INSTEAD OF A CASH BONUS...GIVE YOUR EMPLOYEES SOMETHING THEY WILL REMEMBER

My good friend Robert Polk reminds me that studies show that noncash rewards, such as incentive trips, are more effective at increasing performance than giving cash bonuses! One primary reason is that cash does not have the staying power that incentives offer.

When a survey conducted by Wirthlin Worldwide, was given to 1,010 people, their findings showed that people saw cash "rewards" as compensation and spent it on necessities rather than a personal reward. For example, 29 percent of the people spent the money on bills, 18 percent do not remember what they spent it on and 11 percent spent it on household items. Additionally, cash rewards do not reinforce association with the company the same way an incentive trip would, nor does it provide a tangible symbol or lasting reminder of their achievement. Do you remember what you spent your last bonus on?

IRA CONTRIBUTION

Larry, I am 63 and plan on retiring at the end of the year. Can I still make an IRA contribution for 2008? Henry

Henry, the answer is yes. For the 2008 tax year you can contribute $5,000...that is assuming that you have earned $5,000. In addition, since you are over age 50 you can add an additional $1,000 for a $6,000 total. It does not matter when during the year you retire so long as you meet the compensation requirement. But you can no longer contribute to an IRA after you reach age 70 ½.

It is a pleasure serving you.

Larry Kopsa CPA

CLIENT GIFTS

This may be a little late for this year, but keep it in mind for the future. It is customary to thank customers this time of year with a gift. As you might guess, once again the IRS has to stick its nose into our business. They have rules on how much you can give and still deduct. The biggest problem is that there is a $25 limit per client per year. This amount has not been changed since the 1970’s.

The downside is a dollar limit that makes the IRS look suspiciously like Ebenezer Scrooge. 25 bucks per person, max. (Bah, humbug!) Husband and wife count as one person. (Humbug again!)

How can you get around that limit? Consider these strategies:

Consider giving to groups of people, like "the Kopsa family" (Larry and Maggie ((husband and wife so 1)), Ryan ((son 1)), and Tony((son 1)), for a $75 total) or "the folks at Kopsa Otte CPA’s" (There are 25 of us, for a $625 deduction).

Consider giving a gift of entertainment, which you can treat as a gift (subject to the $25 limit) or an entertainment expense (subject to the 50% limit). For example, tickets to a ball game sell for up to $110 each. If I give two tickets, I can deduct them as a $50 gift or a $110 entertainment expense. That's an easy call. (Almost as easy as giving the tickets away instead of attending the game!)

Ad specialties with a value up to $4 each are deductible as advertising and don't count against the $25 per person annual limit for business gifts. Contest prizes you give to customers (but not employees) also qualify.

I know, I said it's better to give than receive. But why not receive that tax break for your holiday gift if it's out there?

FIVE REASONS WHY THE ECONOMY MIGHT RECOVER FASTER THAN YOU THINK IN 2009

Here is Some Optimistic News

(U.S. News & World Report) -- There are a number of reasons to think that the economy might, just might, shift back into gear faster than most of us think or hope. One is plunging oil prices. Now they're below $40 thanks to slowing global demand. At the same time, gas prices have plunged from over $4 a gallon to around $1.67 nationally. (And some analysts think they're heading to a buck a gallon.) JP Morgan Chase economist James Glassman estimates that the drop in oil prices represents "a boost equivalent to a $350 billion stimulus." Another reason is falling mortgage rates. Rates for a 30-year, fixed-rate mortgage fell to a low, low 5.19% last week. That should help housing affordability and the ability of current homeowners to refinance their mortgages. Other reasons are the actions by the Federal Reserve, which has made it clear that the Fed will buy various debt securities to unfreeze the credit markets, and President-elect Obama's stimulus plan, as the new Democrat-controlled Congress will likely spend somewhere between $750 billion and $1 trillion over the next two years to boost the economy. The final reason is America's deep fundamentals. Overall, the core U.S. economy is in far better shape than it was in the 1970s, with a higher productivity and a better tax and regulatory system. Even though the U.S. economy finally succumbed to the oil shock and the credit crisis in 2008, it held up longer than many predicted thanks to its deep strengths. Who knows, maybe it will surprise the bears again in 2009.

