CPA Blog Talk

In today’s economy, every businessperson is looking for ways to maintain business profits. Ideas for increasing sales and cutting costs abound. You’ve probably tried most of them. But there’s one source of cost savings that is often overlooked, and it can be surprisingly effective.

Most businesspeople don’t think of taxes as a profit source, but saving a dollar of taxes can be even better for your financial health than cutting a dollar of costs. Why? When you reduce your taxes, you get to keep 100% of the savings. On the other hand, when you increase profits by increasing sales or cutting costs, you must share a portion of your additional profit with the IRS.

Consider this example. Say you do an exhaustive study of your operations and figure out a way to cut $10,000 of costs. If sales are unchanged, you’ll boost your pretax income by $10,000. Assuming a 39% corporate income tax bracket, you’ll pay $3,900 in taxes on the $10,000 income, leaving $6,100 of after-tax profits.

Now let’s look at an alternative scenario. Assume you do some serious tax planning and identify $10,000 of tax savings. That’s $10,000 less that you’ll pay to the IRS and $10,000 more cash in your bank account. Conclusion: A dollar of tax savings has more financial impact than a dollar of cost reductions.

Depending on how efficient your business is, you should be on the lookout for ways to cut costs. But don’t give up when you’ve run out of cost-cutting ideas. It’s highly unlikely that your business is taking advantage of every tax-saving opportunity available. As this example shows, effective tax planning could be the most direct way to end up with more money.

If you own a business, a thorough business and tax review may reveal tax-cutting opportunities. Contact us if you would like our assistance.

Tragic disasters like the earthquake in Haiti can bring out the best and the worst in people. While many people want to volunteer or contribute money to the Haitian relief effort, others are setting up scams hoping to make high profits from charitable givers.

Don’t fall for a fraudulent appeal for contributions. Here are a few good consumer tips issued recently by the FBI -

* Don’t respond to unsolicited (spam) e-mails, including clicking the links embedded in those messages.

* Be skeptical of individuals representing themselves as surviving victims or officials asking for donations via e-mail or social networking sites.

* Verify the legitimacy of nonprofit organizations. Already, there are links on Google and ads on Craigslist that lead to fake charities or malicious software sites. Try an independent site such as charitynavigator.org to help identify legitimate and worthwhile charitable organizations.

* Don’t give your personal or financial information to anyone soliciting contributions. Providing such information may compromise your identity and make you vulnerable to identity theft.

Be cautious and diligent when considering donations in the aftermath of a disaster. Legitimate charities providing relief to the Haiti earthquake victims are out there – but keep a watchful eye out for the scam artists who capitalize on the good intentions of charitable people.

On January 22, President Obama signed a law that could give you an early tax deduction for contributions you make for earthquake relief in Haiti.

If you itemize deductions on your return, you may elect to take a charitable deduction on your 2009 return for contributions you made for qualified Haiti disaster relief. The contributions must have been made after January 11, 2010, and before March 1, 2010.

The law also provides another way to substantiate these charitable contributions. Normally, you would need a bank record or written communication from the charity to back up your deduction. However, under the new law if you make a monetary contribution through your cell phone via a text message, you may use your telephone bill to substantiate your contribution. The telephone bill must show the name of the charitable organization, the date of the contribution, and the amount of the contribution.

If you claim a Haiti relief deduction on your 2009 return, you may not also claim it on your 2010 return (which you will be filing in 2011). You should compare the tax benefit of a 2009 deduction or a 2010 deduction. For 2009, higher-income taxpayers have a limit on their total itemized deductions. This limit is eliminated for 2010, so the deduction may actually provide a bigger tax break if taken on your 2010 tax return.

If you need additional information or filing assistance, please contact our office.