Is This Your Situation - Poor Cash Flow?

Contrary to popular opinion, profits are not the pulse of business. You can't spend profits. Most companies go out of business because they lack quality cash flow — not because they lack profits or assets.

So what should you do? Keep in mind that you must see the situation as a WAR. There are many battle fronts and many issues. If aren't victorious … you're out of business.

Here are some ideas to help you win the cash flow war:

1. Develop a written plan to increase cash flow.
  • Involve your staff in ideas.
  • Engage our firm to prepare the plan or facilitate the process.
  • Have specific action plans and due dates for all items.

2. Examine inventory levels – think of inventory as cash in a warehouse.
  • Get rid of obsolete items.
  • Have a fire sale.
  • Figure out how to reduce inventory levels and maintain in-stock rates.

3. Examine credit and collection procedures.

4. Examine billing practices – you can't collect until it's billed.
  • Create an objective to reduce the number of days in the billing cycle.

5. Negotiate with creditors – get better terms.
  • You'll be amazed at what creditors are willing to do if you ask and they understand the issues.

6. Examine staffing levels, compensation plans, and bonus plans.

7. Review all fringe benefit programs.

8. Prepare detailed cash projections with "What If?" analysis.

These are only some possible solutions. The issues are complex and must be acted on with a deliberate systems approach. For some companies, it may even be advisable to consider bankruptcy.

We can help in many of these areas. Contact us for guidance.

Don't wait until it's too late.

Can I Claim a Casualty Loss for Tax Purposes?

Q.  My home suffered major damage after a horrible storm. Do I get a tax break for a disaster like this?

A.   Possibly. When a natural disaster, such as a tornado or hurricane strikes your home or business, the results can be devastating — especially if the losses aren't fully covered by insurance or your insurance claim is contested.


What Qualifies for Tax Purposes?
 
To get a casualty tax write-off, damage must be caused by a "sudden, unexpected or unusual" event such as a hurricane, earthquake, tornado, fire, flood or storm. Auto collisions and thefts can also qualify. (There is no deduction for damage that results from gradual deterioration, such as destruction caused by termites or drought.)

Fortunately, you may be able to get help from Uncle Sam by claiming a casualty loss deduction on your tax return. If your region is officially designated as a "presidentially-declared disaster area" you don't even have to wait until you file your next tax return. You may be able to file an amended return for last year and get a quick tax refund for fast financial relief.

Claiming the loss on a return for last year will get you an earlier refund, but waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors.

If you suffer a casualty or theft loss, you generally may deduct the amount of your unreimbursed loss only to the extent that your losses for the year exceed 10 percent of your adjusted gross income (AGI) for the year. (Special rules apply to losses in federal disaster areas.) Before the 10 percent limit is applied, you must subtract $100 for each casualty or theft occurrence.

Example: Let's say the storm damage to your home is estimated at $200,000. But the insurance only covers $150,000. Your AGI is $100,000. After subtracting $100, your deductible loss is limited to $39,900 ($50,000 unreimbursed amount minus $100 minus 10 percent of your $100,000 AGI).

However, there are no limits on losses for business or income-producing property such as rental real estate. In other words, you can write off business losses without applying the 10 percent limit or the $100 per casualty amount applied to personal losses. So if your business suffered $50,000 of damage that was not reimbursed by insurance, the entire amount would be deductible (assuming your tax basis in the damaged assets was at least $50,000).

To claim a property loss, for tax and insurance purposes, you must be able to prove that a disaster took place. Keep copies of newspaper clippings and police reports. Take photos or videos after a casualty. If you have any "before" and "after" pictures or videotapes, they can help back up casualty loss claims of the disaster. This kind of detailed documentation may also be necessary to get insurance reimbursement and to apply for FEMA grants and SBA loans.

In addition to compiling records and other proof, you may also have to substantiate the value of the property loss by getting an independent appraisal from a real estate expert. (The cost of the appraisal and the cost of obtaining photographs or videos may be deductible as a miscellaneous expense.)

Consult with your tax adviser for more information about claiming deductions after suffering a casualty.

Supreme Court: Healthcare Law Involves a Tax, Not a Penalty

By now, you've heard of the decision of the Supreme Court to affirm in part and reverse in part appellate court rulings on the healthcare law.

The court's ruling preserved the heart of the Patient Protection and Affordable Care Act, which requires most Americans to buy health insurance by 2014 or pay the government a tax penalty.

We'll explain 10 ways the law might affect you and your business, but first, here are the facts of the landmark case.

In Plain English

There were two main issues to be determined in the case, National Federation of Independent Business v. Sebelius:

1. Whether the individual mandate to require all Americans to purchase health insurance is constitutional.
2. Whether the federal government can force states to accept changes in Medicaid or lose their funding.

The Individual Mandate

The Court held that the healthcare law requirement that almost all Americans must purchase health insurance or suffer a penalty is constitutional. This was not based on the Commerce Clause in the U.S. Constitution, but on the taxing power of Congress. Five Justices agreed that the penalty citizens must pay if they refuse to buy insurance is, in effect, a tax that Congress can impose.

