Kevin McCoy, CPA

As a follow up to this post, I thought I would provide a real world example of a client that has improved their cash collection by 25% in the past year.

How do I know this? One of the analytical tools we use to advise clients is the “Days sales in Accounts Receivable” ratio.  It is computed by taking accounts receivable divided by net credit sales/360 (basically your daily sales is the denominator).

Our client went from a figure of 45 days in accounts receivable at 12/31/08 to 33 as of 12/31/09.  That means in 2008, they had a month and a half worth of cash sitting there uncollected.  Meanwhile, they still had to pay bills, payroll, etc. By the end of 2009, they were down to just over a month’s worth of sales, basically everything billed in December was not collected. That’s a 25% improvement – incredible!

How did they do it? I inquired of their accounting personnel and she informed me they aggressively pushed their customers towards automatic payment or paying with a credit card. So not only do they get paid faster, they don’t have to mess with taking checks to the bank – a time saver anyone would love. A side benefit of this is paying their vendors quicker to take advantage of early payment discounts.

I love sharing stories like this! Please tell me what you’ve done to improve your business so others can learn from it.

So you took the plunge and bought your first home sometime in 2009.  Looking forward to getting that $8,000 or $6,500 tax credit as a refund?

Don’t hold your breath.

Reports say people are waiting months for their refunds – and these are folks that filed amended 2008 returns last summer/fall.  Can you imagine how long it’s going to take now that the IRS will be swamped with returns during regular filing season?

Our position for most clients anticipating a refund is to go ahead and file your 2009 returns without the credit, so that money is not delayed.  Then file an amended 2008 return and elect to treat the home as purchased on December 31 of that year.

Then wait.

Of course there are many considerations to take into account before you decide, so this may not apply to all taxpayers.  Contact me and we’ll discuss what is best for you, individually.

The NY Times recently ran this column by Thomas Friedman who suggested that President Obama recapture the excitement of his Presidential campaign by fostering innovation and entrepreneurship.  I think most people agree small business is the key to America’s success economically – both here and globally.

How can a CPA help you launch your business? We are uniquely positioned to see a variety of industries and what works well, and sometimes not so well in each. Here are a few services we can provide so entrepreneurs can focus on the important tasks like growing revenue and pleasing customers.

Pre-formation

1. Name selection – is the name you want available, how do you register it?
2. Entity selection – Would a corporate structure be best, what about an “S” Corp or LLC?
3. Information system – how will you set up your files – paper or paperless?  What about an accounting software package?
4. Funding – will you self-fund the venture, seek a bank loan or need investors?
5. Write a business plan

Ongoing support

1. Tax planning, consulting and compliance – tax time should not be the only time you see a CPA, it should be an ongoing conversation
2. Financial support – from budgeting to financial statement preparation
3. Asset protection
4. Fringe benefit planning

The above is a chip off the block of what a CPA can do to streamline business operations.  If you are interested in talking more about these items or have a question, please contact me at kmccoy (at) cdnscpa (dot) com or leave a comment. Thanks for reading.

Organization and structure is important in any business – large and small. Whether your company has 5 employees or 5,000 it should have a system of internal control in place to monitor and protect company resources.  Running a business is hard enough, without having to worry about a rogue employee taking off with cash or inventory. Or worse, ruining a company’s reputation.

A recent article put out by the AICPA compares 2 companies and stresses the importance of starting off right.  Just because your business may be run out of your home or garage doesn’t mean you’re too small to worry about such matters.

A side benefit of internal controls is potentially automating non-valuable tasks or pushing them down the organization structure, thus allowing the business owner to focus on other tasks – whether it might strategic planning, following up on sales leads or exploring potential new products or services.

As a CPA, I get to see how multiple types of businesses have set up their organization.  I’d be happy to work with your company as well. Please contact me with any questions or leave a comment below.

Roth IRAs are usually out of the question for those taxpayers with Adjusted Gross Income (AGI) exceeding certain limits. For 2009 if you make over $120,000 as a single taxpayer or $176,000 as married, filing joint you are ineligible to contribute to a Roth IRA.  Similarly, anyone with over $100,000 in Modified AGI cannot convert a traditional IRA to a Roth*.

*As with tax law, there is usually an exception.  For 2010, the Modified AGI limitation is removed.  Anyone can convert to a Roth IRA this year.

