to your credit cards), stocks, and other financial assets. Noncash contributions such as vehicles, real estate, or artwork are also deductible.
Keep records. When you make cash contributions of any amount, a bank record, pay stub, or written acknowledgement from the charity is required to support your tax deduction. If you donate via text message, keep a copy of your phone bill showing the amount you gave, the organization you gave it to, and the date of your donation.

The greater your contribution, the more paperwork you need. As an example, for noncash donations over $500, you'll need to file Form 8283, and for donations of $5,000 and up, a qualified appraisal is required.
Contact our office at (949) 453-1521 or taxalert@maxwellcompany.com if you'd like more details about charitable giving tax rules.

October, 2010

Learn to cope with financial stress
These are stressful times. Economic uncertainty has touched everything from corporate earnings to pension plans to the livelihoods of American workers. People are worried about the stability of their retirement plans, company layoffs, and dwindling home values. In one study, eight out of ten people cited the economy as a significant source of turmoil in their personal lives. Another survey found that a majority of Americans are dealing with high or moderate levels of financial stress.

Because financial stress is a normal part of life for most people, learning to cope with money worries is important — vital, in fact — for maintaining positive relationships, job productivity, and personal health. Fortunately, proven strategies for coping with stress (and financial stress in particular) can provide relief for a wide variety of people. If you're dealing with excessive anxiety about your finances, consider implementing the following three policies:

Don't sweat things you can't control. If you've been laid off from your job, for example, don't spend time mulling over the idiosyncrasies of your old boss, the shortcomings of the guy who took your job, or anything else that's beyond your ability to change. Putting aside those emotions may be difficult, but looking ahead can relieve stress now. You might need to expand your job search, network with long-forgotten colleagues, even retool for a new career. Don't waste your energy by dwelling on the past.
Take charge. When dealing with personal finances, uncertainty can generate stress. Preparing a written budget can bring your money worries into focus and provide a starting point for action. You may find that cutting out a few unnecessary luxuries can provide breathing room. Getting the debt monkey off your back may take time, but watching your credit card balances decline for a few months can provide relief and hope for the future.
Broaden your perspective. Remember that life is a lot more than money. If you're burdened with financial worries, take time to consider the many blessings you do enjoy: health, family, nature, whatever gives you pleasure and a sense of well-being apart from your checkbook. Relax and smell the daisies.
Sometimes talking to a trusted advisor also helps. If you'd like additional suggestions, give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com.

Retirement Plan Update

August 9, 2010
DB(k) retirement plans are new this year
Have you heard about Plan X?

A 2006 tax law added section 414(x) to the Internal Revenue Code, creating a retirement plan you can establish for the first time this year. The IRS calls this new option an "eligible combined plan" because it has aspects of a defined benefit (DB) retirement plan and a 401(k), which is a type of defined contribution plan. For the same reason, the new plan is also called a DB(k).

An overview.

The DB(k) combines two types of retirement plans into one.
The rules for the defined benefit portion require your company to make contributions on behalf of eligible employees and to pay specified benefits after retirement.
Under the rules for the 401(k) defined contribution portion, you and/or your employees contribute specified amounts before retirement. After retirement, the amount received by each employee depends on how the contributions were invested and how well those investments did.
Some details.

You can offer a DB(k) when you employ at least two but no more than 500 workers.
You can set up the plan using a single document and you'll file one Form 5500, Annual Return/Report of Employee Benefit Plan, each year.
The DB(k) is exempt from rules that generally apply to retirement plans when most of the benefits go to highly paid employees.
Your plan must follow certain vesting, contribution, and nondiscrimination rules.
Retirement plans offer benefits to your business and employees. Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com to discuss whether this new option will work for your company.

Questions to ask before retiring

August, 2010
If you're within a stone's throw of retirement — for most folks, that's somewhere between the ages of 55 and 65 — you've probably spent at least a little time dreaming about life after work. But before you turn off the computer and turn in your retirement paperwork, consider three important questions.

What will you do in retirement? If you love golf, and dream of getting up late and hitting the greens every afternoon, retirement may be just the ticket. But your hobby may not hold the same appeal after a few years. That's why it's important to take stock of your interests, hobbies, and activities before retiring. Consider "field testing" activities you intend to pursue in retirement, such as joining a band, volunteering for a nonprofit organization, or taking classes at a community college. Doing "retirement activities" before you retire can be an eye-opening experience, and may help to separate daydreams from reality.
Will you work? Studies show that the number of older Americans either holding jobs or looking for work has been rising for at least 15 years. Of course, some folks seek employment out of necessity: bills need to get paid. But for many people, work also provides needed social interaction and a sense of satisfaction. Consequently, some may decide to work at least part-time during retirement — whether or not they need the money. Another idea that's gaining popularity is called "serial employment." With this strategy, you spend part of your "retirement" years employed in a series of full-time jobs interspersed with periods of travel and leisure. Such a plan can generate a healthy supplemental income for you and benefits for talent-starved employers.
Have you saved enough? This, as they say, is the million-dollar question. But how much money you'll need to comfortably retire depends on many factors, including the status of your mortgage and other loans, your general health, expected rates of return on your investments, the size of your current nest egg, life expectancy, plans during retirement (including travel), pensions and other sources of income, the cost of health care and insurance, and myriad other considerations. One size doesn't fit all. So it's important to confer with a trusted advisor who'll help you take a hard look at the numbers — before you wave goodbye to your employer.
For guidance in your retirement planning, give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com $