NEW RULES FOR CHARITABLE CONTRIBUTIONS

Congress is looking everywhere to find more money to put in the government coffers. Now they are even squeezing money from charities. The record keeping that you need to do to substantiate charitable contributions starting in 2007 is a nightmare. Starting in 2007, to claim a deduction, things get more complicated and most likely, you will not be able to claim all of your charitable contributions. I know that in the past I estimated some of my cash contributions. For example, when I am traveling I put cash in the collection plate. I deducted this cash on my personal return. Starting in 2007, I will not be able to deduct the cash.

• As mentioned, you can no longer deduct cash contributions. When I say "cash" I don't mean checks, sometimes people get confused by this. This means that any cash that you drop in the the collection plate or give to the Salvation Army Santa Claus will not be deductible on your return.
• Checks are valid substantiation for gifts of $250 or less. For example, my wife just wrote a check for $400 to a charity. Unless we get written confirmation from the charity (see below), we will not be able to deduct this charitable contribution. On the other hand, if she would have written two $200 checks, we would have been under the $250 limit and the checks would have been sufficient. She now knows better!
• For donations over $250, you will need a written confirmation from the charity acknowledging the contribution and stating that you did not receive anything of value for the contribution. For example, last year I gave $1,000 at a silent auction for the right to be "cook for the day" at our local school. In 2007, in order to claim such a deduction I will need to have a written statement stating that there was no value in the contribution.

Remember the deduction for the contribution of old clothes or household items? Things will get trickier in 2007. Under the Pension Protection Act of 2006, you can't deduct charitable donations of clothes or household items (such as furnishings, electronics, appliances and linens) unless they're in "good" condition or better. Congress never defined "good," but I suspect my old socks and underwear are out. (Remember when Bill Clinton disclosed his tax return when he was president and he reported taking a donation for "used boxer shorts" at $4.50 per pair?)

Congress did give the IRS the power to issue regulations to deny a deduction for items with "minimal monetary value."

Even if an item is clearly "good," if you claim a value of more than $500, then you must include a qualified appraisal with your return. That's $500 for an item, not total.

Even if no item is valued at more than $500, if the sum of the non-cash contributions is more than $500, you will still have to file Form 8283 with the date of the contribution, the date acquired, your cost, the fair-market value, and the method used to determine the fair-market value. Special rules apply to contributions of cars, boats, and other items (such as art, jewelry, and collections) with a claimed value of more than $5,000.

FOLLOW UP ON THE TAX CUT PARODY

A few days ago I published an example of the problem that the politicians have when they cut or increase taxes. As an accountant that has been around for awhile, I have seen how taxes impact the economy. If you look at history you can see that tax cuts have invigorated the economy while tax increases have slowed the economy down. If you think that I am overly paranoid about the future of special tax rates for long-term capital gains, check out this prediction of Democrat plans, including raising the current 15% rate to 35%.

For those of you that don't go to the link, please read an excerpt from the article. Read carefully Robert Rubin's advice to Bill Clinton when he was president and how his advice changed the economy. As Rubin says, "it is the high taxpayers that create jobs."

Enter Rubin, at first a mere assistant to the president. Updating the Roosevelt view of Wall Street as a New Yorker cartoon, Rubin reminded Clinton that the rich create jobs. As Bob Woodward reported in ``The Agenda,'' Rubin at one point provided what could be termed the Great Reality Check of the 1990s, saying, ``Look, they're running the economy and they make the decisions about the economy. And so if you attack them you wind up hurting the economy and wind up hurting the president.''

Changed Direction
Aided by Republicans who gained control of the House and Senate in 1994, and egged on by Federal Reserve Chairman Alan Greenspan, Rubin proceeded to redirect the administration. He turned Clinton, who was, after all, a governor from Arkansas, into a bond-market expert who nattered on about basis points. By 1997, James Carville was uttering his famous quote about being reincarnated as the bond market, because then `you can intimidate everyone.''

Clinton gave up on health care. Rubin even pushed him into cutting the capital-gains rate to 20 percent, a level below that of the second half of the 1980s during the Reagan years.

Reality Check
The Rubin Reality Check was so powerful it affected both parties long after Clinton left the White House. Through Rubin, Democrats learned that expansive experimentation has a downside because of the fear it can generate. Through Rubin, Republicans were reminded that capital-gains-rate cuts can generate extra revenue. The economic-growth rate of the late 1990s, 4.1 percent on average, was something to brag about -- and still is. Protecting the economy from uncertainty was Rubin's hallmark. He even titled his 2004 memoir ``In an Uncertain World.''

Democrats today are back where they were when Begala, Carville and Reich were leading the transition team: bouncing with ambition to do something grand. But much more talk -- never mind laws -- about a big capital-gains increase will sock equities in the face, just like the mortgage crisis socked subprime and commercial paper in recent months.

IS YOUR SALON IN YOUR HOME?

I was talking to a stylist that just moved her salon into her home. One of the items that we discussed was her insurance coverage. Since I am not an insurance expert, I advised her to talk to her insurance agent about her coverage. I thought I would pass my thoughts on to you just in case you have your salon in your home, or if you have some type of home-based business.

By running a business out of your home, the risks can add up fast. Since you see customers, you could be sued if someone trips on the steps. A short in your dryer or other salon equipment could cause a fire. Your have inventory or equipment that could be stolen. All of these are risks, but the biggest risk of all is assuming that your homeowner's policy will cover these damages.

Talk to your agent, but normally regular homeowner's policies cover only a fraction of business-related claims -- yet many salons and home-based businesses don't buy additional coverage, leaving them potentially exposed to huge losses.

