DEDUCTING MEALS AND ENTERTAINMENT

Meals and entertainment gives us a great opportunity to save taxes but also is an area that we see many mistakes.

The first problem is that many salons do not deduct all of the meals and entertainment that they have coming to them. There are many opportunities that are overlooked. Think about situations with:

• Meals with customers


• Meals with staff


• Meals with stockholders


• Meals with DSC's


• Drinks and expensive meals with your accountant


• Entertainment with any of the above.

The second problem is that many salons deduct meals and entertainment but they don't "audit proof" their deduction with good records. Check out our website for a good summary of the rules: Make the Most of Business Meals/Entertainment. Let me know if you have any questions.

Larry Kopsa CPA

NOAH & THE ARK TODAY

If you ever wondered if Noah could build the Ark today, wonder no longer. Check out the web site below. Unfortunately there is more truth than comedy in this: Noah & The Ark Today.

QUESTIONS ON FDIC COVERAGE

Now with the supposed economic crisis, we've been receiving questions on FDIC coverage. One of our accountants, Megan Munsell, researched this subject and came up with answers to some of the questions you may be having.

Find out if you are FDIC Insured with these common questions:

Q: What types of bank accounts are insured?
A: Checking, Savings, Trust, Certificates of Deposit (CDs), IRA Retirement Accounts, and Money Market Deposit Accounts.

Q: What is not FDIC Insured?
A: Investments in mutual funds, annuities, stocks, bonds, Treasury securities and safe deposit boxes. See additional questions and answers below for more on these accounts.

Q: How much is insured?
A: The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.

If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage -- your deposits are fully insured.

Q: What if we have more that $100,000 deposited in the same bank?
A: The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership. You can qualify for more than $100,000 in coverage at one insured bank if you split up your deposit accounts into different ownership categories.

The most common ownership categories are:

Single Accounts: these are deposit accounts owned by one person and titled in the person’s name only. All of your single accounts at the same bank are added together and the total is insured up to $100,000.

Note: Retirement and qualifying trust accounts are not included in this ownership category.

Certain Retirement Accounts: these are deposit accounts owned by one person and titled in the name of that person’s retirement plan.

Only the following types of retirement plans are insured in this ownership category:

Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs

Section 457 deferred compensation plan accounts (whether self-directed or not)

Self-directed defined contribution plan accounts

Self-directed Keogh plan (or H.R. 10 plan) accounts

All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.

Note: Naming beneficiaries on a retirement account does not increase deposit insurance coverage.

Joint Accounts: these are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if a husband and wife share accounts at one bank, the total of their accounts is insured up to $200,000.

Revocable Trust Accounts: these are deposits held in either payable-on-death (POD) accounts or living trust accounts. Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account.

The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:

The beneficiary is the owner's spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.

The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.

For POD accounts, each beneficiary must be identified by name in the bank's account records.

If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner's other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner's share as his or her single account.

Note: In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner’s POD accounts with the living trust accounts that name the same beneficiaries at the same bank.
Additional Questions and Answers:

Q: What about Mutual Funds?
A: The key point to remember when you contemplate purchasing mutual funds, stocks, bonds or other investment products, whether at a bank or elsewhere, is: Funds so invested are NOT deposits, and therefore are NOT insured by the FDIC – or any other agency of the federal government.

Q: Securities?
A: Securities you own, including mutual funds, that are held for your account by a broker, or a bank's brokerage subsidiary are not insured against loss in value. The value of your investments can go up or down depending on the demand for them in the market. The Securities Investors Protection Corporation (SIPC), a non government entity, replaces missing stocks and other securities in customer accounts held by its members up to $500,000, including up to $100,000 in cash, if a member brokerage or bank brokerage subsidiary fails.

Q: Treasury Securities?
A: Treasury securities include Treasury bills (T-bills), notes and bonds. T-bills are commonly purchased through a financial institution. Even though Treasury securities are not covered by federal deposit insurance, payments of interest and principal (including redemption proceeds) on those securities that are deposited to an investor's deposit account at an insured depository institution ARE covered by FDIC insurance up to the $100,000 limit.

Customers who hold Treasury securities purchased through a bank that later fails can request a document from the acquiring bank (or from the FDIC if there is no acquirer) showing proof of ownership and redeem the security at the nearest Federal Reserve Bank.

Q: Safe Deposit Boxes?
A: The contents of a safe deposit box are not insured by the FDIC. If you are concerned about the safety, or replacement, of items you have put in a safe deposit box, you may consider purchasing fire and theft insurance. Consult your insurance agent for more information.

Information provided by FDIC.gov

DID YOU KNOW???

