FAQ

Accounting

• Can you help me set up QuickBooks?

  Yes. We have a number of QuickBooks experts that can help you quickly get your QuickBooks accounting program set up. We can also provide guidance so that your recordkeeping is efficient and organized for easy generation of ledgers and tax statements.

Audit

• What types of audit clients do you serve?

  Our audit practice focuses on small to medium size businesses and charitable organizations, and other non-profit entities.

• Why would I need an audit?

  Whether or not you need an audit, and the type of audit needed, depends on your business and circumstances. Most nonprofit organizations require an audit to meet their board’s fiduciary responsibility. Additionally, nonprofits often need audits to apply for grant funds. Small to medium businesses usually require audits to meet the provisions of debt covenants with their lender or to qualify for bonds to bid construction projects. Organizations (such as school districts, local governments and nonprofits) who receive federal or state funds are often required to have an audit by the funding source. Regulated industries, such as banks, are required to have audits to meet the requirements of their regulator.

• Audits, compilations, reviews - I'm confused about which I need.

  The following list summarizes the various levels of service available.

  1. Audited Financial Statement - An audit opinion on a financial statement is the result of an intensive process for testing the accuracy and completeness of the financial statements and the underlying accounting records. It is the highest level of assurance a CPA can provide regarding the integrity of the financial statements.
  2. Reviewed Financial Statement - A review consists of analytical procedures and inquiries applied to the financial statements. Because its scope is substantially less than an audit, a review provides only limited assurance of the accuracy and completeness of the financial statements.
  3. Compilation - A compilation consists of preparing financial statements from information that is the representation of management, with a reading by the CPA to determine whether the financial statements appears to be free of obvious errors. It provides no assurance on the accuracy or completeness of the financial statements. Compilations are often used for internal purposes, but in many cases are accepted by third parties.

Tax

• What special deductions can I get if I'm self-employed?

  You may be able to take an immediate expense deduction of up to $125,000 for 2007, for equipment purchased for use in your business, instead of writing it off over many years. Additionally, self-employed individuals can deduct 100% of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE plan and deduct your contributions (investments).

• How are mutual fund distributions taxed?

  You must generally report as income any mutual fund distribution, whether or not it is reinvested. The tax law generally treats mutual fund shareholders as if they directly owned a proportionate share of the fund's portfolio of securities. (The fund itself is not taxed on its income if certain tests are met and substantially all of its income is distributed to its shareholders.) Thus, all dividends and interest from securities in the portfolio, as well as any capital gains from the sales of securities, are taxed to the shareholders.

• There are two types of taxable distributions: ordinary dividends and capital gain distributions.

  Distributions of ordinary dividends, which come from the interest and dividends earned by securities in the fund's portfolio, represent the net earnings of the fund. They are paid out periodically to shareholders. Like the return on any other investment, mutual fund dividend payments decline or rise from year to year, depending on the income earned by the fund in accordance with its investment policy. Because these payments are considered dividends to you, they must be reported on your tax return. As qualified dividends, they will enjoy the special low tax rate granted dividends in the 2003 Tax Act: specifically, a tax rate of 15% (except 5% for taxpayers in tax brackets below 25% and 0 for those taxpayers in 2008).

  Capital gain distributions are the net gains, if any, from the sale of securities in the fund's portfolio. When gains from the fund's sales of securities exceed losses, they are distributed to shareholders. As with ordinary dividends, capital gain distributions also vary in amount from year to year. Capital gains distributions received after 5/5/03 also qualify for a tax rate of 15% (except 5% for taxpayers in tax brackets below 25% and 0 for those taxpayers in 2008). What does this mean for you at tax time?

  Your mutual fund will send you a Form 1099-DIV, which tells you what earnings to report on your income tax return and which are post 5/5/03 distributions. You include ordinary dividends with your capital gain distributions as long-term capital gain, regardless of how long you have owned your fund shares.

• I have a large capital gain this year. What should I do?

  If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

• What makes Roth IRAs so special?

  Roth IRAs offer the following advantages:

  Withdrawals—if they qualify—are completely exempt from income tax, unlike all other retirement plans.

  Many can quickly build up their Roth IRA accounts by converting traditional IRAs into Roth IRAs—at a tax cost.

  Since you need not withdraw from your Roth IRA at any age, more can be passed on to heirs than would be allowed under other plans.

• What can I do if I converted to a Roth IRA and my income exceeds $100,000?

  You can "re-characterize" your Roth IRA to a Traditional IRA (with suitable paperwork). This eliminates the Roth IRA and the tax. The deadline is the tax return due date including extensions.

