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Contents

Issue 1 I TaxSmartMag.com I

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TAX PROFESSIONALTAX PRO GAME PLAN Tax pros or any service industry, these 7four fundamentals are necessary for growing your business.THE INSIDIOUS NATURE OF THE AMT Managing the 8tedious, complexity of the alternative minimum tax.OIC–OH, I SEE Helping clients get rid of tax debt, not as 10easy as we would like.

FEATUREMAKE MORE MONEY RECESSION OR NOT Put more 12money in your clients’ pockets and your pockets grow too!

BUSINESS OWNERTAX PLANNING TIPS FOR THE BUSINESS OWNER 16What you don’t know can hurt you. Make sure you read thesevaluable tax saving tips. S CORP WHY & HOW Understanding the entity that can 17save you thousands of dollars in taxes.SCOOPING UP ROCK-BOTTOMS The real estate investor 17rally is around the corner. Learn how the Cost Segregation method helps you keep even more of your money.

CONSUMERTHE SUBTLE EROSION OF WEALTH Wealth Series Part 1 of 4. 19Upcoming issues include Wealth Accumulation (Part 2), Wealth Preservation (Part 3), and Wealth Transfer (Part 4).DREAM BIG PLAN SMART Thinking of starting your own 21business? Make sure you keep these things in mind.

EDITOR’S NOTE 4WEBCLIPS 5TAX BULLETIN 6SPOTLIGHT On Jay Chimayan 11SPOTLIGHT On Diane Jara 14PARSE WITH THE PRO Q&A 20TAXSMART AMERICA 22BUSINESS CENTER DIRECTORY

“Of all the different types of tax we have,the only one I really like would have to bethumb tacks.”

– Susan Harnsberger

I TaxSmartMag.com I Issue 1

EDITOR IN CHIEF: Susan Harnsberger

CONTRIBUTING EDITOR: James HarnsbergerEDITORIAL ASSISTANT: Teri Sampson

CHIEF WRITER: James HarnsbergerCONTRIBUTING WRITERS: Nick Angello,Susan Harnsberger

MARKETING AND PUBLIC RELATIONS: Gabi Barbarena

EDITORIAL DIRECTOR ONLINE:Susan Harnsberger

LAYOUT, DESIGN, AND ART DIRECTOR:Ric Jara ASSISTANT LAYOUT AND DESIGN: Susan HarnsbergerPHOTO EDITOR: Ric JaraCONTRIBUTING PHOTOGRAPHER: Nick Angello

DIRECTOR OF AD SALES: Teri Sampson

THE ADVISORY BOARDJames HarnsbergerFounder of TaxSmart America® Business Centers andTaxSmart America® University; 23 years in the tax industry as a business owner and 10 years in the industryas an educator; holds a degree in paralegal studies.Susan Harnsberger Founder of TaxSmart America® Business Centers andTaxSmart America® University; Bachelor of Science Degree in Physics; business owner since 2002.Ric JaraThrough custom design, Mr. Jara brands companies forgrowth in the market. Degree in Graphic Design & VisualCommunication.Gabi Barbarena Ms. Barbarena works with numerous business entities tostrategically grow their business and broaden their market reach. Masters Degree in Executive Management,Bachelor of Science Degree in Organizational Behavior.

TaxSmart America® Magazine is published quarterly by TaxSmartAmerica® Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123.Copyright© 2008 by Universal Abundance Enterprises, LLC. Allrights reserved. No part of this issue may be reproduced or trans-mitted in any form or by any means, electronic or mechanical, including photocopying without permission. Requests for permission may be sent to TaxSmart America® Inc.,8825 Aero Drive, Suite 103, San Diego, CA, 92123. Subscriptionrates: one year $27.90. Reprints available: write Reprint Department, TaxSmart America®, Inc., 8825 Aero Drive, Suite 103,San Diego, CA, or call 858 277-0775.

TaxSmart America® Magazine is published quarterly by TaxSmart America®Inc., 8825 Aero Drive, Suite 103, San Diego, CA, 92123, (858) 277-0775. Opinions expressed herein are solely those of the editors and contributors.Readers are advised to take special care in relying upon opinions or recommendations. The reader is responsible for verification of any information provided herein.

One day about a year ago my husband and I were at the bookstore browsing fora couple of magazines to take over to the coffee place a few stores over. We enjoy having coffee and reading outside, so it’s something we do as often as we can. I don’tknow what it was about that particular day, but wandering through the magazineaisles, I had an epiphany that would alter and add to my role in our companies in avery rewarding way.

Looking through a plethora of business and finance magazines, I noticed that although several boasted an article or two on taxation, there was not a single magazine dedicated to taxes. Now you might think, well, yeah, who wants to readabout taxes? When I first met my husband, I wondered the same thing. I love himdearly, so I just assumed that on the other side of his exceptional brilliance was maybea mild mental disorder that makes him enjoy reading tax code and tax law.

But after seeing the passion he has for this industry, after watching him pour overhis research, after listening to him provide in-depth, continued education lecturesand workshops to thousands of tax professionals in Southern California, I realizedquite sometime ago that taxes and our tax system are anything but boring.

Between the pages of this Magazine, we intend to inspire and educate the tax professional, bring awareness and knowledge to the business owner, and encourageand empower the consumer. Ultimately our desire is to help all taxpayers keep asmuch of their money as the tax code allows. We do this both through the Magazineand through our Business Centers.

TaxSmart America®Business Centers interviews and screens tax professionals(most have been in the business at least 5 years), throughout Southern California whoare interested in licensing with us. Those we license we feel are the crème de la crèmealready, but they then go through a rigorous 18-month professional development program along with 12 months of CTEC and IRS approved advanced education ontaxes and business services. In October we licensed our first 22 offices in SouthernCalifornia with another 30 scheduled for October 2009. We hope you’ll take a look atour directory on page 22. This is a talented group of very special people.

Through the Magazine, our goal is to become an exceptional resource for you. Wehope the articles in this first issue are of great interest and benefit to you. We alwayswelcome your comments and any suggestions you have for upcoming issues.

When my husband and I got over to the coffee place that life-changing day, Icasually mentioned that there are no tax magazines and maybe we should start one.The idea immediately resonated with him. I am eternally grateful for all his hard work,his support, and his belief in me in bringing our Magazine to life.

Susan HarnsbergerEditor in Chief

RAISING THE BAR

Photo: Nick Angello

Editor’s Note


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Tax preparation: Art or Skill? Actually, it’s both. The skill comes from understanding the tax code and keeping up with aplethora of weekly changes; the art is in being able to utilize the knowledge to the greatest advantage of the taxpayer.Missing deductions and credits could cost the taxpayer thousands of dollars in overpaid taxes. This is a lot more commonthan most people realize. Here are a few you might be missing: primary and secondary home mortgage (with somecaveats), points, discount fees, prorated property tax, investment management and advisory fees, keeping meals and entertainment separate, hobby expense if you earned hobby income, mileage for commuting between two jobs, professional publication subscriptions (like this one), professional association dues, FMV deduction on donating art ownedfor more than a year, possibly foregoing claiming your college students as dependents (high income taxpayers), AMT credits frequently left on the table, AMT rules approved in the Emergency Economic Stabilization Act of 2008 which maybe retroactive. This is a small sampling. To gain a better understanding of each of these and to see the full article for a lot moredeductions and credits for personal and business returns, please visit TaxSmartMag.com.

In a series of government studies published by the Government Accounting Office (GAO), it was found that many taxpayers don’t realize the extent by which they may have overpaid their taxes. Overpayment of taxes can be a result of errors, (deductions calculated incorrectly), or omissions (information not included on the return). Choosing to use the simplicity of the standard deduction rather than itemizing can also lead to significant overpayment. It is worth noting thatmany taxpayers, including small business owners, do not know that the IRS will allow for the filing of an amended tax return to correct these mistakes. An amended return also serves as a claim for refund of taxes that may have been overpaid,and in most cases the IRS will also pay interest to the taxpayer on refunds from overpaid taxes. Refund recovery can go backthree years and sometimes more. To read this article in its entirety, please visit TaxSmartMag.com.

