20017 E. Sharon Avenue
Houghton, MI 49931 USA
Phone (906) 482-1305
Fax (906)482-9555


November 2002

Major Tax Deadlines For November 2002

During November: It's wise to estimate your 2002 income tax liability and review your options for maximizing your 2002 taxes. Call us if you'd like to schedule a tax-planning session.

Note: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.

Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid. For more information on tax deadlines that apply to your business, contact our office.

IRS change may help preserve retirement savings

Generally you must wait until age 59½ to begin withdrawing retirement funds, or you face a 10% early withdrawal penalty. One exception allows you to take a series of equal payments for at least five years or until you turn 59½, whichever is longer.

If you're currently taking early distributions, the balance of your retirement account may be shrinking faster than you expected due to the stock market decline. Now you may be able to slow down your distributions to preserve your retirement savings.

According to the IRS, you can now change the way the required withdrawals are calculated. The alternate method bases the required withdrawal amount on the account balance at the end of each year, instead of when you originally began taking distributions. This may decrease your required distribution.

If you'd like details about changing methods, contact our office.

Avoid Roth IRA traps: Brush up on the rules

A Roth IRA can be an attractive way to save for retirement. However, if you're interested in establishing a Roth or rolling funds from your traditional IRA into a Roth, be careful not to be caught in one of the many tax traps. Here are some important Roth IRA rules you need to know.

* You can convert a traditional IRA into a Roth IRA, but only if your adjusted gross income does not exceed $100,000. This income limit is the same whether you are single or married. Rollovers to a Roth IRA are not permitted for married taxpayers who file separate tax returns.

* When you convert a traditional IRA to a Roth, you'll owe income taxes based on the value of the IRA when converted. If you change your mind, you can switch the funds back into a traditional IRA until October 15 of the year following the conversion. If done properly, there will be no tax due on the conversion.

* Once your income reaches a certain level, your eligibility for making Roth IRA contributions is reduced or eliminated. The income phase-out range is $95,000 to $110,000 for singles and $150,000 to $160,000 for joint filers. For couples filing separate returns, the phase-out range is $0 to $10,000.

* You can have both a Roth and a traditional IRA if you like, but the total of your contributions to all IRAs (not counting education savings accounts and Roth rollovers) can't exceed $3,000 for 2002. The limit is $3,500 if you're 50 or older.

* You can take tax-free and penalty-free withdrawals from your Roth provided you meet two tests. First, the Roth must be in existence for at least five years. Second, you must be at least 59½, disabled, or use the money to buy your first home. If you fail either test, the earnings portion is taxable and may also be subject to a 10% early withdrawal penalty.

The rules for IRAs are complex and mistakes can be costly. Contact us for planning assistance.

New Business

IRS releases new per diem travel rates

If you're in business, you probably know expenses for business travel, meals, and entertainment must meet strict tests in order to be deductible. In addition, you must have records to substantiate the expenses.

In some cases, per diem amounts may be used in lieu of keeping track of actual expenses for away-from-home lodging, meals, and incidental expenses. This simplifies recordkeeping. Under the per diem method, the amount of the expense is considered to be substantiated. However, you still must document the time, place, and business purpose of the expense.

Recently the IRS announced the per diem rates that are effective October 1, 2002, through September 30, 2003. For high-cost locations, the rates for meals and incidental expenses increased from $42 to $45. For low-cost areas, the rate increased from $34 to $35. Also, several cities were added to the list for which higher per diem rates apply. If you'd like more information about accounting for your business travel expenses or the per diem rates, contact our office.

Smart Business

Applying for a business loan? Know what your banker needs

How do bankers decide whether or not to grant that all-important loan approval? The most important reason for any banker to approve a loan is also the most obvious: because it will be repaid, and with interest. What will your banker consider?

* Cash flow. To determine how you will repay a loan, bankers look first at the cash flow of your business, both historical and projected. Bankers need convincing evidence that there is adequate cash flow to take care of your business, with enough left over to make payments on the loan. Because of this fact, your application should focus on the source of repayment for the loan.

* Financial statements and tax returns show the historical cash flow of your business. Typically, you will need to provide your banker with statements and returns for at least the most recent three years. Estimated future cash flow can be included in a business plan.

* Loans for expansion. Perhaps you need a loan for a particular item of equipment or real estate. Show your banker how your business will earn enough to repay the debt. For example, additional cash flow may be generated by the new equipment or property.

* Bridge loans. Maybe you need a loan to bridge the time period between purchases and sales or sales and collections. Show your banker how inventories and receivables are converted to cash in your business. This can be demonstrated by turnover ratios for inventory, payables, and receivables.

* Other information. Your banker may have additional needs, such as a list of available collateral. Your credit record must be sound. But in the eyes of your banker, nothing is more important than cash flow to repay the loan.

For assistance in preparing a loan application for your business, contact our office. We can see to it that the information a banker needs is properly presented in your request.

What's New in Financial Strategies

Why are companies announcing reverse stock splits?

Perhaps you own a stock that has split since you purchased it. Stock splits are common when a company's share price increases to the point where investors are reluctant to buy it. Splitting the stock creates a lower price that can stimulate trading. After a stock split, you simply own more shares at a fraction of the previous share price. A two-for-one split is like getting two ten-dollar bills for a twenty. You own more shares, but the total value of the shares is initially the same.

Now investors are experiencing another phenomenon. Some stock prices are so low that the companies risk being delisted from the major exchanges, or investors are simply reluctant to buy their stock. To jack up the price, some companies are announcing reverse stock splits. A reverse split is like getting a twenty in exchange for two ten-dollars bills. It reduces the number of shares owned, and it increases the individual share price. Again, the total value of your shares is initially the same.

When evaluating whether to buy or sell an investment, you should always look beyond the share price and evaluate how well the company is actually performing. For assistance, give us a call.

Exercise caution with 401(k) loans

Borrowing from your 401(k) retirement plan may sound like a great idea. After all, 401(k) loans may help you to pay for college tuition, a new house, or a hospital bill.

With a 401(k) loan, you can withdraw funds quickly and repay the loan at a low interest rate, generally one or two percent above prime. You may be able to repay the loan over five years or an even longer period if the loan is for a principal residence. Not only that, payments are deposited right back into your 401(k) account.

But 401(k) loans also carry some not-so-apparent costs. Consider this: What if you lose your job and can't pay off the loan balance within a preset time? If you're under age 59½, you'll owe a 10% early withdrawal penalty on the outstanding loan balance. In addition, the outstanding loan balance will be added to your taxable income for the year.

There's also the cost of earning less money on your 401(k) account balance after you take out a loan. Over several years, the result can be substantial and can affect the funds you'll have for retirement.

Bottom line: If you need to borrow, it pays to review all your options. For some people, home-equity loans with tax-deductible interest make more sense than 401(k) loans. If you'd like help deciding which options make the most sense for you, give us a call.

Test Your Math Skills

Take this simple quiz to test your math skills. Solve it without taking notes and without using a calculator.

Take 1000. Add 40.
Add another 1000.
Add 30.
1000 again.
Plus 20.
Plus 1000.
And plus 10.

What is the total?

Answer: If your answer is 5000, it's wrong! Try the test again using a calculator. The correct answer is 4100.

The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

Copyright 1998 Richard C. Woodbury P.C. CPA