Why 2010 is the Year to Consider Converting to a Roth IRA

Not many people make New Year's Resolutions four years in advance, but when President George W. Bush signed the Tax Increase Prevention and Reconciliation Act into law in May 2006, which included a provision to expire the $100,000 modified adjusted gross income (MAGI) limit for Roth IRA conversions in 2010, a lot of savvy folks probably added "Switch to Roth" to their 2010 list.

First a quick word on Roth IRAs or Individual Retirement Accounts. Roth IRAs are similar to traditional IRAs except for one very, very important difference: Traditional IRAs are tax deferred, meaning your contributions aren't taxed until you withdraw the money. Roth IRAs are tax exempt, meaning you pay taxes on the money you put in, but not
the money you take out. Now that's a lot of italics, and here's the reason why: Although it seems counter-intuitive to pay taxes now rather than defer, younger investors can use a Roth to take advantage of a long investment time to enjoy tax-free growth while established, more affluent investors should consider rising tax rates. With a growing national deficit, many experts feel that income and capital gains tax rates could rise considerably very soon, and it might make sense to pay taxes on today's rates and let your investments grow
tax free going forward rather than potentially paying taxes at a higher rate in the years to come.

For example, if you convert $100,000 in 2010, you may pay around $25,000 in taxes, but if you wait until after 2010 when the Bush tax cuts expire, your tax rates may rise increasing your tax liability significantly by the time you withdraw. If you convert after 2010, you also risk paying higher taxes at the time of the conversion to a Roth IRA.

The MAGI limit for Roth IRA conversions expire in 2010, and thanks to Congress (a phrase rarely used or uttered), the tax liability from the 2010 conversion can be allocated over 2011 and 2012 unless the tax payer elects not to. For example, if you converted $100,000 in 2010, instead of owing the probable $35,000 for taxes, you could
declare $50,000 of income in 2011 and $50,000 in 2012. This one-time benefit is only available in 2010, but you should consider that tax rates are expected to rise in 2011 or 2012, so this might not be the best strategy.

Though the conversion limit for Roth IRAs will expire in 2010, the income restrictions for new contributions still exist, although there is a seldom mentioned loophole. You can set up and contribute to a SEP IRA (IRA for
the self-employed) and contribute 25% of your income up to $46,000 and then immediately afterward convert it to a Roth. If you are not self-employed but make more than the MAGI limit to contribute to a Roth IRA, you can contribute to a nondeductible IRA and then roll it over to a Roth IRA If you are going to convert, we suggest that you start saving
now for your tax liability. Because no matter what, the taxman's going to collect his. We just prefer paying a little now rather than more later.

For more information on Roth IRAs or other personal tax strategies, please contact Rita Schooley, CPA at Wendroff & Associates, LLC at 703-553-1099. Also, please look out for our upcoming CEO Roundtable Group this October. To find
out more information about joining the group, contact Wendroff CPA Director of Communications Darren Wendroff at
202-596-2891.

Obscure Tax Credit Pays $10,000 of College Education

Ask right, and Uncle Sam Will Pay More of Your College Tuition

People often say a college education is the best investment a person can make, but with the costs of tuition, books and supplies rising fast, you have to wonder if it’s an affordable one anymore. While the government and IRS rarely, rarely get any praise, one seldom mentioned program we think does deserve attention is the American Opportunity Tax Credit.

For 2009 and 2010, the AOTC has a lot more bite than its predecessor, the Hope Education Tax Credit. First, the IRS raised the maximum amount of the credit from $1,800 to $2,500 per student, and the credit can now be claimed for the first four years of post-secondary education, rather than only the first two years. Second - and this is huge - is that the credit can now be used for “course materials,” which include books, supplies and even course study equipment such as a laptop for business majors or a digital camera for aspiring photojournalists.

The credit begins to phase out (gradually reduce) if your gross income is between $80,000 and $90,000 ($160,000 to $180,000 for joint filers), and 40 percent of the credit is now generally refundable, meaning you still receive up to $1,000 even if you owe no taxes.
So while college and, “The best eight years of your life,” generally aren’t free, ol’ Uncle Sam is ready to lend a hand - for the first four at least.

For more information on taking advantage of the American Opportunity Tax Credit or your personal tax strategy, please contact an associate at Wendroff & Associates at 703-553-1099. Also, please look out for our upcoming Technical Solutions: QuickBooks Online Advanced Webinar, which will feature advanced QuickBooks Online techniques and an open Q&A with the CPA. The webinar will be totally free, and you can attend from your office or home computer.

8 Awesome Small Business Bookkeeping Tips

Ask any entrepreneur why they went into business for themselves, and you’ll get a hundred different answers, but odds are pretty near even that, “To do bookkeeping,” is nowhere on that list. But proper bookkeeping is the core of any successful business, it is a way to tangibly measure growth, keep cash flow positive, and track expenses to ensure you don’t overpay your taxes.

“Bookkeeping is like learning the piano: Hard to learn, easy to master,” says Brian Wendroff, Wendroff CPA President. “The secret is to learn the fundamentals and create a system that works for your company.”

While it’s up to you to create the system, these eight tips should have you bookkeeping like a virtuoso in no time:

Use the Right Software
Forget (heaven forbid) spreadsheet, today countless options exist to keep track of your books. QuickBooks offers Simple Start, their free version of the popular software, or you can use several online editions from QuickBooks, FreshBooks or WorkingPoint, which all offer scaled down free versions.

Automate Your Invoicing
Several online invoicing services such as FreshBooks, Bill.com, Blinksale and QuickBooks online allow you to schedule invoices for clients you charge contracted monthly fees to, saving you time and cutting down on errors.