Now more than ever a tax-planning strategy should be one of the top items on your after-tax-season “to do” list. If you area tax professional, you should be opening your files, determining who would benefit from your help, and letting them knowduring their tax season appointment that you’ll be calling them in after April 15 for a free consultation. Your client’s job isto build their wealth, your job is to help preserve it through effective tax planning. We are in the middle of a very tough recession. Many business owners are struggling to stay afloat and the idea of paying taxes when they are having troublemaking payroll leaves them in a state of ice cold fear. Knowing they have someone willing to put in hours of research tohelp them keep more of their money at least minimizes their worries. By the same token, if you are a taxpayer and have notreceived word from your tax professional, you should be asking him/her for a free consultation for a tax planning strategy.If he/she does not specialize in this, and it is a specialty, a list of professionals who do it everyday can be found on the directory on page 22. For more details on a healthy tax diet and research links go to TaxSmartMag.com.

The IRS has recently announced it is stepping up the examination and auditing of tax returns in an effort to increase compliance as well as tighten the multi-billion dollar “tax gap”. High on the list of growing IRS audits will be self-employedtaxpayers who file a Schedule C with their tax return. Estimates range from a 50% to a 74% increase in these taxpayer audits. Some of the examination issues include unreported income, particularly for small businesses with large cash volume, issues surrounding expense deductions, payments for independent contractors (possible employee issues), mileagedeductions, or expenses that may be personal in nature versus legitimate business expenses. Another target for examination and audit is the S corporation. Issues include reasonable salary, losses in excess of the basis in stock, accountable reimbursements paid under a plan and corporate compliance. The IRS will be paying special attention to thebusiness record-keeping practices for sole proprietors and all entities. To read this article in its entirety and find out what youcan do to prepare yourself, be sure and visit TaxSmartMag.com.

Webclips

TAX BULLETINIRS Imposes New Taxpayer

& Preparer Fines and PenaltiesBy James Harnsberger

The IRS has introduced a series of new penalties relatedto the preparation of tax returns. With passage of “The SmallBusiness Work Opportunity Act of 2007” (The Act), a tax preparer may now face a myriad of penalties related to thepreparation of a tax return: accuracy, understatement, andnegligent acts.

Section 6694 Penalties – The Act amended Section 6694(a)to now include a penalty if:

a) the tax return preparer knew or reasonably should have known of the position;

b) there was not a reasonable belief that the position would more likely than not be sustained on its merits;

c) the position was not disclosed (to the IRS) as provided in the section.

The Act increased penalties under this section from $250to $1,000 or 50% of the fee, whichever is higher. Thispenalty relates to reporting any item on an information return (including any Form 1040) where the return preparer knew, or should have known, that the itemreported would more than likely not be sustained on itsmerits. In addition a failure to disclose such an item to theIRS using IRS Form 8275 or 8275-R will result in the imposition of the penalty. Also, a second tier of penaltiescan be imposed if the IRS determines in any case that theconduct of such reporting is willful, or reckless in disregarding the rules. The penalties in such a case will nowbe $5,000 for each case or 50% of the fee, whichever ishigher.

In another example, the IRS will now impose penalties inany case where the return preparer fails or refuses to sign areturn they have prepared. Under the old law the penaltywas $50 for each violation. Under the new law the penaltyhas been increased to a maximum of $25,000 where a preparer has failed or refused to sign the return. The newpenalty assessments are retroactive back to May 26, 2007for any such return.

Tax preparers are advised to adopt a series of steps intheir practice to assist the client in understanding the newrequirements, as well as providing disclosure to the client ofthese requirements. Adopting a Client Acknowledgement

on the issue of new penalties is advised as follows:

a) Adopt a procedure that ensures every client is interviewed in the appointment.

b) Adopt a procedure to review all tax returns before providing them the client using a checklist.

Provisions of these new penalty assessments are retroactive back to May 26, 2007, for any such return. Finally,the IRS also ushered in a host of new penalties for taxpayers regarding the following:

Taxpayer Requirements

• RECORD KEEPING • SUBSTANTIATION • PROPER REPORTING • FILING REQUIREMENTS • UNDERPAYMENT OF TAX • UNDERSTATEMENT OF TAX• FAILURE TO COMPLY WITH REPORTING AND FILING

REQUIREMENTS

Tax professionals are advised to provide the client with aFULL DISCLOSURE of the possible penalties they now faceand advise the client of the requirements including interviewing the client, reviewing client records, substantiation of items reported on any return, and the DISCLOSURE TO THE IRS in accordance with FORM 8275and 8275-R.

ConclusionThe IRS announced that over the course of the next fiscalyear, starting October 1, 2008, it anticipates it will generatebetween $80 Million and $180 Million in new fines andpenalties. As an added problem the E&O insurance andbond may not cover the preparer or their client in thesecases of the more serious penalties now imposed.

Comments: Please visit TaxSmartMag.com/2cents.

RELATIONSHIP FIRST

As simple as it sounds,clients are people first. Even ifyou're the best tax pro in town, people feel most comfortablewhen you foster a solid work-ing relationship to accompanyyour skills. This means providevalue, communicate that value,and educate your client. For example, if your client is a soleproprietor that could benefitfrom forming an S-Corporation,then your job is to communi-cate the value while educatingthe client on entities and com-pliance and the tax conse-quences involved. Your clientcan now make an informed de-cision. Also if you are preparinga return with the client sittingacross from you, stop it. Youare doing little more than theclient could do with a software programat home. This does nothing to build a re-lationship or justify the fees you areworth. No matter how simple the return,a part of your value is preparing goodwork papers and substantiation in casethere is an audit. See your clients periodi-cally throughout the year for tax planningand updates. Start today building strongclient relationships.

FILL A NEEDAs you build client relationships, you

will begin to discern their needs. Thereare plenty of opportunities in your clientbase if you take the time to look and listenfor them. An opportunity for both of youto benefit strengthens your symbiotic re-lationship. Also, throughout the yearnearly every one of your clients is going tomake a decision that has a tax conse-

quence. If you are in touch with them,you have the potential to help them withthese decisions. As the professional, youactually have a better understanding oftheir tax needs than they do. The ultimategoal is to become a trusted member oftheir team.

STANDARDSSet them high and don’t waver. Tax

professionals are required to receive 20hours of continuing education each year,but that should be the bare minimum.You should get at least 100 hours CEthrough a quality CE program and bydoing research on your own. With in-creased knowledge and a burgeoning skill set, you build not only confidence but new services to provide your clients.Make a commitment to your education.You should also set aside some time to

learn the business of running abusiness. Not only will your fi-nances improve, but you will havea deeper understanding of thechallenges your business clientsface. Good or bad, word travelsfast. When people mention yourname, you want it to be for a referral.

FEESMost tax offices are greatly un-

dervalued! Know your office.Based on your financial numbers,figure out what you need to makea profit (and a salary) and chargefees accordingly. It's tempting,but DO NOT set fees based onwhat you think your client will payor what you think the guy downthe street is charging. Base yourfees on business acumen. If youare truly practicing the abovethree fundamentals, your fees formost clients will be secondary.

Many tax professionals have no ideawhat they are actually trying to accom-plish, and even if they do, they don'tknow where to start. Take some time anddecide where you want to be in threeyears. Reread everything above and layout a timeline, recognizing that Rela-tionship, Needs, Standards and Fees are in-terrelated with multiple components thatcan be accomplished simultaneously.Next work backward and set goals thatwill move you closer to your dreams.Think positively. Good luck!

Nick Angello holds a Bachelor’s Degree from Vanderbilt University. He is an accomplished writerliving in San Diego.