Basically, a majority of the Court accepted the Obama Administration's "third" backup argument that, as Chief Justice Roberts put it, "the mandate can be regarded as establishing a condition -- not owning health insurance -- that triggers a tax -- the required payment to IRS." The first argument was based on the Commerce Clause, the second was based on Necessary and Proper Clause, and third was based on the taxing power of Congress.

The High Court noted that Americans subject to the individual mandate can lawfully forgo health insurance and pay higher taxes, or buy health insurance and pay lower taxes. The only thing that they cannot lawfully do is not buy health insurance and not pay the resulting tax.
The Court made clear it was not making a political decision. "We do not consider whether the Act embodies sound policies," Chief Justice Roberts stated. "That judgment is entrusted to the Nation's elected leaders. We ask only whether Congress has the power under the Constitution to enact the challenged provisions."

The Expansion of Medicaid

The second key component of the Supreme Court case is the Medicaid expansion. The current Medicaid program offers federal funding to states to assist pregnant women, children, needy families, the blind, elderly, and the disabled in obtaining medical care. The Affordable Care Act expands the scope of the Medicaid program and increases the number of individuals the states must cover.

Specifically, the law requires state programs to provide Medicaid coverage by 2014 to adults with incomes up to 133 percent of the federal poverty level. Currently, many States cover adults with children only if their income is considerably lower, and they do not cover childless adults at all. The Affordable Care Act increases federal funding to cover the states' costs in expanding Medicaid coverage. But if a state does not comply with the law's new coverage requirements, it may lose not only the federal funding for those requirements -- but all of its federal Medicaid funds.

The Court considered the basic question: Is the Medicaid provision constitutional if it requires states to comply with new eligibility requirements for Medicaid or risk losing their funding? The Court held that the provision can be allowed as long as states will only lose new funds if they don't comply with the new requirements, rather than lose all of their funding.

Chief Justice Roberts noted that a state "could hardly anticipate that Congress's reservation of the right to 'alter' or 'amend' the Medicaid program included the power to transform it so dramatically." Therefore, the Medicaid expansion "violates the Constitution by threatening States with the loss of their existing Medicaid funding if they decline to comply with the expansion."

However, the Court continues stating: "The constitutional violation is fully remedied by precluding the Secretary from applying [the statute] ... to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion. The other provisions of the Affordable Care Act are not affected. Congress would have wanted the rest of the Act to stand, had it known that States would have a genuine choice whether to participate in the Medicaid expansion." 

What Does All this Mean for You?

There are so many provisions of the Patient Protection and Affordable Care Act that are applicable to almost all Americans. Here are 10 basic ways the law may affect you:

1. Most Americans must have healthcare insurance by 2014, or pay a penalty tax for not having it.

2. An insurance company cannot turn children under age 19 down for coverage because of pre-existing conditions. Beginning in 2014, this protection extends to cover all Americans.

3. Many young people will be able to stay on a parents' plan until they are age 26.

4. Seniors may pay less for prescription drugs.

5. Insured individuals will generally be entitled to certain preventative services without charge.

6. The private sector will continue to provide health care financed by the insurance companies.

7. More low-income people will likely be covered by Medicaid.

8. Starting in 2014, employers with 50 or more full-time equivalent employees that do not currently offer health insurance as a benefit will be required to do so, or a penalty will be imposed. However, businesses with less than 50 employees are exempt.

9. Insurance companies cannot cancel your policy and beginning in 2014, they cannot impose lifetime dollar limits on your benefits.

10. There are many tax implications in the new law for individuals and businesses. Click here for our chart listing the most important.

Key Quote

"The Federal Government does not have the power to order people to buy health insurance. Section 5000A (the individual mandate provision of the law) would therefore be unconstitutional if read as a command. The Federal Government does have the power to impose a tax on those without health insurance. Section 5000A is therefore constitutional, because it can reasonably be read as a tax."
-- Chief Justice John Roberts, writing for the Supreme Court

Supreme Court Case Background and Facts

• Twenty-six States, several individuals, and the National Federation of Independent Business brought suit in Federal District Court, challenging the constitutionality of the individual mandate and the Medicaid expansion in the healthcare law.

• The Court of Appeals for the Eleventh Circuit upheld the Medicaid expansion as a valid exercise of Congress's spending power, but concluded that Congress lacked authority to enact the individual mandate. Finding the mandate severable from the law's other provisions, the Eleventh Circuit left the rest of the Act intact. Subsequently, the appeal to the Supreme Court ensued.

• In a move that surprised many people, Chief Justice John Roberts sided with Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayour to form the 5-4 majority upholding the Affordable Care Act.

• The opinions, collectively, are long! The Chief Justice Robert's majority opinion is 59 pages, Justice Ginsburg's concurring opinion is 61 pages, the four dissenters are 65 pages, followed by a short two-page opinion from Justice Thomas.

If you have questions about how the healthcare law may affect your business, speak with your employee benefits adviser, tax adviser and/or attorney.

