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April 1999

Welcome to ONLINE ADVI$OR.

Our monthly online newsletter provides useful tax, business, and financial planning information as part of our firm's commitment to total client service.

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 ADVI$OR, or for assistance with any of your tax, business, or financial planning concerns, contact our office.
Major Tax Deadlines

April 15 - Individual income tax returns for 1998 are due.

April 15 - 1998 partnership returns are due.

April 15 - 1998 annual gift tax returns are due.

April 15 - Deadline for making 1998 IRA contributions.

April 15 - First installment of 1999 individual estimated tax is due.
What's New in Taxes

It's that time of year again - April 15th!

April 15th is the deadline for filing your 1998 tax return.

If you won't be able to file your return by the April 15th deadline, be sure that you request an extension of time from the IRS. To get additional time, you must file Form 4868 with the IRS by April 15th. The extension is automatic and you are not required to explain why you need extra time. The extension gives you until August 16, 1999, to file, but it does not eliminate interest and late payment penalty charges for taxes you still owe.

What does the new accountant-client privilege mean to you?

Recent tax legislation established an accountant-client privilege, which is effective for advice given on or after July 22, 1998. "Privilege" means that an accountant is not required to disclose certain client communications to the IRS. How much can taxpayers rely on this privilege, and exactly when does it apply?

Congress had struggled with this issue for many years, and one of its concerns was that an accountant-client privilege would lead to new abuses of the tax system. The result is a privilege with many exceptions.

What does this privilege cover?

To come under the privilege, the communication between accountant and client must be in connection with tax advice and must be such that it would be privileged if made between lawyer and client. The privilege does not apply to tax preparation, just as there is no attorney-client privilege covering tax preparation. The client must have the expectation that the advice will be confidential. Any disclosure, even inadvertent, voids the privilege.

The privilege is owned by the client, not the accountant. Therefore, if the client doesn’t give consent, the accountant may not claim that advice is privileged. The privilege applies only to noncriminal matters before the IRS or in Federal Tax Court, and excludes matters related to other government agencies, such as the Securities and Exchange Commission (SEC). At the last minute, Congress included a provision which disallows the privilege for any written communications between an accountant and a representative of a corporation concerning any tax shelter.

Unfortunately, the definition of certain terms is unclear, and concepts such as "tax shelter," "tax advice," "disclosure," and "accountant" are likely to be defined in future court cases.

With all this complexity and uncertainty, is there a place for privileged communication between accountant and client? The answer is yes, but only for the informed and careful. Do not assume that what you tell your accountant will come under this new privilege. As with much tax legislation, this provision is likely to be a mixed blessing.

New Business

New IRS ruling may boost your travel deductions

The costs of traveling from your home to your job, called "commuting expenses," are generally not tax-deductible. However, under certain very limited circumstances, these expenses are considered "transportation expenses" and they are deductible.

The deduction is available when you are traveling to a job site that meets the definition of a "temporary workplace." In the past, the IRS generally defined "temporary" in terms of days or weeks. Now the IRS has issued a ruling defining temporary workplace as a location where work is expected to last (and does in fact last) for one year or less.

Still complicated, this new ruling should be reviewed by all employees and employers involved with short-term work locations.
Smart Business

How to increase the value of your business

If you own a business, one day you will probably decide to sell it or otherwise dispose of it. Therefore, your major concern should be how to plan today to maximize the value of the business in the future.

Start with a business plan

Because your business is already in operation, you may have a written business plan. If not, make one. A business plan is your road map. It will guide you over the rough spots and assist in getting you where you want to go.

In the plan, you should address specific areas that have a direct bearing on the ultimate value of the company. These are organization, marketing, finance, accounting, and personnel.

Organization. The proper organization of your company today can make it easier to sell in later years. It can also have a significant impact on how much of the selling price you will keep rather than pay out in taxes. Which is best - corporation, limited liability company, partnership, or sole proprietorship? Seek professional assistance in determining the best form for your business.

Marketing. If you have not had formal training or extensive experience in selling to your target market, engage a marketing expert. It matters little that you have the best product available if you don't reach the right buyers with the right message and do it with the least time and money.