The Tax Pro Game PlanBy Nick Angello

Tax Professional

It happens in every industry. You've been working hard and putting in long hours, but you haven't been able to break through to the next level. Sometimes, however, hard work needs to be coupled with established fundamentals before success can be realized. Pro ath-letes obviously spend a lot of time practicing, but they don't just practice hard, they practice smart. With the help of a coach, they work toward a single goal by focusing on sound, proven techniques. For tax professionals, and really any service industry, there are four fun-damentals that should be kept in mind to help you not only work hard, but work smart as you go about building your business.

RelationshipStandards

Need



Tax Professional

THE INSIDIOUS NATURE OF THE AMTBy Susan Harnsberger

the regular income tax. Effectively, thehigher of the two gets paid. Most peopleare unaware they are even paying AMT.Software does everything and many taxpreparers simply provide the client theirreturn and tell them how much they owe.It is not always obvious.

Efforts have been made to reform or re-peal the AMT, but Congress has droppedthe ball time and again, year after year.Instead they have done nothing morethan put forth yearly “patches”. The latestpatch for 2008 was included in the first“bailout” measure last October, The Emer-gency Economic Stabilization Act of 2008.This Bill, passed by the Senate and theHouse and signed by President Bush onOctober 3, increased the exemption formarried filing jointly from $66,250 to$69,950, half that for married filing sepa-rate, and filing single or head of house-hold the exemption was increased from$44,350 to $46,200.

The AMT taxable income (AMTI) is,however, still taxed at 26% up to$175,000 and 28% for any AMTI above$175,000. This calculation is called theTentative Minimum Tax (TMT). The$150,000 phase-out threshold, which has

not been adjusted for inflation since itwas enacted in 1986, essentially meansthat any TMT over $150,000 will be taxedanother 25%. This effectively pushes thetwo tax rates, 26% and 28%, up to 32.5%and 35%, respectively. Very simply, up to$150,000 AMTI, the rate is 26%; between$150,000 and $175,000 AMTI the rate is32.5%; and greater than $175,000 AMTIthe rate is 35%.

For capital gains the rates are effec-tively 21.5% to 22% instead of just the15% calculated under regular income taxrules. This is because for every dollar ofcap gain, 25 cents more of ordinary in-come is subject to the 26% or 28% rate.So, for example, for a $100 cap gain, youhave $25 of the cap gain taxed at 26% or28% ($6.50 or $7.00 in tax) plus the $100cap gain taxed at 15% ($15 in tax). Addingthe two is $21.50 or $22.00 in tax, whichon a $100 cap gain is an effective rate of21.5% or 22%, respectively.

The Alternative Minimum Tax (AMT) was introduced by the Tax Reform Act of1969, and by 1970 it was up and running. This tax was originally intended toprevent a few wealthy families from paying little or no income tax using preferential tax treatment under the tax code of the time.

Now almost 40 years later, the AMT hasbecome an extremely complex and insidi-ous tax. In years gone by the AMT waspaid by the top 1% of taxpayers. However,since its inception, it has never been in-dexed for inflation. Every year more andmore people owe AMT. By 2010 the Con-gressional Budget Office estimates thatabout 20% of all taxpayers and about 40%of married couples will pay AMT. Of thosenumbers most are middle class not thewealthy for whom this tax was originallycreated. Table 1 illustrates that within par-ticular income levels, some percentage oftaxpayers will likely pay AMT by 2010. Table 1.

Percentage of taxpayers in various income levelsto pay AMT in 2010. Data obtained from the Congressional Budget Office.

The AMT is a tax that, for certain taxpay-ers, for a combination of reasons, must becalculated under an alternative set ofrules. Any amount of AMT over the regu-lar income tax must be paid along with

% of Taxpayers Annual Income~ 30% > $500,000~ 66% $50,000 to $100,000> 90% $100,000 to $500,000

7 ITEMS THAT CAN CONTRIBUTETO AMT LIABILITY

1. Personal ExemptionsThe more you claim on your regular tax re-turn, the likelier you will have AMT liability.

2. CreditsLike personal exemptions, many of these are not allowed when calculating AMT.

3. State and Local TaxesIf your locale has high state and local tax, you are likely to owe AMT. AMT does not allow these deductions.

4. Mortgage InterestMortgage interest to buy, build or improve your home is allowed. Mortgage interest for anything else is not AMT deductible.

5. Incentive Stock Options This is a timing issue that may cause AMT lia-bility. (More details in the April Issue. )

6. Itemized DeductionsMany deductions when itemizing are limited or not allowed under AMT rules.

7. Long-Term Cap GainThis comes into play with large cap gain which pushes you over the AMT thresholds.

See Issue 2 in April for ways to minimize and manage AMT liability.

AMT TIMING◄►AMT MANAGINGHOW AND WHEN IS VITAL in managing AMT liability. Here is a heads-up list ofissues to be aware of and ask your tax professional to outline and manage during your tax planning session.1. Large capital gain2. Dual Basis Assets3. Exercising ISOs and timing4. Business expense on Schedule C5. SEP, IRA, Simple IRA, 401(k)6. Home office deduction7. Some tax-exempt bonds8. Timing real estate tax and state and local income tax

In Issue 2 in April, we really dig into timing, managing, and reducing AMT liability, addressingeach of these issues and more.

TAX SERVICES | BUSINESS ENTITY | BUSINESS SUPPORT | REFUND RECOVERY | AUDIT PROTECTION

www.tsabusinesscenters.com

The road toBusiness Success

OWN A BUSINESS? STARTING A BUSINESS? GROWING A BUSINESS?

Let our experts help you plan. TaxSmart America® Business Centers are dedicated professionals who specialize in business tax planning. Each office is independently owned and operated and commited to more than200 hours per year in small-business, tax-planning courses. We providea free consultation and business evaluation to assess your business andtax planning needs. Turn to page 22 to find the office located nearest you.

OIC – OH, I SEEBy Susan Harnsberger

I TaxSmartMag.com

The Offer in Compromise (OIC) program is oneof the most complex, time consuming servicesa tax professional can offer with a very lowprobability of success. Simply stated the OIC isan IRS debt relief program for a very selectgroup of taxpayers in which the IRS may agreeto settle the taxpayer’s debt for less than what isowed. It is a program that is misunderstood byboth taxpayer and tax professional alike. It isalso fodder for scammers who promise to settlethe debt for “pennies on the dollar”.

The first step in submitting an OIC is to explore all other payment options. This is a submission requirement by the IRS. Pay closeattention to the Partial Payment InstallmentAgreement (PPIA). This may be a good alternative to the OIC. However, if your client isstill intent on submitting the OIC, the next stepis to determine which type of OIC. There arethree:

Doubt as to Collectibility – There is doubtthe taxpayer could ever pay in full the amountof tax within the statutory period for collection.

Doubt as to Liability – Legitimate doubt exists that the calculated tax liability is accuratedue to examiner error; the examiner did notconsider evidence submitted; or the taxpayerhas new evidence.

Effective Tax Administration – There is nodoubt as to liability or collectibility. Instead thetaxpayer must prove that full pay would lead toeconomic hardship or be unfair and inequitable.One example is that the taxpayer is responsiblefor long-term care for a dependent child andwill need to use the equity in assets to providefor basic living expenses and medical care forthe child.

All three types of OIC require the taxpayer tofill out and submit extensive amounts of paperwork. This should be thoroughlyresearched in IRS form 656.

Next your client needs tounderstand how thepayments work.

They are required to submit $150 with the OICapplication which is non-refundable. If theycannot pay the $150, another slew of paperworkmust be submitted and approved. They are alsorequired to determine if they will pay in full theamount offered in the OIC or if they will makepayments throughout the IRS statutory collection period. If it is the former, 20% of thisamount must be included with the submissionand is non-refundable. If it is the latter, the firstpayment must be made and monthly paymentsmust continue to be made throughout the two-year period the IRS has to decide. None ofthis money is refundable regardless of the IRS’sfinal decision. BTW, the IRS must decide withinthe two-year period or your client is automatically approved for the OIC. The client isrequired to be on time and pay the full amountof subsequent tax liability for the next five yearsor the agreement can be cancelled with the fullamount owed and may include interest andpenalties. All money paid to that point is non-refundable.