Make Sure Charitable Contributions Pass Strict Documentations Rules

When it comes to the tax code, some documentation requirements are flexible, while others are dictated by law and there's no exception. A recent Tax Court case illustrates the importance of following the strict charitable contribution rules.

Facts of the case. David and Veronda Durden filed a joint return for 2007 claiming a deduction of $25,171 for charitable contributions made by cash or check. Most of the contributions were made to the taxpayers' church. Except for five checks, the amounts the taxpayers wrote checks for were larger than $250.

In April 2009, the IRS sent a notice of deficiency disallowing the taxpayers' claimed charitable contribution deduction for 2007. The taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church dated January 10, 2008, which acknowledged contributions from them during 2007 totaling $22,517. The IRS did not accept this first acknowledgment and informed the taxpayers that it lacked a statement regarding whether or not any goods or services were provided in consideration for the contributions.

The Durdens obtained a letter from the church dated June 21, 2009 that contained the same information in the first acknowledgment as well as a statement that no goods or services were provided in exchange for the contributions.

Under the tax code, the court noted that no deduction is allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment of the contribution by the donee organization. For donations of money, the donee's written acknowledgment must state the amount contributed, indicate whether the organization provided any goods or services in consideration for the contribution, and if so, provide a description and good faith estimate of the value.

A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of:

• The date the taxpayer files the original return for the year of the contribution or
• The due date (including extensions) for filing the original return.

The IRS argued that the first acknowledgment received by the Durdens did not meet the requirements of the law because it did not state whether or not any goods or services were received. The second acknowledgment failed because it was not contemporaneous.

The Durdens conceded they did not strictly comply with the law, but argued that they substantially complied and were still entitled to the deduction. The court noted that it has allowed "substantial compliance" in some cases where, despite a lack of strict compliance, the taxpayer substantially complied by fulfilling the essential statutory purpose. The doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply with the specific requirements of a provision. The court listened to the Durdens' arguments but sided with the IRS and held that the taxpayers failed to strictly or substantially comply with the clear requirements of the law. Therefore, the deduction was disallowed. (Durden, T.C. Memo. 2012-140) 

What the Case Means for All Taxpayers

The result here seems unduly harsh considering the church made the error, but it's not the first time a taxpayer has been denied a charitable contribution deduction because of poor documentation. The rules are strict.

As the taxpayers in the above case learned, you can't just rely on the charity to provide the correct documentation. Many organizations know the rules and are careful, but some are not. Obviously, the larger the contribution, the more care you should take.

Shortly after a contribution, most charities will follow up with a statement. Some organizations mail out their statements just after the end of the year. Large contributions may be acknowledged quickly.
After making a substantial contribution, set up a reminder to look for the acknowledgment. Then, make sure the amount listed is correct and the other requirements are met.
Here's a synopsis of the most frequently encountered charitable donation rules:

Cash contributions.  No matter how small the amount, you need:

• A canceled check, credit card statement, or other banking record or 
• A receipt or other written documentation from the charity with the donee's name, amount, and date of contribution.

For contributions of $250 or more, you'll need an acknowledgment from the charity (see below). The $5 bill you drop in the kettle during the holidays isn't deductible unless you get a receipt.  
Noncash donations under $250. For each donation, you must have a receipt or letter from the organization indicating the organization's name, date and location of donation, and a description (no indication of value required) of the property donated.

Many charities are lax with the rules. Make up a detailed list of items before contributing (don't just write "five bags"). If that's impractical, for example in the case of a clothing drop box, you may be able to satisfy the requirement with a reliable written record.
Contributions of $250 or more. For these donations, you must receive a contemporaneous written acknowledgment from the organization. It must include:

• The amount of cash and/or a description of the property contributed.
• Whether or not any goods or services were provided in return for the contribution and a good-faith estimate of the value of the goods or services.
• A statement that the only benefit you received was an intangible religious benefit, if that was the case.

Noncash contributions of more than $500.  Property contributions of more than $500 require a description on IRS Form 8283 of your tax return of the donated property and certain other requirements. The $500 threshold is determined by totaling all similar items of property donated to one or more organizations and treating that as a single item.

Noncash contributions of more than $5,000. You need a qualified appraisal of the property donated. There are certain exceptions to this rule. One is for publicly traded securities for which market quotations are available on a securities market.

Vehicle contributions. If the vehicle is valued at more than $500, you need an IRS Form 1098-C or other contemporaneous written acknowledgment from the charity. The rules here can get complicated. Talk with your tax adviser before contributing.

Payroll deductions. Save the W-2, pay stubs, or other documentation provided by your employer. You must also have a pledge card or other document prepared by, or for, the qualified organization that shows its name. If your employer withheld $250 or more from a single paycheck, you must also have an acknowledgment from the charity that you did not receive any goods or services in return for any contribution.

There are other rules dealing with conservation easements, contributions of appreciated property, facade easements, etc. And, while there are chances to save some significant tax dollars with these types of donations, there are plenty of traps. If you're making a substantial contribution, or a series of contributions over time, check the rules carefully and consult with your tax adviser.