This beats getting out of the car and looking for the gas cap door. Why doesn't anyone tell us these simple things? Why didn’t the manufacturer make more of a point of this? Seems as if it is reasonably important.

I have been driving for many years... I would think I should have noticed the little secret on my dashboard that was staring me in the face the whole time...I didn't...and I bet you didn't either...Have you ever rented or borrowed a car and when arriving at the gas station wondered...mmmm, which side is the gasfiller cap?

My normal solution was to stick my head out the window, strain my neck and look, try to see in the side mirrors or even get out of the car! Well ladies and gentlemen, I'm going to share with you my little secret so you will no longer look like Ace Ventura on your way to the gas station or put your neck at risk of discomfort or injury.If you look at your gas gauge, you will see a small icon of a gas pump?The handle of the gas pump will extend out on either the left or right side of the gas pump? If your tank is on the left, the handle will be on the left? If your tank is on the right, the handle will be on the right (see photo). It is that simple!

Don't feel dumb, just go out and share the world's best kept auto secret with your friends.

NEW TAX LAW

Correction: The dates of 4/9/08 and 6/30/08 were incorrect when this post was published on 9/15/08. These dates have been corrected and appear in red below.

As I mentioned in my post on August 4th, the New Homebuyers' Tax Credit gives a $7,500 credit to some people buying homes between 4/9/08 and 6/30/09. But beware, this is an interest free loan, not a true credit, and must be paid back over a period of 15 years.

Below are a couple of questions I have received about the new credit, including my responses.

Q - If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?

A - Yes, but you must meet certain qualifications in both years. The law allows taxpayers to choose to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. There are some detailed rules on this which you should discuss in person with your tax preparer to make sure that you qualify.

Q - If I purchase a home in 2009, can I choose whether to report the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?

A - Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 amounts, then you can choose the year that yields the largest credit amount. There’s also a new special website devoted just to this new credit.

SOMETHING TO PONDER

What was the reason given for developing the Department of Energy during the Carter administration? We have spent multi billions of dollars in support of this agency and I am willing to bet not one person who reads this will remember the reason given. It was very simple.

THE DEPARTMENT OF ENERGY WAS INSTITUTED TO LESSEN OUR DEPENDENCE ON FOREIGN OIL.

NOTE: IN 2008 THE BUDGET FOR THIS DEPARTMENT IS NOW AT $24.2 BILLION A YEAR. THEY HAVE 16,000 FEDERAL EMPLOYEES AND APPROXIMATELY 100,000 CONTRACT EMPLOYEES.

NON CPA TAX PREPARERS CRITICISED

According to the Treasury Department, many returns done by unlicensed paid preparers are riddled with errors. Agents made undercover visits to 28 such preparers and found that 61% of the returns contained mistakes, and in a third of those cases, the preparers acted recklessly.

In one example the preparer added in deductions the taxpayer wasn’t entitled to, or claimed dependents erroneously. One of the problem preparers the Treasury visited prepared over 700 actual returns for taxpayers during the most recent filing season. This information gives legs to a bill forcing unlicensed preparers to register with IRS.

Preparers who aren’t CPAs, lawyers or enrolled agents will have to pass a test to do tax returns. As Senator Grassley once said, “it does not seem right that you have to have a license to cut hair, but do not need to have a license to do a tax return.”

We at Kopsa Otte know that this is true. We get to see a lot of returns when we do second opinions. Just this week we are amending a return prepared by an unlicensed preparer and the happy new client is getting refunds of over $3,000. If you are not a client of Kopsa Otte, and are interested in having us do a Second Opinion on your tax return, contact Amanda Hansen at ahansen@kopsaotte.com for details.

EAT, DRINK, AND BE DEDUCTIBLE

Fall is here. The kids are back in school, and it's time to get down to business. As the holidays approach, you'll want to know how to make the most of holiday entertainment expenses.

Here is a review of the rules for deducting business meals and entertainment.

Meals and entertainment you host in the course of your business are deductible if they’re directly related to the active conduct of your business or they take place directly before or after a substantial, bona fide discussion directly related to the active conduct of your business. That means, clients or customers; prospective clients or customers; referral sources; and other business relationships (vendors, professional colleagues, etc.).

The general rule is that you can deduct 50% of most meals. Specific deductions include meals, drinks, taxes and tips.

Now for the fine print:

• Surroundings must be conducive to business discussion.
• To prove your deductions, you’ll need a diary, day planner, or similar log to verify your deduction. IRS Publication 463 directs you to record the cost of the meal, date of the meal, establishment where the meal takes place, the business purpose for the expense (or business benefit you gain or expect to gain from the meal), and your business relationship with your guest.
• You’ll need receipts for expenses over $75. (Many clients mistakenly think they have to keep receipts for expenses over $25.) Credit card statements work if you corroborate them by recording the business purpose of the expense in your business diary.
  