At the end of the day there are five and onlyfive strategies for getting out of tax debt:

1. Installment Agreement (IA) – IRS agreesto a monthly payment plan

2. Partial Payment IA – IRS agrees to long-term plan at a reduced $ amount

3. Offer in Compromise – debt reliefprogram; see IRS form 656

4. Not Currently Collectible – IRS agrees not to collect for a year or so

5. Bankruptcy – discharges tax debt under the rules of chapter 7 and/or 13

Any one of these is likely to be more effectivethan the OIC for most people, including bankruptcy, and should be thoroughly researched.

For info on PPIA or bankruptcy strategies goto TaxSmartMag.com.Comments: Please visit TaxSmartMag.com/2cents.

TaxSmart America®Magazine is publishedquarterly by TaxSmart America® Inc., 8825Aero Drive, Suite 103, San Diego, CA,92123. Opinions expressed herein aresolely those of the editors and contributors. Readers are advised to takespecial care in relying upon opinions orrecommendations. The reader is responsible for verification of any information provided herein.

Things get really heinous ifthe taxpayer happens to bebenefit from preferential taxtreatment not recognizedunder AMT rules. Some ofthese include deducting ac-celerated depreciation ofbusiness assets, incurring netoperating losses, receivingincentive stock options,(ISO), etcetera. In additionthere are timing issues thatneed to be considered: whento earn income, when to payfor activities that may be de-ductible, when to exerciseISOs, to name a few. Thesetiming issues can have a sig-nificant effect on AMT liabil-ity, (see the box on theprevious page for a summaryof AMT timing issues). Thereare AMT rules specific tocarry-forward losses, carry-forward cost basis, carry-for-ward tax credits, and carry-forward passive losses. Fur-ther the portion of the taxconsidered AMT may beused in future years as a min-imum tax credit. This ismoney all too often left onthe table.

“The tax professional whocan successfully maneuver inthe quagmire of the AMT is in-valuable. Our knowledge canmean thousands of dollars toour clients.”

– TaxSmart America Business Centers



ON TOP OF THE WORLD – My Accounting Center, Inc.A Certified TaxSmart America® Business Center

Nestled in the heart of Glendale, California, is MAC, Inc., a successfulbusiness advisory and consultation firm. The creative, business-savvyentrepreneur behind it is 26 year- old Jay Chimayan. A few doorsdown is Chimayan Financial Services, a business he and his brotherJevan are poised to take over upon the retirement of the Founder andPresident, Sirvard Chimayan. The two companies offer just about anyservice a business owner could need from a team of professionals inmany fields. This is what Jay has envisioned and produced. But hehasn’t done it alone. He is fortunate to have a tight-knit, talentedfamily who support him and each other and specialize in their ownareas of expertise. Below Jay shares his story with us, how TaxSmartAmerica® University and TaxSmart America® Business Centers havehelped expedite the path to success and his dreams for the future.

TSA MAG: Jay, you have two offices here. Chimayan Financial Services and My Accounting Center, Inc. (MAC). Tell us about the two and how they tie together. Jay: Chimayan Financial was started in 1996 by my Mom, Sirvard Chimayan. Shedoes tax preparation, bookkeeping, and payroll for mostly start-up businesses up tothree years. My Accounting Center started in 2006. It mostly deals with businessesafter they’ve been in business for more than three years. Chimayan Financial specializes in tax returns. MAC is a business advisory and consultation. I’m the President of My Accounting Center. Sirvard Chimayan is the President of Chimayan Financial Services. When she retires, my brother and I will take over.

TSA MAG: How many employees do you have? Jay: Currently we have nine employees.

TSA MAG: How long have you been in this business?Jay: I started in 1999 with my Mom, doing clerical work, a little bookkeeping, andthen moved up to payroll. Then I started doing consultations and entity formations.

TSA MAG: Tell us what services you offer. Jay: Year ‘round we offer bookkeeping services, payroll services, amended returns,and audit representation. We do tax planning, consultations and financial advisory,entity formation and compliance for corporations and LLCs, and living trusts. We alsooffer financial services, IRAs and such.

TSA MAG: Where did you go to university, and what was your major? Jay: I went to California State University at Northridge, majored in accountancy, graduated in 2005.

TSA MAG: What do you enjoy most in your business? Jay: Helping clients get educated in the tax field and providing consultation and advisory for their businesses. It’s great because when we help out a client, we’re giving them value and it makes us feel good.

TSA MAG: What’s the biggest challenge for you? Jay: Most businesses think they have to have a CPA to do their bookkeeping, payroll,or taxes. We have to explain to them that most clients don’t need CPAs and that wecan still help them out. I am currently pursuing my CPA license. I have passed two of

the four tests (at the time of this interview). I expect to hang my license in late ‘09.

TSA MAG: You were a student last year with TaxSmart University for professional devel-opment and continued education. What is your impression of this school? Jay: Really impressive. We’re learning a lot of new things that we didn’t know before.Other programs talk about the laws, but they don’t explain the laws, how it affectsclients. TSU actually explains in full detail how to apply it to the client and how aclient will benefit or be affected by it. We have also learned a great deal about successfully managing a tax practice. The support we receive from TaxSmart is invaluable.

TSA MAG: Most tax professionals take about 20 hours a year of continued education which is all that is required. Whatever possesses you to take 150 to 200 hoursper year?Jay: It’s needed. Just reading the tax law and going to the lectures and workshops,it’s going to be over a hundred hours.

TSA MAG: At the rapid pace you’re moving in the development of your business, and as alicensed TaxSmart America® Business Center, where do you see yourself in five years? Jay: On top of the world (laughing)! Basically, running a successful practice, buyingnew practices, and continuing to grow with TaxSmart.

Spotlight

My Accounting Center is Located at: 460 S. Central Avenue

Glendale, CA 91204 (818) 500-0714

my accounting center inc

Photo: Nick Angello

Recession or NotMoney

Make More


By James Harnsberger

DURING TIMES WHEN OUR ECONOMY heads toward recession, it is important to know there aresome things we can do to help the financial pinch. There are three areas that should be considered for review especially during an economic recession:

• Income (these are revenues)• Expense (what can be done)• Services (building opportunity)

Income – Many are tempted to begin slashing prices in the hope of attracting new clients or outof fear of losing existing clients. Don’t panic. Slashing fees will only accelerate your demise. Hereare some IMPORTANT TIPS regarding your fees. First, communicate value, never sell price.

When you sell the price for a service, you communicate to a client that there is little or no value,and the client then moves to find a competitive price lower than yours. Worse yet, you also com-municate that your previous prices were over-stated and that these new lower prices really arewhat your service is worth. Instead you can communicate to your client that you will provide “ad-ditional” value-based service for the same or slightly higher fee, and invite them to take advan-tage of cost-cutting tax tips by offering free consultations after tax season.

Another strategy during a recessionary period is adding new value-based services to your officethat compliment your tax preparation core business. For example, you may wish to offer smallbusiness clients record keeping/organizing or bookkeeping services. Or perhaps offer tax

planning for small businesses that help reduce their taxes by im-plementing fringe benefit plans, medical reimbursement plansor accountable reimbursement plans that shift otherwise tax-able profits to deductible benefits tax free. In this manner youhelp the client reduce taxable profits and at the same time pro-vide a value-based added service for which the client is morethan willing to pay a reasonable fee. In the Service section belowvalue-based service enhancements are discussed.

In summary, you need to guard revenueto avoid losing ground and hopefully find amethod to add to revenue by expandingservice and value at little or no additionalcost to your firm. Revenue is the life-bloodof any business, and if you lose income, ittakes a significant amount of time andmoney to replace the lost revenue with newclients.

Expenses - Now we move to the secondlevel of effort and focus during a recession:the expenses you pay to operate your busi-ness. First and foremost, a clearly definedand detailed list of the total monthly business expenses is re-quired. On this first round of analysis you are simply looking atthe nature and amount of each expense to determine what theyare and then determine if in fact they are within a range that al-lows a safe operation of your business in order to generate a rea-sonable profit.

