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From the Desk of:
John D. Pivirotto
President
Calif. Insurance License #06993078
Financial Concepts
205 Park Rd. Suite 204
Burlingame, CA 94010
(650) 348-1880
(650)348-0255 Fax
JohnPiv@FinancialConcepts.net
Helping Build & Protect Your Future
Investment Advisor Representative
Securities and Advisory Services
offered through
Lincoln Financial Securities Corporation
Member SIPC
Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2009 Liberty Publishing, Inc.
Copyright 2009 Liberty Publish- ing, Inc., Beverly, MA. The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opin ions, or recommendations of the Financial Planning Association, its affiliates or members. CFPTM and CERTIFIED FINANCIAL PLANNERTM
are federally registered service marks of the Cer- tified Financial PlannerBoard of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. Febuary, 2009.
are federally registered service marks of the Cer- tified Financial PlannerBoard of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. Febuary, 2009.Timing Asset Purchases and Sales
One of the easiest ways to reduce your tax bill is to properly plan your asset purchases and sales.
This involves keeping some basic rules in mind, and thinking about the tax effects throughout the year. Here are a few things to consider.
Timing Is Everything
Timing is critical when you buy or sell assets. In addition to planning for capital gains or losses you may realize on investments, it is important to carefully time purchases of real estate, property, and equipment. Let’s review some key time triggers. The holding period for most capital gains is one year. Making sure you exceed the one-year mark can save you tax dollars since you get to use the lower
capital gain tax rate. And for assets purchased after 2000, a 5-year holding period can net you an even lower rate. Tax deferral is possible in a like-kind exchange or involuntary conversion (gain from condemnation or insurance reimbursement). However, to postpone the gain, you must meet the strict time deadlines for identifying and acquiring replacement property.
Don’t Get Carried Away
Purchasing too many assets in one year can have disadvantages if it triggers deduction limitations. Sometimes waiting a few weeks to purchase assets can make a huge difference. For instance:
Mid-quarter convention is the technical term for the depreciation “hit” taken when you buy too many business assets at the end of the year. If over 40% of your purchases are in the last
quarter of the year, your depreciation deductions for the year—on every asset purchased during the
year—will be reduced. The expensing election under Code Section 179 is also reduced or eliminated if you purchase too many assets during the year. Under The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), the expense deduction quadrupled and is $105,000 in 2005. It starts to phase out if asset purchases exceed $420,000 in 2005. The recently passed American Jobs Creation Act extends this tax saving opportunity through 2007, with amounts indexed annually for inflation.
Start Off Right with New Purchases
Make sure that you get all of the depreciation to which you are entitled. This can be as simple as
confirming that assets have been set up correctly on your in- house depreciation schedule, or can
involve tax advice on the character of expenditures.
Capitalizable costs associated with purchases are added to the basis of the property and depreciated. This includes items such as freight, installation charges, commissions or finder’s fees, and paperwork charges. When you purchase real estate, consider a cost segregation study. This analysis “finds” depreciation deductions by identifying component assets with shorter lives. Generally, real estate must be depreciated over 27.5 or 39 years on a straight-line method. A cost segregation study identifies property components and related costs that can be depreciated over 5, 7, or 15 years using an accelerated method. Examples of such components include: decorative fixtures, cabinets and shelving, land improvements, and soft costs such as architectural fees. You should also consider a cost segregation study when you construct a new facility, or remodel or expand an existing facility.
Eliminate Surprises
People often enter into a sales transaction thinking they’re getting a great deal. Then, when tax time rolls around, they’re hit with an unexpected tax bite. Watch out for these traps: Depreciable property
usually triggers ordinary income when it’s sold. You must pick up depreciation recapture at tax rates higher than capital gain rates. Installment sales can have a worse result. The ordinary income
depreciation recapture is triggered in the year of sale—even if no payments are received. If you don’t factor this in, an installment sale could leave you short on cash to pay tax due on the gain.