I read somewhere that a typical homeowner's policy covers only about $2,500 of on-premises business equipment, and just $250 off premises. In addition, the policy is unlikely to contain any liability coverage for business-related accidents.

Given the risks, experts advise home-based entrepreneurs to beef up their coverage by buying business insurance. There are three general types of policies available. The best choice depends on the size and nature of the enterprise.

First, there are endorsements, also known as riders. These are provisions added to your existing homeowner's policy that bolster the coverage to include your business. If you opt for this type of coverage, check whether it includes liability insurance for your business -- if not, you may need to purchase a separate liability policy. An endorsement usually doesn't offer a great deal of coverage, so it's probably best for businesses with a small amount of equipment and space that don't get visitors or deliveries at the home. A typical endorsement might cover $5,000 of contents and $1 million of liability for about $200 to $250 a year. That's on top of the homeowner's policy.

Secondly an in-home business-owner's policy combines coverage for the home and the business into a single contract, eliminating duplications and gaps in coverage. This type of policy, which generally starts at around $100 to $150 on top of the regular homeowner-policy costs, usually covers you for liability and loss of income. It's a good choice for businesses with limited risk exposure, but not if much of the business is conducted outside the home, because the policy covers only household activities and property.

Finally a business-owner's package policy is the most comprehensive type, and is more like a regular commercial policy than the other two options. It's completely separate from the homeowner's policy, and coverage usually includes liability on and off premises, business property, loss of income and injury.

This type of insurance will probably be best for home-based salons. This option could run about $250 to $500 a year, but may cost more depending on how risky your business is.

In summary, talk to you agent. Make sure that the agent knows everything about your business so that he or she can properly advise you.

Larry Kopsa CPA

TAX - EMPLOYER WON'T PROVIDE A W-2

Someone (my girlfriend) had the poor sense to work in a start-up salon and the start-up failed (all within the tax year). The business is closed and the owner (who registered with the IRS via an EIN) did not report/deposit all withholding (this is probable as there is no W-2 to be had) :

I extended her return but it is due on October 15th. I know how to file her tax return using the last pay stub and the appropriate IRS self-reporting form in lieu of a W-2; but my question is, will she be liable for payroll and withholding taxes deducted but not remitted by this so-called fiduciary/agent employer (if of course all wages were not appropriately reported/deposited)?

Can you let me know?

Unless your girlfriend was in a position within the company to have some control over the payment of bills, she shouldn't have any problem with the IRS. It is the responsible parties within the company, those who chose to use the money for things other than paying the IRS, who will receive the wrath of the IRS and be hit with major penalties.

The IRS considers those people to be thieves, who stole the employees' tax money, and will act very aggressively to recover it from them. The powerless employees whose money was stolen will not be penalized, and will receive the same credits with the government as if the full amount of the taxes had been forwarded to the IRS.

As you apparently are aware, she needs to attach Form 4852, which is a substitute for the W-2, and include it with her return along with an explanation of what happened. She shouldn't have any problems with the IRS.

One very important note. If your girlfriend did have any power over the company checkbook, she should retain the services of an attorney and work on negotiating the scope of her liability with the IRS.

It is a pleasure to serve you.

Larry Kopsa CPA

FOLLOW UP QUESTION ON PRICE INCREASES

Thanks for the information on the price increases. You convinced me. I have one more question I forgot to ask. I was wondering - do you think that I should let the clients know before I do the increase, or just start charging more? Thanks

Your question reminds me of gas prices. Do you know why everybody complains about the price of gas? I think it's because you can't drive down the street without seeing the price of gas. I have often wondered if people would still complain if the prices were not posted in those huge numbers.

But back to your question. There are two schools of thought regarding letting clients know about price increases. One school says to post them in advance so people won't be surprised when they come in. The other school says to just raise prices and let it be.

I am an advocate of the second school. I am not aware of too many items that I purchase where I am informed in advance that the price is going up. An exception to that might be if a company is trying to create sales by telling you that the price is going up soon, but that is normally on big ticket items that you don't purchase on an ongoing basis.

I have found that a majority of people don't even realize the price has gone up unless the increase is substantial. Sure there are some people that are going to complain, but then again, they were going to complain even if you gave them notice.

As you can see, the choice is yours. Whatever you do, make sure that you make a good business decision and set up a system for periodic price increases.

It is a pleasure to serve you.

Larry Kopsa CPA

QUESTION REGARDING PRICE INCREASES

Larry, thanks for your blog. I appreciate all the information that you provide. I remember a while back attending one of your programs and you talked about when to increase prices. I have not increased prices for some time and am wondering if it is time for an increase. Do you think that I should increase prices and if so, when? Thanks

In a word, NOW! My wife was a stylist and we owned a salon a few years back. I know how difficult it was to convince my wife and the staff that we needed to increase prices. There was always some reason not to do an increase. At the same time, it is important to be profitable.

Recently I was working with a new client and I asked how she determined her prices. She said that she called around to other salons to see what they were charging. Given that and according to some industry numbers, 70% of the salons in the USA are not profitable. She was most likely setting a price point for failure. She then went on to tell me that most of the salons that she talked to were not making money.

Here is my advice. First, we always increase prices on or around November 1st. I want the price increases to come into effect before the busy holiday season. The price increase offsets the fact that all costs are going up. We do a calculation for our clients and, just to keep up with rising costs, they must increase prices by anywhere from 2% to 4%. If you don't do this you will most certainly lose money.

Secondly, as you or your staff advance, it is time to raise prices. This might be due to education or some other factor. One factor should be how booked the person is. Once someone becomes around 60% booked, it is time for a price increase.

I have not yet talked to a salon that increased prices and regretted it. The only regret I have ever heard was, "I should have listened to you earlier."

Larry Kopsa CPA