Many items on the expense side of your business can be im-proved if you take some time and evaluate your business andthe expenses involved in the operations. By reviewing what youspend money on and how much you spend, you can begin tosee your performance. Using this information you can nextbegin looking to see if there are some types of expense wherein fact you can trim your spending.

Once you analyze the data and begin drafting a budget, youcan then apply discipline in your spending habits in order to pre-serve your hard-earned capital. If you desire to operate at a 50%gross profit margin, then every dollar you spend must producetwo dollars in income in order to support that one dollar inspending. Conversely, if you save one dollar in expense, it hasthe economic effect of producing two dollars in income. So ex-penses are very important, and budgeting your spending be-comes critical.

Services – One of the most important things that can bedone in a recession is to add value-based services to your prac-tice.

What are value-based services? They are services that en-hance the firm’s offering to clients and thereby increase thevalue of the firm. Important in this process is to look at the coreservices you might now offer and review these services to de-termine what additional value-based add-ons can be imple-mented at little or no cost to the firm but that communicatevalue to the client. This in turn opens up opportunities for theclient to use the firm in new or improved ways.

Let’s examine how you might use this approach if yours is afirm that offers tax preparation for individuals and perhaps hassome number of small business clients.

Since a majority of the revenue is derived during tax season,perhaps you might consider expanding your services to offermid-year and end-year tax planning and records-review serv-ices to your existing clients using FREE consultations. First, itcosts you no more rent since you are already paying rent andnot using the office as much as might be possible. As for yourtime, well you already have time where you are making nomoney, so perhaps you can use that time by creating opportu-

nity where you might be able to make moneyif a client has an additional need you can fill.

As mentioned previously, you might offertax planning tips or records review servicesor perhaps a service that aims at trackingmore deductions using more efficient recordkeeping. In each of these areas you have avalue-based additional service that is in linewith the core service of your firm, tax prepa-ration.

In this article we have looked into a fewareas where you might consider a more ef-fective method to shield against adverse im-

pacts that often come in any recession—increasing revenue,cutting expense, and adding services. Think of how much morevaluable and financially sound your firm will be using these andhundreds of other ideas after the tide turns again and we moveout of the recession. You will benefit greatly in that you have notonly survived and perhaps even grown in a recessionary period,but you are stronger than ever financially for the good economictimes that always follow a recession and down turn.

Also consider the importance of assisting clients in doing thesame for their financial concerns. By always adding value to therelationship, you can be certain that in most cases the client willappreciate your expertise and dedication even if your fees areslightly higher. Never approach the relationship by simply ad-justing your fees for the sake of generating additional revenue.If the value is not present first, last, and always, the client willnot be there for long either. At the end of the day your mostvaluable asset is your client, and you want to do all that is pos-sible to safeguard that important relationship.

Small business owners are the life-blood of our economy. Ourfree-market system has many cycles, and it may be the reces-sion we are in will worsen. Those who thrive and grow are thosewho plan and prepare and execute well-defined plans. Theseplans should insulate and protect the business in downturnsand position it to grow in the upturns of each cycle.

Finally, remember the three rules in any recession.

1. Don’t panic.2. Don’t panic.3. DON’T PANIC!

James Harnsberger has been in the tax industry for over 23 years. He is the Founder of TaxSmart America® Business Centers and TaxSmart America® University where he has taught almost 5000 tax professionals. 1998.



“If you desire to operate at a50% gross profit margin,then every dollar you spendmust produce two dollars inincome in order to supportthat one dollar in spending.Conversely, if you save onedollar in expense, it has theeconomic effect of producingtwo dollars in income. “

Feature Story


BEST OF THE BEST – TAX-411A Certified TaxSmart America® Business Center

TSA MAG: Tax-411 is a great name. How did you come up with it? Diane: Since my husband is in the marketing business, he came up with the nameTAX-411. He wanted a name that would be understandable by all people of any language. Everyone understands what 411 means. My goal is to educate my clientsabout their taxes. I do my best to provide extraordinary service, honesty, and integrity in all I do.

TSA MAG: I know you’re a full-service, year-round practice. What services do your offer? Diane: My office offers a variety of business services, such as tax returns, corporatereturns, business returns, estimated payments, bookkeeping, refund recovery, property tax, sales tax, entity formation and compliance and audit representation.

TSA MAG: Is there any one service that you feel is your specialty? Diane: Audits are my specialty. I have a great deal of knowledge and experience withthem. Having worked for the IRS for a number of years, I have the advantage ofunderstanding the process and successfully helping my clients save money.

TSA MAG: What is most rewarding in your work? Diane: Saving my clients money and educating them about their taxes. Also providing a solution to their problems and helping them succeed. I love that.

TSA MAG: What is the biggest challenge? Diane: It was finding the right place to continue my education in tax law. There wasreally nothing out there to assist me in growing my practice until I found TaxSmartAmerica University. As a professional, I want to continue expanding my knowledgeand being up to date with the many tax law changes. Knowledge is value.

TSA MAG: Most tax preparers spend only the required 20 hours per year in continued education. Last year you will have spent between 150 to 200 hours through TaxSmartUniversity’s lectures, workshops and coaching. For the next 18 months as a licensedTaxSmart America Business Center you will have spent that much time if not more in education. That’s dedication. Diane: Twenty hours is not enough to allocate to this business. My commitment toclients is why I continue my education, which allows me to master my profession anddeliver extraordinary results.

TSA MAG: What do you think about the TaxSmart America Business Centers concept andthe professional development?Diane: I have learned so much from them. I believe in the concept of TaxSmart. It is awell-put-together organization, and I am so excited to be a part of it.

TSA MAG: You mentioned you worked for the IRS. How has that helped you in your business? Diane: When I worked at the IRS, it gave me valuable experience and knowledge tobetter understand my clients’ needs. This has been a great asset when representingthem in audits.

TSA MAG: What made you finally say, I’m going to start my own practice? Diane: I wanted to make a change in people’s experiences when dealing with a tax professional. Also it is my desire to educate and provide a unique service.

TSA MAG: How do you juggle family and business? Diane: I understand how to use time management and prioritize my life. Also myhusband and I raised our children to be flexible because it is what life requires. As aresult, I have the support of my family. This makes my family and business life moresuccessful. One minute I am a soccer mom, the next minute I am an IRS tax professional with an audit. Life is good.

TSA MAG: What are some of your plans over the next several years? Diane: I am excited to make the transition from a tax preparation office to a practice.That is going to be one of my greatest accomplishments for 2009. My success comesfrom being dedicated to my clients and helping them succeed in their financial future.

Business owner, entrepreneur, wife, and mother: Diane Jara ofDowney, California, somehow manages to do it all and do it success-fully. From the vibrant decor to the innovative branding, Diane’s business, Tax-411, a Certified TaxSmart America® Business Center, is anoffice that exudes professionalism and expertise. But while the marketing and branding bring clients into Tax-411, it’s Diane’swarmth, knowledge, and honesty that keep her clients returning forthe high quality tax and business services she provides. Here Dianeshares a bit about herself, her success, and her vision for Tax-411.

Spotlight

TAX-411 is Located at: 11455 Paramount Blvd. Suite A

Downey, CA 90241 (562) 869-4000 • www.tax-411.com

Photo: Nick Angello


TAX PLANNING TIPS FOR THE BUSINESS OWNERBy James Harnsberger

If you are a business owner looking for cost cutting ideas here are eight tax planning tips that may result in substantial tax savings for thisyear and next. These tax planning ideas are sometimes missed by business owners. You should, however, consult a qualified tax advisorto determine which of these are appropriate for you and your business.