Don’t Mix Business and Pleasure
Getting a business credit care not only separates your business expenses from your personal (important!), but you also build business credit and points. We like American Express and Chase Visa, which allow you to automatically download transactions into your bookkeeping system for automated month end inputting.

Keep it Simple
You might be tempted to over-categorize your chart of accounts (office supplies vs. itemizing your fax, paper, letterhead, printer supplies, ect. ect.), but resist the temptation. This will complicate your profit/loss and add time to your bookkeeping.

Schedule Important Reports
Some bookkeeping systems like QuickBooks Online allow you to schedule reports such as your Profit/Loss, Balance Sheet and Accounts Receivable Aging to a schedule of your choosing (daily, weekly, monthly) and email them to various recipients. This can also act as a reminder for due dates such as your state sales tax.

Pimp My Report
Some bookkeeping systems allow you to customize important reports to include key information. One report we suggest is a customized A/R Aging that includes contact info, so you have all the information in one place. Then schedule that to arrive monthly at your A/R clerk to follow up on late invoices.

Use a Payroll Service
Once your business starts to grow beyond you as the only employee, payroll jumps exponentially in difficulty and can lead to heavy fines if done incorrectly. Outsource your payroll to a professional company such as ADP, Payroll or Integral HR to avoid the headache. Shop around to get the best rate.

Hire a Bookkeeper
We know what you’re saying - “Why’d I waste my time reading these last nine tips?!” Knowing how your books work is just as important as investors knowing what Madoff was doing with their money. But hiring a professional bookkeeper provides a second set of eyes looking at your books and frees you up to focus on growing your business instead of working for your business.

Wendroff & Associates, CPA is a full service Accounting, Tax Preparation and Bookkeeping firm located in Arlingon, Virginia and Winter Springs, Florida. We can set full service online bookkeeping systems starting at $220 a month. For a free quote, click here or for more information, please contact an associate at Wendroff & Associates at 703-553-1099. Also, please look out for our Online Entrepreneurship Series in 2009, which will include educational webinars, our online Ask a CPA series and podcasts with leading entrepreneurial minds around the country. The programs will all be free and online.

Business Bookkeeping Tips

Business Bookkeeping Tips

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How to Take a Tax Deduction for Your Next Vacation

Plan Your Vacation Right and Take a Tax Deduction
Summer’s here and while some are planning staycations, other savvy professionals will combine business and pleasure to cut costs. Plan right, and you can take a healthy deduction come tax time.

Here’s how it works: Convention and business travel expenses are fully deductable, and can include fees, hotels, meals, entertainment and travel to and from the event. And if you can establish a business purpose, your spouse may be deducted also. The catch is that the convention or seminar must relate directly to your profession (read: you cannot deduct trips for investment, financial planning events or annual stockholders meetings if you’re a shareholder).

If traveling stateside, the IRS will allow you a travel cost deduction if the trip is primarily for business. If it’s for pleasure, no expenses can be deducted. So, establish that you have a primary business motive before the trip. Save convention materiel relating to subject matter and the location, or if you’re visiting a client, send an email beforehand confirming what will be discussed.
The key is how much of the trip is spent on business and how much is spent on personal time. Typically, you want to have a five to three ratio, meaning if five days are spent on business and three are spent sightseeing, you can deduct all your travel expenses. Switch that around, and you get no deduction. But even if you spend more personal time on the trip, any expenses you incur that are business related – meals, lodging, incidental expenses – can be deducted.

There’s a reason why so many conventions are held in New York, Las Vegas and Miami. Plan right this year and the IRS may foot part of the bill for you and the family to attend one.

For more information on planning a tax deductable vacation, or other tax planning questions, please contact an associate at Wendroff & Associates at 703-553-1099. Also, please look out for our Online Entrepreneurship Series in Spring of 2009, which will include educational webinars, our online Ask a CPA series and podcasts with leading entrepreneurial minds around the country. The programs will all be free and online.

New Tax Law Lets a 2008 Loss Generate a Return

Of all the provisions in the stimulus package, the one struggling business owners can take advantage of immediately is the extension of the Net Operating Loss Carryback Period. We say struggling, because the business owner would have to show a loss in 2008 to qualify for this benefit. The new NOL law allows small businesses to deduct losses in 2008 against profits from prior years. In the past, businesses could only go back two years, but now businesses can carryback NOL up to five years. The one caveat is that the business must have shown average annual gross receipts of $15 million or less for the three-year-tax period ending in the tax period in which the loss arose.

For example, if Pop Top Widgets showed a Net Operating Loss of $200,000 in 2008, they could use that loss to get a refund for taxes paid in the past, until 2003. The NOL would be applied to taxes paid in the past 5 years, starting at the earliest date. So if Pop Top made a taxable income of $50,000 in 2003, $50,000 in 2004, $100,000 in 2005, $25,000 in 2006 and $25,000 in 2007, it may elect to carry its 2008 NOL back for five years offsetting its income for 2003, 2004 and 2005 ($50K + $50K + $100K) and would get a refund of $37,250 (the sum of the taxes paid those years). And since Pop Top didn’t elect to carry its 2008 back NOL only four years (2004, 2005, 2006 and 2007), it still has 2007 revenue to offset in case of a loss in 2009. In an upcoming tax tip, we will talk about how some businesses can use a strategy called Cost Segregation to accelerate depreciation to further take advantage of this new law.

For more information on the new NOL Carryback Period, or other questions regarding new tax laws for 2009, please contact an associate at Wendroff & Associates at 703-553-1099. Also, please look out for our Online Entrepreneurship Series in Spring of 2009, which will include educational webinars, our online Ask a CPA series and podcasts with leading entrepreneurial minds around the country. The programs will all be free and online.

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This blog is about business tips for Small Business Owners and Entrepreneurs. It will be updated monthly.