Selling depreciable business property to a related person or company can also worsen your tax bite. All gain from the sale will be taxed at ordinary income rates—not at capital gain rates.
What’s Best for You?
Some of the tax benefits associated with property are mutually exclusive. In these instances, a calculation can usually determine which makes the most sense taxwise. Begin your tax preparations now to reduce your liabilities and involve your tax professional throughout the year as you prepare to
buy or sell an asset.
Rule Changes for Non-qualified Deferred Compensation Plans
Passed by both houses of Congress in October, the American Jobs Creation Act of 2004 is designed
primarily to repeal certain export tax subsidies, and create a new set of tax breaks, for American industries and farmers. But the new legislation also includes a less publicized provision that
substantially alters the taxation of non- qualified deferred compensation plans, which are used by many businesses and professional practices to provide retirement benefits to owners, executives, and
other key employees. The act, which adds a new section 409a to the Internal Revenue Code (IRC), imposes new distribution and funding restrictions on nonqualified deferred compensation plans. These generally include salary and bonus deferral plans, as well as supplemental retirement plans. The new rules could also impact a wider range of nonqualified vehicles which allow for the deferral of income, including some types of severance packages, SERPs, and 457(f) plans for tax-exempt entities.
Although the new rules generally apply to deferrals beginning on or after January 1, 2005, all
employers with these plans have been advised to begin immediately assessing their current plans for compliance, as legal experts have warned that many of the current arrangements could be in violation as of the day of enactment, October 22, 2004. Failure to meet the new requirements could cause participants to owe tax immediately on all deferred compensation, as well as an additional 20% tax plus interest.
The new rules include the following:
- Initial participant elections to defer compensation must be made during the tax year prior to the tax year in which the services are performed, and must specify the time and form of distributions. Exceptions to this rule apply to newly-eligible participants, who have 30 days to elect to defer, and some types of performance based compensation.
- Subsequent deferrals of scheduled payment or changes to the form of payment are permitted only if the new election is made at least 12 months in advance of the first scheduled distribution, and the new distribution commencement date is at least five years from the original date. Subsequent elections may not take effect until at least 12 months after the subsequent election is made. This will greatly restrict “roll-over” provisions, which had permitted renewing deferrals for relatively short periods of time.
- Distributions while in service are prohibited, with the following exceptions: disability, death, unforeseeable emergency, at a time specified in the deferred compensation plan, or, pursuant to regulations, upon a change in control.
- In the case of key employees of a publicly traded company earning more than $130,000 a year, plan payments made upon separation from service must be deferred for at least 6 months.
- The acceleration of payments is prohibited, except in the cases of death, disability, unforeseeable emergency, or change in control. So-called “hair- cut” provisions that had allowed participants to take early distributions with a penalty are therefore no longer allowed.
Employers are required to report amounts deferred on Form W-2 for employees, or 1099-MISC for non-employees, for the year deferred, even if the amount is not includible in income for that year.
Entrepreneurship and the New Retire
For more and more retirees, retirement signals not the end of a career, but rather the beginning of a new phase— entrepreneurship. Many baby boomers view retirement as an opportunity to start a new chapter in life, and hope to use their hard-earned skills and knowledge to create their own
independent businesses. With increased longevity, retirement often accounts for 25%-30% of a person’s life. According to a recent study of those age 50 and older by the American Association of Retired Persons (AARP), of those surveyed, seven out of ten plan to work in retirement. Financial reasons for continuing to work are a primary consideration, but one in three report they intend to continue working for the enjoyment and “sense of purpose” work brings (AARP, 2003). Regardless of personal motivation, there are many advantages that those age 50 and older possess when starting their own business ventures. By retirement, mortgages have often been paid and children have
graduated from college. With fewer financial obligations—and perhaps a cushion from a lifetime of
saving—the retiree may have the opportunity to take his or her time in developing a strong business plan and concept. Retirees also have the ability to utilize the many business contacts and skills garnered over their working years to further product development, marketing, and sales. This can prove extremely useful for those who wish to use their experiences in a particular field to strike out
on their own.