TEST TIME

This Math test can predict who can give you the best information to help you to be more profitable. Try it without looking at the answers...No cheating!

Ok get your fingers at the ready.....Pick a number from 1-9.....times this number by 3.....then add 3.....then times by 3 again.....You should have a two digit number.....Add these two numbers together.....You then should be left with a single digit number which will tell you who your best business advisor is.

1. The IRS

2. Your banker

3. Your neighbor

4. Your bartender

5. The federal government

6. Your brother in law that has made every mistake imaginable

7. Oprah

8. Your insurance guy

9. Kopsa Otte CPA’s and Advisors :>)

10. Your momma

FOR THOSE OF YOU THAT ARE CONTEMPLATING USING INDEPENDENT CONTRACTORS OR ARE USING INDEPENDENT CONTRACTORS

With business down and costs up, I have heard from many salons that are considering changing to an independent contractor arrangement as opposed to an employee arrangement. As I have said many times in this blog, independent contractor will most likely not pass muster with the Internal Revenue Service and with your State Departments of Labor.

Here is another reason that you want to stay away from this. This case involves a contractor, but the result will be the same in the salon situation. This individual was considered an independent contractor for a manufacturing company. He worked for the manufacturing company for three years and earned over $128,000. A 1099 was prepared for the individual, in that, they treated the person as an independent contractor.

Here is the problem. The Internal Revenue Service audited the individual and found that he had not paid any income taxes on money received. They also found out that the individual was not in a financial position to pay the tax. Because of this, the Internal Revenue Service looked at the business that was paying him and determined this person was actually an employee. As such, they should have withheld 28 percent federal tax and social security tax of 7.65 percent plus matching 7.65 percent. Before penalties, I calculated that the misclassification of the $128,000 cost the company over $164,000. Mind you, this is before any penalties and interest.

If you are using independent contractors in your salon (not booth renters), you are walking on thin ice.

DEAR PRESIDENT ELECT OBAMA,

Taxing small business will not fix the healthcare crisis.

When it comes to addressing the nation's healthcare crisis, there is a right way and a wrong way to implement change. Unfortunately, many public officials think the easiest way to reduce the number of uninsured Americans is to require employers to contribute toward their employees' healthcare costs. These types of proposals are often referred to as employer-responsibility initiatives or "pay or play" legislation.

As small business owners struggle to stay afloat during difficult economic times, it's unfortunate that some elected officials choose to burden our nation's job creators with more costs they likely can't afford. The reality is that these types of proposals, which set a dangerous example are gaining support in statehouses, cities and courthouses across the country.

HERE IS WHAT'S HAPPENED IN SAN FRANCISCO

Recently, the 9th Circuit Court of Appeals ruled in favor of San Francisco's healthcare security ordinance, which requires employers with 20-99 employees to pay $1.17 per hour per employee for healthcare costs. Employers with 100 or more employees must pay $1.76 per hour per employee. These rates will increase in January 2009 to $1.23 and $1.85 respectively, and will continue to increase annually.

Employer healthcare payments can be made either to the employee through at traditional employer-sponsored plan, directly to employees as reimbursements for healthcare costs or to the city to fund its Health Access Program.

TAX REMINDERS

Here are our final tax reminders for this year to help you avoid problems:

• If you have a flexible spending account balance you must clean it out by Dec. 31 if your employer still has not adopted the 2½-month grace period which is now permitted by the IRS. If your employer has not made the change, any money left in your flex spending account is forfeited.
• Mail checks for deductible items before year end to ensure a 2008 write-off. You get to claim the deduction this year even if the checks do not clear until January.
• Make sure you know the rules if you are charging deductible items.
• For charges that you make with a retail store credit card, you are allowed to claim the deduction for the item only in the tax year in which you pay the bill.
• For transactions made with a bank credit card, you take the deduction in the tax year that you charged the goods, even though you pay the bill next year.

And our final suggestion for this year:

• Have a happy holiday season!

The income tax forms will start to arrive in mailboxes in less than three weeks.

YEAR-END TAX TIPS

Here are some year-end tax tips from the IRS. Check out the IRS summary at FS-2008-26.

If you are making year-end contributions to charity, keep in mind several important tax law provisions that have taken effect in recent years. Another good summary is in the IRS release IR-2008-138. Remember that Dec. 31 is the last day for most of these actions to occur.

