The 1099 HC for Massachusetts Residents

If you are a Massachusetts resident, you should be including a 1099 HC with your 2010 tax return. The 1099 HC comes from your health insurance provider and proves that the filer had adequate health insurance coverage (defined by the state as minimal creditable coverage or MCC) over the previous year. Here are some quick tips from the Massachusetts Dept. of Revenue (DOR) site:

• Electronic filing is suggested for the fastest return and 1099 HC information can be included electronically. If you are filing a paper return, include a copy of your 1099 HC.
• The 1099 HC form isn’t standardized and the format may vary for each insurance carrier, but the required information should be included regardless of the format.

For more information, visit the 1099 HC FAQ page at the Massachusetts DOR site.

Tips for Giving to Charity

Here are a few suggestions to avoiding being scammed when making charitable contributions:

• Don’t contribute cash. All of your contributions should be in the form of a check or money order made out to the charity. Never make the check out to the individual soliciting the donation.
• Don’t be misled by a charity that resembles or mimics the name of a well-known organization. All charities should be checked out before you donate.
• Don’t allow yourself to be pressured into donating immediately. Wait until you are sure that the charity is legitimate and deserving of a donation.
• When appropriate, ask for a written description of the charity’s programs and finances, especially if your intended contribution is substantial.
• If you have any doubt about the legitimacy of a charity, check it out with the local charity registration office (usually a division of the state attorney’s general office) and with the Better Business Bureau (BBB).

Writing a Will – 5 Reasons Everyone Should Have a Will

Many people don’t appreciate the importance of a will, especially if they think their estate is too small to justify the time and expense of preparing one. And even people who recognize the need for a will often don’t have one, perhaps due to procrastination or a hesitation to broach this sensitive subject with loved ones.

The truth is, nearly everyone should have a will. Here are the five basic reasons why:

Reason 1: To Choose Beneficiaries

The intestate succession laws of the state in which you live determine how your property will be distributed if you die without a valid will. In most states the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to the spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings, if the parents are deceased).

These distributions may be different that what you would intend. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive.

Note: If you wish to leave property to a charity, a will may be needed to accomplish this goal.

Reason 2: To Minimize Taxes

Many people feel they do not need a will because their taxable estate does not exceed the amount allowed to pass free of federal estate tax. Tax laws change, however, and these assumptions should be reviewed given the current state of federal estate tax laws. It is important to review and update your will on a regular basis. Most wills were written with the existence of a federal estate tax at a certain level.

Further, your taxable estate may be larger than you think. For example, life insurance, qualified retirement plan benefits, and IRAs typically pass outside of a will or estate administration. But retirement plan benefits and IRAs (and sometimes life insurance) are still part of your federal estate and can cause your estate to go over the threshold amount. Also, in some states, the estate or inheritance tax differs from the federal laws. A properly prepared will is necessary to implement estate tax reduction strategies.

Tip: Changes in the estate tax laws and in the size of your estate may warrant a re-examination of your estate plan.

Reason 3: To Appoint a Guardian

You should prepare a will to name a guardian for minor children in the event of your death without a surviving spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.

Reason 4: To Name an Executor

Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you may not have chosen. Obviously, there is peace of mind in selecting an executor you trust.

Reason 5: To Help Establish Domicile

You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.

If you need guidance with your will, just give us a call at (781) 449-8700.

Succession Planning for Family Businesses

The transfer of a family-owned business from one generation to another can be one of the most difficult times for both the business and the family. Transferring the family business requires the family to make a determined effort to do the following:

• Create a business strategic plan.
• Create a family strategic plan.
• Prepare an Estate Plan.
• Prepare a Succession Plan, including arranging for successor training and setting a retirement date.

These are the four plans that make up the transition process. By implementing them, you will greatly improve the odds of a successful transfer of your business within the family hierarchy. A detailed description of each is below:

Q: What is a business strategic plan?

A: A strategic plan for the business will allow each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company’s future. This plan is long term in nature and focuses on where you want the business to be at some future date.

Q: What is a family strategic plan?

A: The family strategic plan is needed to maintain a healthy, viable business. It establishes policies for the family’s role in the business. For example, it may include an entry and exit policy that outlines the criteria for working in the business. It should include the creed or mission statement that spells out your family’s values and basic policies for the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.

Q: What is an estate plan?

A: An estate plan is critical for the family and the business. Without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.

Q: What is a succession plan?

A: A succession plan will ease the founding or current generation’s concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready.

The office of Edward F. Connelly, CPA is experienced in working with family businesses and can help with any succession planning or issues that may arise. Give us a call at 781-449-8700.

7 Small Business Tax Mistakes

Taxes can be confusing, especially for small businesses. Here are some of the most common mistakes and misconceptions:

Myth 1: 100% of Start-Up Costs Are Deductible Immediately

Business start-up costs are expenses you incur before you actually begin your business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.

You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation. You can elect to deduct up to $10,000 of business start-up costs and $10,000 of organizational costs paid or incurred in the year that you start a business. The $10,000 deduction is reduced by the amount your total start-up or organizational costs exceed $60,000. Any remaining cost must be amortized.

The only catch is that in order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years (180 months).

Myth 2: Overpaying The IRS Makes You “Audit Proof”

The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. However, they do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

Myth 3: Being incorporated enables you to take more deductions.

Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are pretty much equivalent to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend $1,000 in legal and accounting fees to set up a corporation, only to determine shortly after that they want to change their name or company direction. Plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

Myth 4: The home office deduction is a red flag for an audit.

This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.

Myth 5: If you don’t take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

Myth 6: Taking an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date.

Myth 7: Part-time business owners cannot set up self-employed pensions.

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial. After all, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If your accountant messes up, you pay the penalty, not him.

For more tax tips and financial guides, visit the Financial Guides section of the 128cpa.com website.

Welcome to 128CPA’s New Boston Accounting Blog

Thank you for visiting our new blog. It’s the new year and our resolution here at 128CPA is to create a helpful and informative new blog that will be relevant to both individuals and small business owners. We plan to cover accounting, tax preparation and financial topics. If you have a question on any of our posts or would like us to cover something specific, just let us know. We’d love to hear your feedback.