Starting in 1997, you can take part in a SIMPLE (Savings Incentive Match Plan for Employees) retirement plan. The plan can be either and IRA type or a 401(k) type plan. Just to show how simple this stuff is, I attended two different seminars this fall that covered these plans. The seminar that focused on retirement plans pushed the SIMPLE 401(k) and said the SIMPLE IRA was a joke and that no one in their right mind should have anything to do with it. At the other seminar, which focused on taxes, the advice was the opposite-the SIMPLE IRA is a good idea, the SIMPLE 401(k) is a complicated waste of money. (I’m paraphrasing of course). These simple plans have a bunch of rules about making elections within given time periods, not having other plans available, matching contributions under certain guidelines and requirements, special rules for not matching contributions, rules for determining eligibility, penalties for failing to furnish proper notices, penalties for early withdrawal (up to 25% for SIMPLE IRAs), etc. In other words, the complicated rules these simple ideas usually have. In all seriousness though, these plans can be very advantageous for some taxpayers.
For the SIMPLE IRA, the employee (or self-employed individual) can make elective contributions up to $6,000 per year. The employer must match dollar-for-dollar up to 3% of the employee’s compensation, although there is a special rule for reducing the matching contribution to 1% for 2 out of 5 years. For the SIMPLE 401(k), the employer matching contribution can be 3% of employee contributions or 2% of compensation of all eligible employees (even if not participating).
Have you heard about the Medical Savings account (MSA)? Well maybe you don’t hang out in the same circles I do (wouldn’t be caught dead in that circle, probably). A self-employed person would probably be the most interested in an MSA since health insurance is pretty much not deductible to them. The general idea is to change your health insurance to a high deductible plan ($1500-2250 for an individual and $3000-4500 for a family) and then to make a tax deductible contribution of either 65% (individuals) or 75% (families) to an MSA. What is hoped will happen is 1) with a higher deductible, your insurance premium will go down and 2) since the money will be yours (and not the insurance company’s), you will more closely examine your medical bills. If your family experiences good health (or if you become to cheap to go to the doctor), the MSA can become a savings vehicle. If you don’t spend the money, you don’t lose it - any unused MSA funds can be available as retirement benefits at some future date (similar to an IRA). If this works (it is officially “experimental”), the insurance companies, hospitals, doctors, and drug companies will begin receiving less money. And taxpayers’ health will be at least as good, if not better, than now.
Just to show that I can waste time as well as anyone, I created my own home page for my business on the World Wide Web, or Internet. (Does that make me a “home boy”?) My idea was to jump on the information superhighway (cyberhighway? infobaun?) and not get run over. My wife, Pam, was awarded a fellowship to make paper in upstate New York for two weeks last September. That left me with the choice to either cause trouble or create a web page. I figured that the people of Phoenix had enough trouble, so I chose the later. Anyway, I enjoyed the opportunity to learn to use HyperText Markup Language (HTML), which is easier to say than to do, and to learn how to crop, rotate, resize, and put captions on electronic photographs using Paint Shop Pro software. If you are Internet literate, my webpage address is /. If you are e-mail capable, my e-mail address is firstname.lastname@example.org. If you are neither, don’t worry, I am still available at 956-1774 or in person.
An example of what is available on the Internet (signs of intelligent life?):
David Letterman Top 10 List As presented on the 12/2/93 broadcast of LATE SHOW with DAVID LETTERMAN
"Signs You've Hired a Bad Department Store Santa"
10. He wears the Santa costume all year round.
9. Tells salesgirls that "Me and Mrs. Claus have an understanding."
8. After every toy request says "Yeah, right."
7. Tries unsuccessfully to hide the fact that he's wearing handcuffs.
6. Charges $5.95 for the first minute; $2.95, each additional minute
5. Every day around 10:00 AM, throws up on the down escalator
4. Keeps sending elves out for more vermouth
3. Whether they want it or not, gives every kid a crewcut
2. Keeps reminiscing about his vice presidency under George Bush
1. He's packin' heat.
Copyright 1996 Worldwide Pants, Incorporated. All Rights Reserved
Business bad debt or non-business bad debt? If the purpose of a loan is to protect your investment, it is a non-business loan; if its purpose is to protect your job, it is a business loan. Lets say you have invested $100,000 in your solely owned corporation, $1,000 in stock and $99,000 in debt (a loan back to you). Lets say the business went south on you and everything is lost. The stock is a capital loss and does not qualify for the preferable ordinary loss treatment. Period. The loan is usually considered a non-business bad debt and is also a capital loss. Recently, the Supreme Court ruled that a taxpayer in a similar situation had a business bad debt and, therefore, was entitled to ordinary loss treatment. Their reasoning was great, first that no one would invest $99,000 to protect a $1,000 investment and second, that if this guy didn’t work for himself, no one else would probably hire him.
To err is human, but when the eraser wears out ahead of the pencil, you’re overdoing it. J Jenkins.
A good CPA is hard to find. A taxpayer employed the services of an accountant, who reviewed the taxpayer’s past returns and retained his original tax records. While doing so, the IRS executed a search and seizure of the accountant’s office, resulting in the loss of the taxpayer’s records. The poor guy wound up in court, unable to document his deductions and credits. The Tax Court acknowledged that the records had been lost through no fault of the taxpayer, but that his failure to duplicate his records before turning them over to the accountant did not relieve him of his obligation to prove his deductions and credits. Reading between the lines, I wonder if the Court suspected that there were records actively being lost in the back room while the IRS was in the front room going through the files.
People who buy annuities outlive people who buy life insurance. Maybe it has something to do with the anticipation of receiving something. In France, they have contracts in which someone sells their home but retains the right to live in it until their death. The French lady who is 120 some years old has apparently taken advantage of this and has reportedly outlived 4 buyers!
Congress looks to strip IRS of authority. Not only is Congress looking to cut the IRS’s budget, it is seriously considering removing entire projects from under IRS control and giving responsibility to outside groups. Last summer, a key House subcommittee voted to cut $270 million from last year’s spending level and freeze all work on the IRS’s Modernization program. To make matters worse, they also voted to turn over control of the program to the Defense Department. In 8 years, the IRS has spent $8 billion on the program and there is little to show for it. According to reports, Congress has concluded that the IRS lacks the technical expertise and management experience to undertake so large a project. Things are so bad that the measure passed would bar the IRS from developing or producing tax policy; the Treasury Department’s assistant secretary for tax policy would have sole responsibility.
I'm going out there to show them what nobody has ever seen at an arts festival before: a representative of all the thousands of artist who devoted their entire lives to a search for truth and beauty - and didn’t find doodley-squat.” Kurt Vonnegut, Jr Breakfast of Champions
Gary J Wood, P C, CPA has been solving tax and accounting problems for individuals and owners of closely-held businesses in the Valley area for more than a decade. Information contained in this article is general by its nature and should not be construed to be tax or legal advice.
If you would like specific advice for your situation,
please call (602) 956-1774 and arrange an appointment.
A copy of his newsletter, Schedule FYI, is available on the Internet at / or by sending a SASE to
P O Box 32815, Phoenix, AZ 85064.
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