1. S Corporation: Set up an S corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, apartnership, or a limited liability company the first $102,000 of 2008* profits are subject to a self-employment tax rate of 15.3%. Theprofits in excess of $102,000 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S corporation is not subject to self-employment tax on the profits earned. However, you must take "reasonable" compensation as salary subject to F.I.C.A.2. Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which theybecome uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end. If you used a collectionagency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off thatamount at the time you turn over the receivable to the agency.3. Equipment Expense: For 2008*, Section 179 of the Tax Code lets companies deduct up to $250,000 of new equipment, subjectto certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loadedgross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining valueof that equipment – it’s faster than the straight-line method of depreciation.4. Home Office Expense: You can take this deduction even if you use the space for administrative purposes, as long as there isnowhere else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs forutilities, security, homeowner’s insurance, etc., as well as all costs for the room such as carpeting. Although you can also claim thedepreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence. (If you need a qualified tax advisor, please see page 22.)5. Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at lowsalaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse onthe payroll in 2008* will also double the amount of Social Security tax owed up to the first $102,000 of income.6. Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2008* you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so childrenunder age 18 get this tax break too. Have your children put $4,000 into a Roth IRA where it will compound tax-free over time. If themoney is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on thatmoney or its earnings. If your business is not incorporated, and the children are under age 18, neither you,as employer, nor your children will owe Social Security or Medicare tax on their wages.7. Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2008*, it can be carried back two years or carried forward up to20 years to offset future profits. To get a refund, file an application on Form1139 for corporations and Form 1045 for sole proprietorships. Most refundsare sent out by the IRS within two months.8. Education: Set up a company tuition-reimbursement plan to pay a child’sschool cost. Businesses can set up plans that pay up to $5,250 in tuition peremployee annually, each employed child, parent or other qualified employee. The business owner’s children must work for the company, beolder than age 21, own no company stock, and cannot be claimed as a dependent on the business owner’s tax returns. The benefit is that theamounts paid under the tuition plan are a business deduction, thus reduc-ing taxes for the business owner, and the amounts paid to the child are nottaxable income.

* Updates and changes for 2009 visit TaxSmartMag.com.Comments: Please visit TaxSmartMag.com/2cents.

Business Owner

Business Owner

Many businesses begin their life as a“Sole Proprietorship” in terms of the taxstructure of the business. Defining the taxstructure can be as important as the busi-ness itself because each form of businessstructure has with it specific tax require-ments, as well as benefits.

First, let’s define the term “S” corpora-tion. “S” refers to sub-chapter S of the taxcode. In short, an S corporation is consid-ered a pass-through entity in which theincome and certain tax items pass-through to the shareholders of the corpo-ration.

The leading feature and considerationfor selecting an S corporation is that inmost cases the profits of the business are

With the downturn in the housing market, sub-prime industry scandals, andrecord-level foreclosures, many savvy investors are sitting on the sidelines wait-ing for the economic bottom before jumping into the real estate market again.There are, however, other considerations important in thepurchase of that next property, be it residential rental, com-mercial rental, new development, or even rehab property,and that is Cost Segregation.

One of the feature benefits of investing in real property isthe depreciation of the property. Typically, depreciation doesnot include an allocation toward the land cost of the property.Instead the price is adjusted to exclude the value of the land,and depreciation is spread out over a life-period of 27.5 yearsfor residential rental and 39 years for commercial.

However, the IRS has another option that could spell significant tax savingson future capital gains when the property is later resold. The cost segregationmethod allocates various components of the property into alternative economicclass groups with shorter life periods, thus increasing the deduction today andperhaps saving on capital gains tax in the future. This is possible because recap-ture is not required for some components.

As an example, let’s assume you purchase a rental home for $450,000 whichhas a land value allocated at $100,000. You would have a basis of $350,000 fordepreciation, and a useful life of 27.5 years resulting in an annual deduction of$6,364 the first year and $12,727 each year thereafter. With cost segregation you

not subject to corporate taxes,and more importantly theprofits pass through to theowner-shareholders and arenot subject to self-employ-ment taxes.

As with every benefit pro-vided by the code, therecomes with it a cost. In this

case the cost here is that the owner-shareholders must receive a “reasonable”salary in the form of taxable wages. In ad-dition, the corporation must maintain amore strict manner of conducting busi-ness in that it must adhere to the formal-ity requirements and conduct its affairs asa corporation accordingly.

Items such as using corporate funds forpersonal expenses, not maintaining cor-porate minutes, not conducting regularmonthly meetings, or not maintainingformal books and records can be a prob-lem that could result in loss of the specialS status of the corporation.

When considering the use of an S cor-poration, here are some important con-siderations to review:

• Use a qualified tax professional to de-

termine all tax benefits (see page 22).• Compare the forecasted tax savings. • Consider the time and expense in-

volved in operating as an S corp.• Consider the long term benefits for

potential exit from the business.• Consider the use of retirement plans

and any impact the S corp may have.By far the use of an S corporation can

provide significant tax benefits both inshort as well as long term business plan-ning. As with any business objective,careful planning is always advised to re-view both short term as well as long termbusiness objectives.

Educate yourself by reading articles orself-help books. Meet with your advisoror find a qualified advisor within our di-rectory to assist you in making an evalua-tion. You should avoid the use ofdo-it-yourself services in this area due tothe complex nature of tax issues that re-quire careful consideration and planning.

– James Harnsberger

Comments: TaxSmartMag.com/2cents.

could allocate the property based upon a study to reflect the price of $450,000 and$100,000 for land of which $40,000 in the land represents improvements in andupon the land (sidewalks, sewer lines, plants, trees and shrubs) leaving you with

$60,000 in land value and no depreciation. Then on the build-ing you would allocate, based upon the same study, $30,000for fixtures, and $40,000 for equipment and finishing, leavingyou with $280,000 in structure. These “segregated” amountshave far lower class-life than the 27.5 years, thus increasingyour deduction in the first 5 to 7 or 10 years of ownership.

When the property is later sold, the amount on these lowerallocated assets would generally not be subject to recapturesince you would claim the straight-line method of deprecia-tion versus accelerated. If the rental activity is passive, of

course the losses would remain suspended; however, you would have far greatersuspended losses to offset future gains when you sold, thus providing significanttax savings on the total investment.

NOTE: Before using cost segregation, review the rules with a qualified tax pro-fessional (see page 22), and obtain a cost segregation study to support the claim. Attach IRS Form 8275 to your return to disclose any contrary positions to the IRS.

– James Harnsberger


S CORP WHY AND HOW

“The leading feature of an Scorp is that the profits of thebusiness are not subject tocorporate taxes . . . and theprofits pass-through to theowner-shareholders and arenot subject to self-employ-ment taxes.”

SCOOPING UP ROCK-BOTTOMSHow the Cost Segregation Method Helps You Keep Even More of Your Money



TheSubtleErosionof Wealth

Part 1of 4 in a series of articles that deals with the threestages of wealth—Wealth Accumulation (Part 2), WealthPreservation (Part 3), and Wealth Transfer (Part 4). Thisfirst article serves to educate us about how individualwealth can quickly erode if we are not paying attention.

Consumer

you drop a froginto a pot of boiling water, he’s going to leap out.

But if you put him in a pot of tepid water and ever so slowly turn up the heat, he’ll be cooked before he knows it.

Old story, but perfect analogy. For the past nearly 100 yearsthe tax and economic systems of our government have beenturning the heat up ever so slowly on our proverbial pot. If wereally want to build our wealth and someday pass somethingon to our heirs, we had better have an understanding of whatwe are up against so we can generate a viable plan before wetruly are cooked.

This is not another article about wealth redistribution, al-though it could be. Instead it is addressing a subtle wealth-eroding mechanism we never really acknowledge in ameaningful way. Never mind for now all the “hidden” taxes—the excise taxes, the use taxes, import, transport, utili-ties taxes. Never mind the tax charged to insurance companieson gross premiums—for California the rate is 2.35%. Nevermind the excise taxes on tires, countless taxes on a gallon ofgas, taxes on vaccines, prescriptions, airline tickets, hotelrooms. I could go on and on and every single one of thesehundreds if not thousands of taxes gets passed on to the con-sumer ever so slowly eroding our wealth. This we get. Wedon’t like it, but we get it and for the most part try to plan forit—maybe not as effectively as we could, but we do under-stand. So for now, let’s just never mind those. Instead I’mgoing bring the pot to a boil and hope to get your attention.