• What's the education tax credit?

  There are two types of education credit, and you must choose. Briefly: the Hope credit is for the first 2 years after high school, so it fits community college or the first 2 years of a 4 year college. It must be for at least half-time study. The credit ceiling is $1,500 per student per year (100% of the first $1,000, 50% of the next $1,000).

  The lifetime learning credit fits any undergraduate or graduate study, but study less than half- time must be work-related. The credit ceiling is $2,000 (20% of expenses up to $10,000) per taxpayer per year.

• How do Coverdell Section 530 plans and qualified tuition Section 529 plans differ?

  In several major ways, Section 530 plans limit investments to $2,000 a year per student; 529 plans allow much larger investments. Section 530 plans allow a wide choice of investments, while 529 investment choices are limited and conservative. Section 530 is a single nationwide program; each 529 program is different. Though both are available for higher education, Section 530 can also be used for primary and secondary education. You are free to use both for higher education for the same student.

• What pieces of paper do I need to keep in order to do my taxes?

  Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited. There are several types of records that you should keep. Most experts believe it’s wise to keep most types of records for at least seven years, and some you should keep indefinitely.

• How much property can an individual gift to another individual without paying gift tax?

  An individual taxpayer can transfer $12,000 in property, and spouses who agree to split their gifts can transfer a total of $24,000, to any number of individuals in a calendar year without ever paying gift tax. However, for gifts in excess of these amounts the excess is considered a taxable gift and is applied against the taxpayer’s $1 million lifetime exemption. The lifetime exemption shields a donor’s lifetime gifts of up to $1 million from gift tax. A gift tax return, Form 709, is required to be filed by a taxpayer who makes “taxable gifts” in the calendar year of greater than $12,000, although no tax is due until the taxpayer exhausts the $1 million lifetime exemption.

• As a business owner, what meals and entertainment expenses can I deduct as a business expense and what records must I maintain to substantiate them?

  In general you may deduct 50% of meals and entertainment expenses provided they are directly related to the active conduct of a trade or business or are associated with such business. To be directly related the taxpayer must have had more than a general expectation of deriving income or business benefit in the future. To be associated with such business means the entertainment either directly preceded or followed a substantial and bona fide business discussion. In either case the taxpayer must be able to substantiate the expense as to amount, time and place, business purpose and relationship of the person being entertained. As a general rule, entertainment facilities such as yachts, pools, tennis courts and the like as well as club dues for business, social, sporting and athletic clubs are not deductible.

Trusts & Estates

• What is a living Trust?

  A trust is a contract involving three parties. The Trustor (or trust maker) is the person who places assets into the trust. The Trustee is the person who operates the trust. The Beneficiary is the person who benefits from the trust. Usually, when a living trust is first set up, these three parties are all the same person. The trust maker sets up the trust, operates the trust and receives income from the trust. The Trustor/Trustee/Beneficiary is usually a single person or a married couple.

  A living trust is a trust that is created while you are still alive. You have complete control of it and can revoke or change it at any time. Because it can be changed, the IRS does not recognize it as an entity, and the beneficiary reports income earned from a living trust on the Form 1040 of the beneficiary.

  On the death of one or both of the Trustors, the trust will usually become irrevocable and it will no longer be a living trust.

• What is a Trust Agreement?

  The trust agreement provides a name for the trust, and it names the present and future trustees and beneficiaries. It often lists the initial assets placed into the trust and it describes the duties and powers of the trustee. It will provide for when the original trustee is to be replaced by a successor trustee and usually prescribes for the manner of operation of the trust after death of the Trustor(s). It will provide for how and when future beneficiaries of the trust are to receive income and/or assets from the trust.

  The trust agreement acts much like a will, except that assets in a trust are not subject to probate and the contents of the trust do not have to be made public. A trust agreement may, in some cases, help reduce or avoid estate taxes.

• How does a trust avoid probate?

  If you die without a trust, even if you have a will, your estate must go through probate if you own any real estate or have assets totaling over $100,000 in California. Even simple probates can take a year or more before the beneficiaries receive anything.

  If you have transferred your estate assets into a trust, when you die your assets will be simply handed over to your beneficiaries by your successor trustee, quite possibly within a few days after your death. Or, if you want your assets to be managed by your successor trustee and not turned over to your beneficiaries until they reach a certain age, that can be arranged by your trust agreement. When all assets have been turned over to the beneficiaries, the trust will no longer exist.