Finance. The financial structure of your business will affect its sales value. A business that has excessive short-term debt is less attractive to a buyer than one with the same amount of debt with a long-term easy payment commitment.

Use debt wisely; keep an eye on the ratio of your total debt to total assets and the financial return on your equity. Use budgeting and forecasting to control costs, to match your production to sales and to keep inventory at the appropriate levels. Avoid the temptation to drain all the profits from the company.

Accounting. Accounting is also very important. Good records will show potential buyers why your company is worth the asking price. Some companies with poor accounting procedures unintentionally understate their ending inventories. This will reflect an increase in the cost of goods sold and reduce bottom-line profits. The company pays lower taxes, but a buyer sees a less profitable business and will be unwilling to pay what the business is actually worth.

Personnel. Finally, build an organization of high quality people. Train your staff to operate the business in your absence. This is a long-term project and requires a commitment of time and money. Pay your people well enough to avoid excessive turnover. Your customers will appreciate the stability of your staff, and you will be able to enjoy more time away and a better price when you are ready to sell.
Three social security changes could affect you

1) If you're receiving social security benefits, you now may ask to have income taxes withheld. Doing so could reduce the size of quarterly estimated tax payments you're required to make or eliminate them altogether. To request withholding, complete IRS Form W-4V (Voluntary Withholding Request) which you can get by calling the IRS at 800-829-3676.

2) You no longer have to ask the Social Security Administration for an estimate of benefits you'll receive when you retire. Starting this year, every worker age 25 and older will automatically get an annual earnings and benefit estimate report.

3) The amount of earnings you can have before your social security benefits are reduced are adjusted for inflation every year. In 1999, you can earn $9,600 if you're under age 65 and $15,500 if you're 65 to 69. As always, there is no earnings limit if you're 70 or older.
What's so hot about stock index funds?

A record amount of money has poured into the stock market in recent months, and more of it than ever has been invested in a type of mutual fund called an index fund. These are mutual funds that are designed to mimic the performance of a stock index, such as the S&P 500 index. They do this by holding all or nearly all of the stocks that make up the index in the same proportion as the index – in effect, the fund becomes a miniature version of the index. As the index goes up or down, the fund should follow.

You can now buy funds reflecting various indexes, including the S&P 500, the Dow Jones Industrial Average, and indexes of small company stocks, international stocks, specialized industry sectors such as utilities, and even corporate bonds. Historically, the S&P 500 index funds have outperformed well over half of actively managed stock funds; however, funds tracking other indexes have done less well.

An index fund will never quite match the performance of its index because of the fund’s operating costs. But these costs are low compared to actively managed mutual funds, where the managers are constantly buying and selling stocks as they search for winners. In contrast, an index fund holds the same basket of stocks, only trading to reflect changes in the index or to invest new money coming into the fund. The lowest cost index funds have expense ratios around 0.2% of assets, compared to ratios of around 1.4% or more in actively managed funds. Because they trade stocks less frequently, index funds also generate fewer taxable capital gains distributions for their investors to worry about each year.

If you enjoy the challenge of seeking out the winning active fund managers, an index fund may be too passive for you. But if you want the assurance of knowing that you will do almost as well as the market without active participation, consider an index fund for at least part of your portfolio. Remember though, your investment will follow the index down as well as up, so invest for the long run. By selecting various indexes you can still allocate your investment portfolio among different sectors, such as large cap stocks, emerging markets, or international funds.
Chuckle of the Month

Personal safety is all in the numbers for comedian Elayne Boosler.
Though statistics show that violent crime is down, Elayne isn't taking any chances. She says, "I have six locks on my door all in a row. When I go out, I only lock every other one. I figure no matter how long somebody stands there picking the locks, they are always locking three."
ONLINE ADVI$OR is issued monthly to provide useful information. Return to this site every month for helpful tax-cutting suggestions, business information, and financial planning tactics.

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.

If you would like more information on anything in ONLINE ADVI$OR, or if you'd like to be on our mailing list to receive other tax, business, or financial planning information from time to time, please contact our office. We're here to help you minimize your taxes, manage your business more profitably, and identify financial planning strategies suited to your situation.

Copyright 1999 Richard C. Woodbury P.C. CPA