Let me show you a subtle erosion of your wealth that willnever ever be called a tax, yet it has the same effect. We call it

inflation. I’m going to show you how your tax bracket of, say,34% can become 183% if you’re not watching the heat.

At the time of this writing inflation was 5.7% over last yearaccording to the Bureau of Labor Statistics. So suppose you put$10,000 in a one-year investment instrument in October of2007. Suppose you earned 7% interest or $700 at maturity inOctober of 2008. That means that you now have $10,700, prin-

cipal plus interest. So tax season comes, and here youare, handing over your 1099 to your tax profes-sional who then reports this $700 income.

Now let’s suppose you are in the 28% fed-eral tax bracket and 6% state. Your combinedtax on this income will be 34%. So 34% of$700 is $238 in taxes. Again you may not behappy about this, but you knew it was com-ing. The problem is with a 5.7% rise in

prices (inflation) over the course of theyear, it turns out you would need

$10,570 in October of 2008 to havethe same purchasing power as you

had with your $10,000 back inOctober of 2007. So before

you even pay the $238 intaxes, it turns out your

real income generatedfrom your $10,000 one-year investment instrument is $130.That is, $10,700 (what we hold in our hand on date of maturity)minus $10,570, our principal adjusted for inflation.

It’s bad enough to find out effectively you only earned $130income instead of $700, but would you like to guess your taxbracket? It’s tax paid divided by income made times 100. Pay-ing $238 in tax on inflation adjusted income of $130 means youpaid 183% on this particular income.

This is important. It’s important because now you under-stand how subtle the erosion of your wealth can be if you’renot paying attention. Something needs to be done. And that’sthe good news—there is a solution. In our next issue I’m goingto show you how to build your wealth regardless of taxes andinflation and taking into consideration any tax changes underour new administration.


By Susan Harnsberger

Parse with the Pro—James Harnsberger

James Harnsberger has been in the tax industry for over 23 years, during which time he has owned five tax offices, obtained his paralegallicense, and worked as a paralegal researching tax law. He is the Founder and CEO of TaxSmart America® Business Centers and TaxSmartAmerica® University where he has taught almost 5000 tax professionals since 1998.

If our child was born on the last day of the year, can we claimher as a dependent and can we also get the Child Tax Credit?- David O’Brien, Irvine

If the exemption tests are met and the child was born aliveanytime during the year, you may take the full exemption.You also may be entitled to the Child Tax Credit (CTC). SeeIRS.gov: Pub 501, TT 354. Also read the instructions onForm 1040 (CTC).

Can I deduct alimony I paid to my former wife? - Chris Sheldon, Pacific Beach

Yes, you may be able to deduct alimony that you have beenordered to pay. You may also be able to deduct separatemaintenance payments that you are required to make toyour spouse if you are separated. See IRS.gov: Pub 504 (di-vorced or separated) and TT 452 (alimony after 1984 andrequirements).

I purchased some land that I would like to build my dreamhome on. Is this interest deductible?- Nancy Simpson, Hemet

You need to have begun construction on the home and beable to occupy it within 24 months to have the mortgageinterest you paid qualify as deductible. See IRS.gov: Pub936.

What are the rules to be able to deduct the mortgage intereston my second home if I intend to rent it out in the summer? - Jerry Lopez, Northridge

A second home is any residence that you treat as a secondhome, and there is no rule that you have to use it duringthe year unless you rent it out. You must then use it as ahome during the year for 14 days or 10% of the number ofdays you rent it, whichever is greater, in order to have itqualify for the home mortgage interest deduction. SeeIRS.gov: Pub 936.

My client has a Limited Liability Company and he is the soleowner with no employees. Does he still need a Federal Tax IDNumber?- Jane Meyer, Oceanside

A sole owner of an LLC with no employees does not need aseparate Federal Tax ID number. He needs one if he hiresan employee and elects to report and pay employmenttaxes through the LLC. An LLC with more than one ownerwill always need a separate Federal Tax ID number (Appli-cation: Form SS-4). LLC’s are one of the more complicatedof the various entities, and I strongly advise that your clientsee a tax attorney to help navigate through the legal mine-fields. You can visit TaxSmartMag.com if you need an attor-ney referral. See IRS.gov: Pub 1635.

I have a California corporation that had no income for the year.Must the corporation still file a tax return?-Mia Ng, Tustin

Yes. Even if it has no taxable income, a domestic corpora-tion must file an income tax return. A domestic partner-ship is a bit different. If there is no gross income and nopaid or incurred amount used as a deduction or credit forfederal tax purposes, then no income tax return needs tobe filed. As always you are advised to visit a qualified taxprofessional who specializes in entity formation and com-pliance.

Can I deduct the excise taxes for a vehicle?- Rob Garcia, Long Beach

Yes. Excise taxes that are the ordinary and necessary ex-penses of doing business can be deducted. See IRS.gov:Pub 535.

We welcome your questions. Please email them to [email protected].


Q&A


Consumer

NEARLY EVERYONE AT SOME TIME in their life hashad the dream of starting their own business.But when it comes down to it, the people who fi-nally take the leap are the most daring amongus. They are the most independent, the mostpassionate, and possess the greatest drive. Wecan, however, divide this group of entrepreneursinto two categories: those whose businesses suc-ceed and those that fail.

No one starting a new business goes out andbecomes an expert in all areas, but it is a goodidea to get enough background so that you arequalified to hire the right person to help youthrough.

If you find your entrepreneurial desire heat-ing up, and you have a great idea for a business,here are a few not so common things you needto know that can save you hundreds of thou-sands of dollars in taxes and give you legal pieceof mind. ► The Tax Professional ► Choosing an Entity► Federal/State/Local Requirements ► Avoid Hobby Status► Implement Risk Management► Tax Year Considerations► Tax Accounting Method► Exit Strategies

THE TAX PROFESSIONAL – The most importantperson beside you is your Tax Professional, pro-vided you choose the right one. He/she needs tobe a business tax and business services specialist.This is a person whose expertise and talent willsave you countless hours and potentially hun-dreds of thousands of dollars over the life of yourbusiness. Tax planning, audit protection, entityformation and compliance when the time isright, and a multitude of other business needsare frequently neglected by new business own-ers. Take the time to interview a few tax profes-sionals when you are in the planning process.Ask for a free consultation and use that time todiscern his/her qualifications (please see theTaxSmart America® Business Center Directory onpage 22). In the next issue we will discuss how toconduct an effective interview with a tax pro-fessional.

DREAMBIG, PLAN SMARTCHOOSING AN ENTITY – There are tax and legalconsiderations regardless which you entity youchoose. Choosing the correct one under whichyou do business does not guarantee success, butgoing with the wrong one or none at all, cancontribute to your failure. Most new businessesstart out as sole proprietors and move to entitystatus when tax and legal considerations dic-tate. Your tax professional will educate you andhelp you make a decision. Some of the consid-erations to compare among the entities arestate and federal tax considerations, limited li-ability considerations, method of management,method of capitalization, and method of own-ership transition.

Once you have made your decision, your taxprofessional will form your entity and keep youin compliance. There may be occasion you willneed legal advice, and again your tax profes-sional will tell you when and what for.