QUESTION ON RECEIVING INVENTORY

Larry, we will be receiving retail orders from now until the end of the year- should we receive them now or wait until the new year? Sarah

Sarah, remember we want to "match" revenue and expense. If you pay for the inventory you will want to count it. If you include in ending inventory and don't pay for it, we want to make sure that it is in accounts payable even though you are a cash basis taxpayer.

Let me know if there is anything else that we can do for you.

It is a pleasure serving you. Merry Christmas to all.

Larry Kopsa CPA

JOE THE PLUMBER

I don’t know how I had missed the following joke during the election season, but thought that you might enjoy. It is about applying the tax policy change philosophy to plumbing bills.

Barack Obama discovers a leak under his sink and calls Joe the plumber to come and fix it.

Joe drives to Obama’s house, which is in a very nice neighborhood where it’s clear that all the residents make more than $250,000 per year (or $200,000 per year or $150,000 per year, depending on who’s speaking and when).

Joe arrives and takes his tools into the house. He’s shown the room that contains the leaky pipe under the sink. Joe figures it’s an easy job that will take less than ten minutes. Obama is standing near the door and asks Joe how much it will cost.

Joe immediately says, “$9,500.”

“$9,500?” Obama replies stunned. “But you said it’s an easy job!”

“Yeah, but what I do is charge a lot more to my clients who make more than $250,000 per year so I can fix the plumbing of everybody who makes less than that for free,” responds Joe.

Obama tells Joe there’s no way he’s paying that much, so Joe leaves.

A week later the leak gets so bad that the Obamas have had to put a bucket under the sink, and it fills up every two hours, so they call Joe back. Joe goes back to the Obamas’, looks at the leaky pipe, and says, “It’ll cost you about $21,000.”

Obama exclaims, “A few days ago you told me it would cost only $9,500!”

Joe explains, “Well, a lot of rich people are learning how to fix their own plumbing, so there are fewer of you paying for all the free plumbing we’re doing for the people who make less than $250,000 - and I refuse to charge the lesser income people for plumbing work.”

Obama tries to straighten out Joe. “But don’t you get it? If all the rich people learn how to do their own plumbing and you won’t charge the poor people, what will you do for money?”

Joe immediately replies, “I guess I’ll run for President.”

LOOKING FOR WAYS TO CUT BACK?

I have received several emails lately from clients and non-clients asking for ways to cut back due to the slow economy. Every situation is different, but here are a few things clients are doing that seem to work.

1. Add a new service related to your current offerings.


2. Entice customers with a discount or promotion.


3. Ramp up customer service. Be extra attentive to existing customers, but court new ones, too.


4. Split advertising costs with neighboring, non-competitive businesses.


5. Reduce your inventory to only what you need.


6. Renegotiate a deal with a supplier.


7. Cut back on overtime.


8. Trim the cost of benefits. Some decisions might be tough for employees, but it's better to scale back on benefits than to discontinue them entirely.


9. Learn the ropes of tax deductions.


10. Turn down the thermostat in the winter.


11. Turn off lights when you leave a room and shut down office equipment at night.


12. When not in use, turn off electronics chargers, which draw power even when not charging.


13. Have everyone bring in their own coffee mugs instead of going through hundreds of disposable cups each month.


14. Be honest with employees about how the economy is affecting your business.


15. Offer low- or no-cost rewards (like an afternoon off) to employees who come up with other cost-cutting measures you can implement.

QUESTION ON "C" CORP FISCAL TAX YEAR

Larry, I ran across your blog and was wondering if you could answer a question for me. I was interviewing an accountant for my taxes and he was telling me that the only choice for year end for a C Corp fiscal year is either Oct. 1st or Jan. 1st. I could not find the info on the IRS web site. Thanks for your time. Kyle

Kyle, a "C" corporation can have a fiscal year ending at the end of any calendar month. Either there is a misunderstanding, or you need to find yourself a professional tax advisor who is a little more knowledgeable about such basic matters. If this is what the accountant really thinks, consider yourself lucky that this person revealed his ignorance so early in your potential relationship.

Good luck.

