The Return of Prosperity — A Two Part Series. Part Two: The good signs And the darkest hour Is just before dawn Dedicated to the one I love — By the Shirelles in the fifties and the Mommas & the Poppas in the sixties If you just read the headlines or watch CNN and other mainstream medial, you may well believe the economy has stalled, global credit markets are frozen and we’re heading toward another vicious recession, the infamous “Double Dip.” This all reminds me of an old joke in journalism that you should never let the facts get in the way of a good story, and as we learned in Part one of this series, “If it ain’t bad, it ain’t news.” So here’re are some facts to consider: The Conference board Consumer Confidence Index (CI) dropped from 62.7 in May to 52.9 in June and the media touted this as the worst that could happen. The facts are that the CI index has moved sideways for more than a year showing no signs of breaking out of that range. Although a 10 point drop appears severe, let’s bear in mind that the CI tumbled from 56.5 in January to 46.4 in February…and gained it all back by April. Consumer Confidence is one of the most volatile data series there is and a 10-point drop is not unusual. Negative media commentators also made much of the June reading for Purchasing Managers Index (PMI) that came in at 56.2 instead of the consensus estimate of 59. Predicting such numbers are iffy at best and let’s keep in min one thing: ANYTHING above 50 is good, and indicates growth in US manufacturing, a definite positive sign. Okay, but what about Europe, the mess in Greece, won’t that drag us down? No, here’s why: European Central Bank (ECB) President Jean-Claude Trichet, a notorious gloom-and-doom sayer, was uncharacteristically upbeat in recent comments, noting positive data coming out of Germany, emphasizing that the pessimism surrounding Europe is overdone. Among positive data is the spread between US Treasuries and European bonds, (called the TED Spread) is closing, recently narrowing from 50 basis points to the mid thirties, and that’s a very good sign. Here’s more good news: New orders for goods show strong growth with leading sectors in food, chemicals, apparel, autos, plastic, electronics and computers. Hiring has nudged up a bit and so has production, although not yet up to pre-recession levels. Last year’s stimulus spending package still has a lot of steam left with about $400 billions in the pipeline for infrastructure work, tax cuts, Medicaid and unemployment benefits. Plus there is an additional $125 Billion added this year. See the details on www.recovry.gov. The Conference Board’s Index of Leading Economic Indicators (LEI) is used to gauge the strength of the economy. The LEI comprises 10 economic indicators that are harbinger of times to come. The LEI is not perfect but it’s predicted most of the major economic cycles over the past four decades including the vicious 2007-2008 recession, and the recovery that began in 2009. The LEI has been moderately positive for fourteen months, consistent with a cyclical recovery for the US economy. Look, I don’t want to make the mistake of being too optimistic, we’re still facing some headwinds, but they’re very far from being the hurricane mainstream media makes it out to be. Unemployment will be slow to pick up, spending will be low as US consumers gear up toward debt reduction and return to savings, ultimately that’s a very good thing even if it dulls the recovery a bit. But Patrick, you might say, I listen to station WIFM (What’s in it for me?) What’s going to happen in real estate? What always happens in real estate: Pent up demand and improving economic conditions will cause a boom. It always has. Be prepared to hang on another year perhaps, then we’ll see improvements. Of course, as always it’s highly regional. Some areas will do better than other, but all will recover. In conclusion, if we look at the data in a dispassionate manner, there is nothing that leads us to believe that the world is headed for a double-dip recession or that Europe’s newly-found fiscal responsibility will doom the global economy. We’re in a slow, grinding recovery that will last more than a year, but will eventually lead us back to good times, hopefully with less excess and more common sense. Patrick P. Astre, CFP, EA, RFC is a financial author, advisor, and Enrolled Agents representing taxpayers rights before the IRS. His office is on Rt 25A in Shoreham and he welcomes your questions and comments. You may reach him at his office 631-744-9100 or his website www.prosperousboomer.com and subscribe to his newsletter through the website. It’s Not What Your Business Makes That Counts — It’s What You Get To Keep! By Patrick Astre “The hardest thing in the world to understand is the income tax.” -Albert Einstein There are two things in life you don’t want to watch closely as they’re made; the first is sausages, the second is tax laws. While death and taxes are inevitable, death doesn’t get worse every time Congress meets. The constant push-pull of special interests, partisan and “pork barrel” politics left us with an income tax system that is convoluted and overly complex. The system has one saving grace: it’s semi-voluntary. For example, everyone knows that if you own a home, you may deduct the property taxes and mortgage interest. But you are not required to. You could file form 1040A and forego deductions and “volunteer” to pay more taxes. There are a great number of tax-saving opportunities available to business owners. Sad to say, many of these opportunities are not well known and often ignored even by tax planners, CPAs and attorneys. By not using them, you will have “volunteered” to pay more taxes. Let’s get one thing