Many retirees find the opportunities of their dreams during their golden years. For example, prior to
retirement, Bill and Helen Dawson (a hypothetical case) had thriving careers in accounting and travel
services, respectively. After retiring, Bill and Helen quickly discovered they were not content to stay at
home, and felt that combining their skills would serve them well in their own business endeavor.
Drawing upon Helen’s years of customer service, and Bill’s bookkeeping finesse, the couple opened
a bed and breakfast, which has allowed them to use their pre-existing expertise in a new and challenging way. If you want to use your years of wisdom to build your own company, here are some questions to consider:
1. Are you personally motivated? Building a business requires intense dedication. You will need to
develop your own ideas, set your own schedule, and manage a variety of responsibilities.
2. Are you a “people” person? Running your own business will likely involve a great deal of interaction
with various professionals and personality types. If you can harness the people skills you gained from four decades in the working world, you will be better prepared to handle difficult clients or professionals.
3. Do you have the ability to think quickly? Representing your own company can mean that you will have to provide answers and decisions at a fast pace, and sometimes under pressure.
4. Do you have passion and stamina? It is often said that you must love what you do. Realize at the start of the enterprise that a good deal of time and effort may be required, but also know that the rewards can make your labors worthwhile.
5. Are you organized? Thorough organization and planning can lead to continued business success. Finances, invoices, and schedules are just a few of the tasks at which you must be or become proficient. According to the Small Business Administration (SBA), poor planning is responsible for a majority of failed business attempts
(SBA, 2003).
6. Is your motivation level high? A business requires a lot of work, and can be physically and emotionally stressful. Those who are highly motivated often do well under stress, because their“hunger” drives them forward.
7.Will your family be supportive? A new business can consume a lot of your time, mental energy, and
sometimes, capital. Make sure to tell your family what they can realistically expect the experience to be like, and gain their support and trust.
There are many advantages to self-employment. The chance to be your own boss, experience the payoff of your own hard work, and the limitless financial and growth potential, all combine to make entrepreneurship an exciting and educational adventure. Interestingly, a lack of experience often accounts for many small business failures. Therefore, a lifetime of knowledge can put you far ahead of the game before it even begins, and many of today’s retirees welcome the challenge.
Pension Plan Limits Get a Boost
Increases in the cost of living during 2004 triggered adjustments to certain retirement plan limits for 2005. Some limits will remain the same, while others will increase as stipulated by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Participants in a 401(k) plan can defer as much as $14,000 of their salary in 2005, up from $13,000 in 2004. Additional catch-up contributions of up to $4,000 may be made to a 401(k) by those who are age 50 and older. Pre-tax contributions to a Simplified Employee Pension (SEP) plan are limited to the lesser of 25% of the first $210,000 of compensation or $42,000. Owners of sole proprietorships or partnerships are limited to the lesser of 20% of the first $210,000 or $42,000 of compensation. The minimum compensation amount for SEP eligibility remains $450. Participants in a Savings Incentive Match Plan (SIMPLE) may contribute up to $10,000 in 2005, up from $9,000 in 2004, and those who are 50 or older may contribute an additional $2,000.
FINANCIAL
Planning Strategies
*Disclosure – Securities and Advisory services offered through representatives of Lincoln Financial Securities Corporation, member FINRA & SIPC. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in California, Oregon and Colorado only. Advisory Services are offered to residents of the state of California only. Lincoln Financial Securities Corporation is not affiliated with Financial Concepts. Financial Concepts offer insurance & financial services to residents in California and Oregon. Variable & Group insurance products offered through LFS Marketing and Insurance Sales Corporation; fixed insurance products offered through Financial Concepts Insurance & Financial Services.
John Pivirotto’s California Insurance License #: 0699308
Financial Concepts’ California Insurance License #: 0786047