Larry Kopsa CPA

THE POWER OF PBA

You've heard me say several times how important the Professional Beauty Association (PBA) is. I encourage all salons and spas to be members of PBA. Visit www.probeauty.org to find out how to join.

The following article from the December 2008 issue of www.modernsalon.com shows how helpful PBA is:

"When businesses and individuals join together in an association like Professional Beauty Association (PBA), we are more powerful advocates at the local, state and national level. Public policy and perception can have a profound impact on the professional beauty companies and organizations that populate the professional beauty industry. PBA's government affairs initiatives focus on a range of front-burner issues crucial to the beauty industry, including a tip-tax credit for salon/spa owners, wage and hour issues, health-care costs, license mobility, ADA lawsuits, manufacturing issues, and health and safety issues."

Here's how PBA helped in New Jersey.

"When new and confusing state tax legislation was passed in New Jersey, 'Having PBA to advocate for salons here in New Jersey was a big relief,' said Ed Simon of Mystique Hair and Skin. 'It's comforting to know there are experts on staff at PBA to turn to when issues like this arise.' Through direct lobbying, grassroots engagement and involvement in strategic coalitions, PBA advocates the interests of the beauty industry on issues that matter most."

"All of the work PBA is forging in government affairs is supported by individuals like you - citizens of a dynamic industry who understand the real cost of apathy and the true power of ideas and action."

POLITICALLY CORRECT GREETING

For those of you so inclined, here’s a Christmas greeting that will offend no one whatsoever. Well, let me re-phrase that…it might very well offend Christians but no one else.

A Politically Correct Holiday Greeting

Best wishes for an environmentally conscious, socially responsible, low-stress, non-addictive, gender-neutral, winter solstice holiday, practiced within the joyous traditions of the religious persuasion of your particular choice, but with respect for the religious persuasion of others who choose to practice their own religion, as well as those who choose to not practice any religion at all. Additionally, a fiscally successful, personally fulfilling, and medically uncomplicated recognition of the generally accepted calendar of 2009, but not without due respect for the calendars of choice of other cultures, whose contributions have helped make our society great, without regard to race, creed, color, religion or sexual orientation.

(Disclaimer: This greeting is subject to clarification or withdrawal. It implies no promise by the wisher to actually implement any of the wishes for him/herself or others, and no responsibility for any unintended emotional stress these greetings may bring to those not caught up in the holiday spirit.)

The American Legion Magazine, December 2008

WATCH OUT FOR THESE NEW PHONE AND EMAIL SCAMS

Just another reminder to not give out private information to anyone that calls you on the phone.

The latest one is a Jury Duty Scam. I have personally gone out to the FBI website to verify this report.

This scam appears to be spreading fast so be prepared should you get this call. Most of us take those summonses for jury duty seriously, but enough people skip out on their civic duty that a new and ominous kind of fraud has surfaced. The caller claims to be a jury coordinator. If you protest that you never received a summons for jury duty, the scammer asks you for your Social Security number and date of birth so he or she can verify the information and cancel the arrest warrant. Give out any of this information and bingo; your identity was just stolen. The fraud has been reported so far in 11 states, including Oklahoma, Illinois, and Colorado. This swindle is particularly insidious because they use intimidation over the phone to try to bully people into giving information by pretending they are with the court system. The FBI and the federal court system have issued nationwide alerts on their web sites, warning consumers about the fraud.

Don't believe me, check it out here:
http://www.fbi.gov/page2/june06/jury_scams060206.htm http://www.snopes.com/crime/fraud/juryduty.asp
http://www.truthorfiction.com/

FRAUDULENT GRAND JURY SUMMONS CONTAINING MALWARE

04/17/08—The IC3 warns consumers of recently reported spam e-mail containing a fraudulent subpoena notifying recipients they are commanded to appear and testify before a Grand Jury. The e-mail attempts to appear authentic by containing a court case number, federal code, name and address of a California federal court, court room number, issuing officers’ names, and a court seal. Recipients are directed to click the link provided in the e-mail in order to download and print associated information for their records. If the recipient clicks the link, malicious code is downloaded onto their computer.

The e-mail also contains language threatening recipients with contempt of court charges if they fail to appear. Recipients are also told the subpoena will remain in effect until the court grants a release. As with most spam, the content contains multiple spelling errors.