out in the open at the get-go: Everything I will tell you is legal, audit-tested and rooted well within the IRC (Internal Revenue Code.) So let’s get started keeping more of that hard-earned money from your business. The income tax has made more liars out of Americans than golf. —Will Rogers There are plenty of business tax savings in the system without resorting to illegal strategies that can come back to bite you. Stay away from tax evasion schemes such as foreign trusts, secret offshore bank accounts, claiming your house as a “church,” and other shady deals sold out of magazines or the Internet. Remember what happened to Wesley Snipes recently? Well, here are a few legitimate strategies you can implement now: · Rent part of your home to your business. Many business owners (such as me) use part of their homes for business, second office, storage, etc…yet those expenses are not deducted. Determine the portion of your home that is used for business and rent it to your corporation or LLC. Rent should be reasonable and average for your area. You must report the income on Schedule E of your personal tax return (1040) but you will apply a percentage of deductions against that income such as utilities, home insurance and maintenance, depreciation, etc.. that you cannot use otherwise. Realtors: If you operate a brokerage and have an office, you can still take this deduction. You take work home with you (I know, I’m married to a real estate broker) so you might as well get a deduction for it. · Don’t fear the home office deduction. If you operate as a sole proprietor you cannot rent part of your home to yourself. However, you can use the home office deduction. A court ruling in the late eighties resulted in that deduction being outlawed and denied to many businesses. Legislation two years later overturned this unfair ruling and restored the deduction. However, many accountants to this day fear using this. Don’t listen to them. Home office deductions are legitimate and allowed by the IRC. As in all deductions, be sure to keep documentation to back it up. · Special Note For Realtors: If you’re a broker within a brokerage, the IRS has ruled that an office is deemed to have been provided for you, hence you cannot take the home office deduction. Wrong! I’ve developed an audit-tested way to take this deduction. · Don’t neglect business use of your automobile. Simply because you don’t use your car a lot in your business doesn’t mean you shouldn’t deduct the amount that you do use. Keep a log of your business mileage, reimburse your self by using the IRS mileage rate and deduct it on your business tax return. Do not include commute to and from your business and document the business reason for auto usage. Realtors: Be sure to keep a log (okay, I know from experience that most of you don’t do this.) but at least know how many miles you put on your car so you can construct a diary that will match records if you’re audited. · Make your spouse part owner (shareholder) of your Sub S Corporation. If you are a sole owner (shareholder) the IRS position is that any income you take out of your corporation is earned income subject to payroll taxes. That’s because “S” distributions are not subject to payroll taxes and the IRS wants those taxes paid. High tax states such as New York will follow up with their own payroll taxes. It’s the case of the never-ending audit. By having a spouse part owner, you no longer have a sole shareholder and the spouse may receive distributions without payroll taxes. Caution: Be certain you have a good marital situation because your spouse will now own part of the business. This does not apply if you are repaying yourself a loan you made to the corporation. If that’s the case, be sure you have documentation and use a reasonable rate of interest. · Are you bad at record keeping? Consider LLC “Disregarded Entity Status.” If you are a single member LLC owner, the IRS allows your status to be “disregarded’ for income tax purposes. You file a Schedule C (Self employment) just like a sole proprietor, yet you are protected from liability. The advantage is simplification of record keeping. You can take money out of your business anytime, you can co-mingle money, avoid filing as a corporation and generally make business life easier. Caution: you must still document income and expenses and retain documentation to back it up. Excellent for realtors who want liability protection but don’t like all the record keeping. · Set up a SEP IRA, SIMPLE, 401K or other retirement plan. Since it comes off the top, this will save 27.5 percent and 7.5 percent (NY) in the average brackets. Sure, you can’t spend it until you retire, but so what? You’re going to get older and need money in retirement; where will it come from if you don’t accumulate it? Caution: If you have employees you must contribute equally to their retirement plan. Consult with a pro for the details. Realtors: If you’re an agent/broker with no employees a SEP is best for you. Little paperwork and IRS hassles, deduct 25% of your net profit up to $40,000. Must establish account by December 31 and fund by April 15 of the following year. · These are only a few business ideas. There are tons more in the IRC. Be proactive. Work with your accountant to develop safe, tax-saving strategies. If you want to “volunteer” money, give it to your favorite charity, not the IRS. Patrick P. Astre, CFP, EA, RFC is a financial author, advisor, and Enrolled Agents representing taxpayers rights before the IRS. His office is on Rt 25A in Shoreham and he welcomes your questions and comments. You may reach him at his office 631-744-9100 or his website www.prosperousboomer.com and subscribe to his newsletter through the website.