• You can’t deduct meals with your spouse unless you’re traveling together for business. However, you can include the cost of a spouse or other “closely connected” person (such as children or parents) if your guest brings their spouse.
  
• Don't forget the cost of entertaining at home! You can deduct costs for small gatherings at your home under the same rules that apply when you go out to eat. If you invite more than 12 guests, you can deduct “reasonable” costs if your primary purpose is business. To show compliance, include employees; let guests know your business purpose; discuss and display your product or service at the event.

Really, why celebrate something as trivial as a birthday, bat mitzvah, or wedding anniversary when you can celebrate 10 years in business, or 15 years at the same location? Just take it from Rick Moranis, playing nebbishy accountant Louis Tully in Ghostbusters:

"Hey, everybody, this is real smoked salmon from Nova Scotia, $24.95 a pound! Only cost me $14.12 after tax, though . . . . that's why I invited clients, instead of friends."

• Expenses for sporting and theatrical events, golf and boating outings, and similar entertainment are also 50% deductible if they take place directly before or after a substantial, bona fide discussion directly related to the active conduct of your business. Deductions include the face value of tickets (but not a scalper's premium) to sporting and theatrical events, food and beverages, travel and parking expenses, taxes, and tips.

You can deduct a full 100% of the expenses listed below:

• Meals and entertainment for sales seminars and similar events where the meal is integral to the presentation
  
• Costs for sporting events you organize to benefit charity
  
• Recreation expenses for your employees

Meal and entertainment expenses are easy to overlook -- especially when it comes to entertaining at home. But over time, those little expenses add up. Don't lose out on those easy savings!

SOMETHING TO PONDER

What was the reason given for developing the Department of Energy during the Carter administration? We have spent multi billions of dollars in support of this agency and I am willing to bet not one person who reads this will remember the reason given. It was very simple.

THE DEPARTMENT OF ENERGY WAS INSTITUTED TO LESSEN OUR DEPENDENCE ON FOREIGN OIL.

NOTE: IN 2008 THE BUDGET FOR THIS DEPARTMENT IS NOW AT $24.2 BILLION A YEAR. THEY HAVE 16,000 FEDERAL EMPLOYEES AND APPROXIMATELY 100,000 CONTRACT EMPLOYEES.

RECOVERY REBATE CREDIT WORKSHEET

As we have discussed quite a bit, there is a lot of confusion over how the rebates will be handled on the 2008 tax returns, both for people who receive checks and for those who don't.

The IRS has just released this draft of the instructions for the 2008 1040. On pages 18 and 19 are the rebate credit worksheets for computing the amounts to enter on Line 70 of the 1040. Add this in… think this is confusing. Check out the two page, 29 line form that you have to fill out to determine if your rebate is correct.

FOR CALIFORNIA RESIDENTS ONLY-REVAMPING THE SALES TAX

One of our clients asked about cosmetology services becoming taxable. We did some research and found the following article: Revamping The Sales Tax

It doesn’t look like anything definite is in the works yet…and who knows what services they will pick, but we thought this might be something California residents might like a "heads up" on.

EXPLAINING THE TAX SYSTEM

My partner, Candy Otte, just passed this on to me. It is a perfect example of the tax system and the politicians' attempts to "buy votes" by claiming that the Republicans are favoring the rich by giving the people paying the most in taxes the most benefit. My question has always been, "how can you cut taxes for someone that is not paying taxes?"

Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

§ The first four men (the poorest) would pay nothing.
§ The fifth would pay $1.
§ The sixth would pay $3.
§ The seventh would pay $7.
§ The eighth would pay $12.
§ The ninth would pay $18.
§ The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

§ The fifth man, like the first four, now paid nothing (100% savings).
§ The sixth now paid $2 instead of $3 (33%savings).
§ The seventh now pay $5 instead of $7 (28%savings).
§ The eighth now paid $9 instead of $12 (25% savings).
§ The ninth now paid $14 instead of $18 (22% savings).
§ The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!" "That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

TITLE IV FUNDING CHANGE MAY AFFECT SALON SCHOOLS

I came across some information regarding a change to Title IV policy that may affect salon schools' ability to retain Title IV aid.

This change deals with the use of Title IV funding to cover prior period charges. A school cannot use more than $200.00 of the current year’s aid to cover prior year costs. If no current year charges are available, the aid (less $200.00) is required to be returned to the student. Prior year charges can be created when a student is charged for the entire amount of tuition up front and receives aid in multiple years. To avoid prior period charges, bill students a piece at a time to ensure current year charges are always available to cover with current year Title IV aid.

It is a pleasure serving you.

Larry Kopsa CPA