But what if you don’t have an IRA to convert?  No problem, contribute now and then immediately convert it to a Roth.  Even taxpayers making over the above mentioned limits can take advantage of this.

Here’s the to-do list:

1) Contribute to a traditional (nondeductible) IRA. If done before April 15th you can even contribute double the maximum $5,000 annual limit ($6,000 if 50+).  Just make sure your IRA custodian specifies one $5k for 2009 and the other for 2010.

2) Convert it to a Roth IRA – your custodian will likely have a form for this.

Another great benefit to this one-year loophole is the ability to spread the tax hit over 2 years – in 2011 and 2012.  If any of your contributions have been non-deductible (as in the example above), that amount is not taxed (since it was never deducted on a previous tax return).

Of course, every situation is different, so consider this tactic along with your other retirement plan components.  Here’s an interesting article on the pros and cons of conversion.

Are you taking advantage of this 2010 Roth conversion provision?  Have a question about if this will work for you?  I’d love to hear your thoughts in the comments.

As an employee, the taxpayer has Federal (and State, if applicable) taxes withheld from their paycheck using IRS created tax tables.  However, if one has significant income other than wages – such as freelancing, pension income, investment income, capital gains, etc. – withholding may not be sufficient.

For freelancers/self-employed workers, no one is there to collect and remit the tax to the government, therefore the responsibility falls to them personally.  Rather than pay withholding, these taxpayers must pay quarterly estimated tax payments using Form 1040-ES.

If tax is underpaid, the taxpayer may be subject to an estimated tax penalty (line 76 of Form 1040).  How does one avoid this?

Total withholding and estimated payments must equal at least:

1) 90% of the tax shown on the 2009 return (see this post on estimated tax liability)

2) 100% of the tax shown on your 2008 return, or 110% of your 2008 AGI was over $150,000 ($75,000 for married, filing separate)

There are also several other exceptions, most notably:

• tax due after subtracting withholding is less than $1,000
• the taxpayer was a US citizen or resident and had no tax liability the prior year
• also see Form 2210 for other situations

Why discuss this now?

• The final estimated tax payment for 2009 is due January 15, 2010.
• A new tax year has begun and it is never too early to start planning ahead.

Please leave a comment or send me an email with any questions or issues you have experienced dealing with this, or any subject.

It’s that time of year – when all the personal finance magazines, newspapers and blogs compile their tax tips.  But are they really as smart as they seem?

Let’s take this list for example.

The first topic is the first-time home-buyer credit (now expanded to include non-first timers).  Now, I completely agree this is a great benefit if you qualify.  But, don’t rush out and buy a home just to take advantage of this.  Buying a home is probably the largest financial transaction anyone will make and it should be given great thought.  The personal finance blog Get Rich Slowly has a column about this very topic.

(Same goes for their “new car purchases” advice.  Don’t just rush out and buy a car, like so many did under Cash for Clunkers, to take advantage of a

Next on the agenda is the ever popular capital loss harvesting.  Every tax tip column I’ve ever read includes this gem.  However, it’s not always the right thing to do.  Here’s a couple examples:

War N. Buffet has a stock that isn’t doing so great, he’s down about $5,000 from his original purchase a few years ago.  If he sells, he can deduct $3,000 of that loss against his other income – wages, interest, dividends, etc. assuming he has no other capital gains/losses.  Great deal, right?

Not so fast.  What if good ol’ War only makes $30k this year (maybe due to a layoff), but expects to double that next year?  If he takes the loss in 2009, he’ll save 15% in federal tax.  But if he waits another 2 months and sells in 2010, he’ll jump up another 10% since the higher income puts him in the 25% marginal bracket.

What if he has other capital gains?  The loss would then offset those first, then he could deduct up to $3,000 against other income.  So if he had $2,000 gain elsewhere, he could deduct the full $5,000.  But – it might be better to go ahead and pay tax on the gain at the lower long-term rates (currently 0% and 15% depending on your income), then take the loss next year.

It’s complicated right?  That’s why it’s important to take this advice with a grain of salt and make sure it applies to your situation rather than just diving in and potentially costing yourself hundreds or thousands in overpaid tax.  Get a CPA involved if it’s too overwhelming, a hour long consultation probably won’t cost you over $100 (my rate is $85/hr) but could save much more than that.

Procrastinators beware!

Extended individual tax returns are due in about a week – October 15th.