If you receive this type of notification and are unsure of its authenticity, you should contact the issuing court for validation.

Be aware; if you receive an unsolicited e-mail, especially from an unknown sender, it is recommended you do not open it. If you do open the e-mail, do not click any embedded links, as they may contain a virus or malware.

If you have received an e-mail similar to this, please file a complaint at www.ic3.gov.

IMPORTANT PENSION INFORMATION

IF YOU ARE OVER 70 ½ AND HAVE NOT TAKEN YOUR REQUIRED MINIMUM DISTRIBUTION FROM YOUR PENSION, THIS IS IMPORTANT

Required payouts from IRAs and plans may yet be waived for 2008, even though Congress decided not to do anything for this year. In light of the stock market’s decline this year, lawmakers considered not requiring folks who are at least 70½ to take payouts for 2008. That way, they wouldn’t be forced to sell investments in their plans with the market near the bottom. New legislation that may be taken up in Dec. would waive payouts for ’09. That’s no help for 2008. Treasury is still seriously considering providing relief for 2008 payouts. Our advice is to delay withdrawals to late Dec. if you don’t need the money. That way, you can take out less if Treasury decides that it can ease the payout rules.

HITLER ON YOU TUBE

How would Adolf have handled the current financial crisis? Click on Zer Dunkoff to find out.

NEW MILEAGE RATES ISSUED

The Internal Revenue Service has issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

· 55 cents per mile for business miles driven
· 24 cents per mile driven for medical or moving purposes
· 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

BE ON THE LOOKOUT FOR THESE ERRORS

Watch out for an error in the instructions for Forms 1099, 1098 and W-2G, and similar information returns. The correct due date for businesses to give a copy of the form to taxpayers is Feb. 17, 2009; not March 2 as the instructions state. The IRS can slap penalties on late issuers. The earlier date was OK’d by Congress in Oct.

HERE IS A GIFT IDEA FOR CHILDREN OR GRANDCHILDREN

If your child or grandchild worked this year and had wages or other earned income, funding a Roth is a great gift. You can give $5,000 or what the child earned, whichever is less. But keep in mind that the gift does count toward the $12,000 annual gift tax exclusion. This does not create a tax deduction but a Roth can grow into a nice nest egg, especially if you keep making pay-ins each year.

PINCH PROOF

For those of you that missed, I was quoted in an article written by Stacey Soble in Salon Today. The article, titled Pinch Proof, deals with the possible slowdown in salons due to the economy. The following was my contribution.

"Larry Kopsa, a partner of Kopsa Otte CPAs, an accounting firm that serves the beauty industry, concurs. 'As I read about the recession, it's been really interesting to examine our wide range of salon clients from small salons to large chains - many are performing more services per client and seeing numbers go up.'"

"Every strategic plan starts with a budget. 'If you're not working with a budget, you don't even know if you're hitting your numbers. You have to have that information upfront, so you can do things differently.'"

"While Kopsa says some salon owners have protested they can't afford to hire a financial expert to help establish and maintain a budget, he cautions that you can't afford not to. 'If you can't afford it, you shouldn't be in business. That's like buying a racehorse, but not being able to afford the trainer.'"

"Kopsa advises all his clients to establish two-to three-months worth of cash reserves in the bank just in case. 'Whether you are facing a recession or strong competition moves in across the street, it's always wise to establish cash reserves. If you put aside every year and end up never needing it, then you have funds for future projects like expansions and remodeling. What you don't want is a situation where you're going down the tubes, putting $100,000 on credit cards trying to save your business.'"

"One word of caution with the holiday season ahead, don't be tempted to use your gift certificate receipts as cash reserves. 'It's hard not to view that money as operating capital,' says Kopsa. 'Owners tend to spend it, but then you're just postponing your problem. As those certificates are redeemed, you'll be stuck dealing with paying for the labor and products associated with those sales.'"

Read the whole article in the November, 2008 issue of Salon Today.

IF YOU ARE A SINGLE MEMBER LLC, TAKE NOTE

If you have a single member LLC and you pay wages, you will need to have an ID number starting January 1, 2009. Per new IRS rules, single member/single owner limited liability companies are required to change how they report wages and pay federal employment taxes in 2009.