Entity compliance is extremely importantand frequently neglected. Many small businessowners go online and quickly and cheaply forman entity only to find during an audit or in courtthat formation, compliance or both have beendone incorrectly and the entity will, therefore,be disregarded for tax and legal liability pur-poses. The message here is when an entity cansave your business thousands if not hundreds ofthousands of dollars and afford you legal liabil-ity protection, don’t take costly shortcuts.FEDERAL/STATE/LOCAL REQUIREMENTS– Infor-mation on each of these can be obtained by call-ing your county office or visiting their website.Your tax professional can also help you expe-dite these obligations.HOBBY STATUS – The Safe Harbor Rule and ForProfit Motive – For tax purposes you do not wantyour business deemed a hobby. The code pro-vides for safe harbor if you have been profitablefor 3 of 5 years. If you meet the safe harbor, theburden is on the IRS to prove “lack of profit mo-tive”. If you do not meet safe harbor, you mustestablish a profit motive. For more detail, askyour tax professional.RISK MANAGEMENT – Managing risk means get-ting the proper insurance. If your tax profes-

sional does not provide insurance services, (andmany do not), ask for a referral or choose anagent yourself. Make sure the insurance agentis experienced in advising small businesses onthe correct deductibles and limits. Then discusswith your tax professional which policy premi-ums are deductible that you are considering pur-chasing. TAX YEAR CONSIDERATIONS – There are two typesof tax year: calendar and fiscal. Within fiscalthere are a couple of options on which day toend. There are circumstances in which a calen-dar year is required for a business. In additionfor each type of entity there are restrictions.Further you may be on a calendar year for fi-nancial reporting and a fiscal tax year. There areboth tax and non-tax considerations which af-fect your year-end choice. An example of a non-tax consideration is business cycle. You maywish to choose your year-end during your slowperiod. Taxation considerations vary with thetype of entity. This is something your tax pro-fessional can help you with. TAX ACCOUNTING METHOD – There are three taxaccounting methods: cash, accrual, and hybrid.The hybrid is a combination of both cash and ac-crual and should only be used if you can provethat it is a more accurate reflection of incomethan either cash or accrual alone. Most smallbusinesses use the cash method. Your tax pro-fessional can help you decide.EXIT STRATEGY – Believe it or not, you shouldplan how you are going exit your business be-fore you begin. Will you gift it, bequeath it, doan installment sale? Each entity has a tax con-sideration depending upon your exit choice.Your tax professional can explain the tax conse-quences so you can make an informed decision.

The bottom line is, the more tools and knowl-edge you have as you move closer to pursuingthe American Dream, the better your chances ofsuccess. Please visit our website TaxSmart-Mag.com for some great reference links to helpyou in your research for starting a new business.


By Susan Harnsberger

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SAN DIEGO COUNTYCHULA VISTATax & Financial, Inc.Oscar A. Almada Carmen K. Aceves2535 Windward Way Chula Vista, CA. 91914(619) 422-1044 OfficeEmail: [email protected]

CHULA VISTAMercado Tax & Business ServiceMichelle Mercado44 Third Avenue, Suite CChula Vista, CA 91910(619) 427-6380 Phone(619) 427-6387 FaxEmail: [email protected]

LA MESA1-800-TAX-LAWSR. Patrick Michael, EA7800 University Avenue, Suite A2La Mesa, CA 91941(619) 589-8680 Office(619) 698-8500 FaxEmail: [email protected]

OCEANSIDEJes TaxesKasey Ortiz909 S. Coast Blvd., Suite AOceanside, CA 92054(760) 529-9825 Office(760) 529-9837 FaxEmail: [email protected]

SAN DIEGOTaxProTerry SmithRichard Smith3511 Camino Del Rio South, Suite 102San Diego CA 92108(619) 283-8055 OfficeEmail: [email protected]

SAN DIEGOAalpha Oomega Enterprizes, Inc.KimR. Luna-Miller3320 Kemper Street, Suite 202San Diego, CA 92110(619) 222-7551 OfficeEmail: [email protected]

SAN DIEGOTaxSmart America of San DiegoDaniel Love4686 Mercury Street, Suite BSan Diego CA 92111(858) 614-1831 OfficeEmail: [email protected]

SAN MARCOSPaulino Olguin Income Tax ServicePaulino OlguinAntonia Olguin1551 W. Mission Road, Suite DSan Marcos, CA 92069(760) 471-8774 OfficeEmail: [email protected]

ORANGE COUNTYPLACENTIAMBR Tax Services, Inc. Myrnah Basallo Ramos414 N. Placentia AvenuePlacentia, CA 92870-4916(714) 577-9400 Office(714)496-6528 CellEmail: [email protected]

SANTA ANA (Also See La Mirada)Bravo Tax & Financial Services, Inc.Flavio R. BravoWarren D. Bravo, Leopoldo D. Bravo517 N. Main Street, Suite 300 S anta Ana, CA 92701 (714) 571-0178 Office www.bravotaxandfinancialservices.com

LOS ANGELES COUNTYCOVINA1 Tax Pro, Inc.Tony Nevarez1393 N. Citrus AvenueCovina, CA 91722(626) 332-5900 OfficeEmail: [email protected]

DOWNEYTAX-411Diane Jara11455 Paramount Blvd., Suite ADowney, CA 90241(562) 869-4000 Office(562) 869-4122 FaxEmail: [email protected]

and Business Needs Independently Owned and Operated

REFUND RECOVERY | BOOKKEEPING | PAYROLL | AUDIT PROTECTION www.tsabusinesscenters.com

Business Centers

GLENDALEChimayan Financial Services, Inc.Sirvard ChimayanJevan Chimayan432 S. Central AvenueGlendale, CA 91204(818)-553-1815 OfficeEmail: [email protected]

GLENDALEMy Accounting Center, Inc.Oganes “Jay” Chimayan460 S. Central AvenueGlendale, CA 91204(818) 500-0714 OfficeEmail: [email protected]

GLENDORAGarnett and Garnett Tax ServiceJacqueline E. Ahlen, Ph.D., EA1148 E. Route 66Glendora, CA 91740(626) 914-1622 Office(626) 375-4733 Cell

HAWAIIAN GARDENSFarfan Tax ConsultantsFrank D. Farfan21528 Norwalk Blvd.,Hawaiian Gardens, CA 90716(562) 865-8868 Office(562) 865-8583 FaxEmail: [email protected]

LA MIRADA (Also See Santa Ana) Bravo Tax & Financial Services, Inc.Warren D. BravoFlavio R. Bravo, Leopoldo D. Bravo14242 E. Imperial Hwy La Mirada, CA 90638(562) 777-8213 Officewww.bravotaxandfinancialservices.com

NORTHRIDGE EASTMTX AccountingThomas Urquilla, EA8707 Lindley Avenue, Suite DNorthridge, CA 91325(800) 866-0922 Toll Free(818) 772-2277 Officewww.mtxaccounting.com

NORTHRIDGE WESTNew Era Tax & AccountingEnzo Paredes8363 Reseda Blvd., Suite 203BNorthridge, CA 91324(818) 435-2321 OfficeEmail: [email protected]

PANORAMA CITYMTV Tax Services, Inc.Ma. Teresita Viray 14650 Roscoe Blvd, Suite 5Panorama City ,CA 91402(818) 294-0058 Office Email : [email protected]

WHITTIERBeachcomber Tax and PlanningJaime Aguayo6713 Bright AvenueWhittier, CA 90601(562) 696-5778 OfficeEmail: [email protected]

WOODLAND HILLSSCG Financial Services, APCStephen C. Gilbert6303 Owensmouth Avenue, 10th FloorWoodland Hills, CA 91367(818) 936-3533 Office (818) 936-3065 FaxEmail: [email protected]

RIVERSIDE COUNTYTEMECULAReyes Financial Business Corp.Elvira “Bobbie” Reyes27780 Jefferson Avenue, Suite BTemecula, CA 92590(951) 699-7181 Office(951) 676-3833 FaxEmail: [email protected]

SAN BERNARDINO CO.LOMA LINDATax & More Inc.Mike ChiaChoo Chia25655 Redlands Boulevard, Suite DLoma Linda, CA 92354(909) 478 1919 Office

Los AngelesTaxSmart America® LAJames Harnsberger, CEOSusan Harnsberger, Sr. V.P.14111 Freeway Drive, Ste. 411Santa Fe Springs, CA 90670

San DiegoTaxSmart America® CorporateJames Harnsberger, CEOSusan Harnsberger, Sr. V.P.8825 Aero Drive, Ste. 103San Diego, CA 92123(858) 277-0775

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