Tapping into the knowledge of premier tax software developers comes as we celebrate 20 years of publishing periodicals for CPAs. While it has always been a tenant of journalistic purview to have articles written by practitioners, it now makes more sense to key into the vast reservoir of tax expertise the top tax developers must maintain in order to develop tax preparation and in some cases, tax research software for what amounts to all of the 20,000 readers of CPA Magazine. Every CPA is technology-dependent on the work tax software developers perform in order to be efficient and correct with every tax return they prepare. As the IRS recently learned, the majority of taxpayers use either a practitioner or tax software to complete their taxes. Indeed, since the onset of AMT software is essential. Of necessity, tax software developers have become more adept and not just to the technology, but the tax law and interpretation in order to make professional tax preparation evermore capable of determining the tax due.
Now that we have explained the rationale for having tax developers offer tax tips to practitioners, let’s just say we are glad we did. As we turn to the tips provided, we find a wide variety of tax ideas. Accounting Practice Sales offers tips on what to consider when allocating assets when selling your practice. 2nd Story Software suggests sending thank-you cards to clients and referring sources as cost-effective ways to build your practice. Taxsoftware.com quotes a survey from Synovate from February of this year that reveals more clients will spend their refunds on vacations (30% vs. 16% in 2006) and less on charity (15% vs. 20% in 2006). CCH Small Firm Services reminds practitioners of the importance of data storage and backup, reminding us of the record keeping requirements of e-filed returns found in IRS Publication 1345.
Intuit provides tips relevant to deductions available to clients seeking employment as well as eligible deductions for education expenses used to improve skills on the job. CCH, a Wolters Kluwer business concentrates its advice on the virtual office and social media, recommending that clients no longer have to come into firm offices for appointments. Thomson Reuters Tax and Accounting provides topical advice for reporting IRA conversions. Drake Software gets specific on incorporating an electronic filing system in the era of electronic filing in order to avoid a $50 penalty for failure to maintain a copy of each return prepared for three years. Fortunately for us, and our CPA readers, there is a diverse set of tips from a terrific group of tax thinkers.
Organizing for Tax Season
Feeling a collective calm now that the bulk of tax season is over? Take advantage of this lull to get organized for tax season 2011.
First, make sure you have backup copies of returns and that all supporting documentation is scanned and attached to client returns. Update your client lists and contact information, add birthday reminders and schedule next year’s preparation notices.
In addition, use the down time to catch up on networking opportunities. Word-of-mouth and referral sources are the least expensive ways to acquire customers. Get involved in community events and attend local networking functions. Write personal thank-you cards to customers and be sure to recognize people who have referred your services.
Strategize for next year’s tax season. Set goals and expectations. What facets of your business need improvement or change? If you plan to make a software switch, allow for ample time to test new software and import client documentation. TaxACT will import data from PDFs of returns prepared by competitor software. You can try all the features in TaxACT 2010 Preparer Editions free of charge, starting in May.
Finally, stay current on your licensing and education, the ever-changing IRS rules and regulations, and, of course, don’t forget to do your own taxes.
— 2nd Story Software
Selling Your Practice
Two tax questions often come up whenever a CPA is selling his or her practice.
One has to do with the allocation of the sales price. Generally, the price needs to be allocated between goodwill, fixed assets and the non-compete agreement. This allocation is most often done in conjunction with the buyer, but be aware that the allocation will make a difference in the tax you might end up paying as opposed to how the buyer will be affected.
Goodwill is most often the major portion and for the seller, usually the more here the better. But, the IRS does not like to see zero in the fixed assets column. Also, there are some possible legal implications to allocating some price to the non-compete, so be sure to consult an attorney.
The other major consideration is the entity you are in. Surprisingly, there are still CPAs operating as a C-Corporation, although, that will most likely cost them dearly when they get ready to sell.
Now is the time to review your entity status in order to see what tax implications will be involved in a sale, even if that sale is years down the road.
— Accounting Practice Sales
Virtual Offices and Social Media Take Off
As we head into the Spring and Summer months, it’s time to start thinking about how your client engagements and firm marketing and recruitment plans will be impacted by new technologies.
Here are a few things to keep in mind as you reflect back on this past tax season and look to the future:
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Firms will be open to more technology-based solutions to address their business challenges.
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If you ignore the technology curve, you will be at a disadvantage.
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Virtual Client Interaction Solutions such as portals, video conferencing, and social media will change the way firms communicate with their clients and prospective clients.
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There’s no longer a need for clients and potential customers to come in-office for an appointment.
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Firms can schedule appointments, answer questions, request and receive source documents, provide consultation services and deliver tax returns digitally.
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Engagement costs will decrease while customer satisfaction and retention rates should increase.
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Answers will no longer be a phone call away — they will be a mouse click, interactive chat or video conference away.
Social media is increasingly important to a CPA firm’s marketing and recruitment strategy. It can be leveraged to engage clients, prospects and even future employees through one-on-one and group conversations. Social media is quickly changing the online marketing and recruiting strategies for thousands of businesses across the world. So if you haven’t given this exciting dynamic some thought, now’s the time to start developing your Social Media strategy and ride the wave to free exposure, stronger referrals, more valued clients, increased profits and a boost in your recruiting efforts.
— CCH, a Wolters Kluwer business
The Necessity of Data Backup
During tax season, it’s easy for professionals to get distracted by their workload. It’s not until disaster strikes — through a computer crash, a flood or even a break-in — that they consider the effects of lost data. In order to protect your firm, it’s crucial to implement a data backup and storage plan.
This may sound like a daunting task, but in reality it can be accomplished by simply defining what, where and when.
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What: Identify the information needed for your records, while keeping in mind professional regulatory demands. For record-keeping requirements for e-filed returns, see IRS Publication 1345.
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Where: Make sure all stored files are organized in a way that lets you quickly find the documents you need. It’s also important to make multiple backups. Many professionals backup data daily to two storage devices, leaving one in the office and storing the other off-site. USB drives are ideal for this purpose.
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When: The key to successful data storage resides in a regularly maintained back-up schedule. If you don’t have an automated backup system, create a reminder in your calendar or cell phone. Don’t forget that additional workstations such as home office PCs or field laptops will also need to store their data at regular intervals.
A trend emerging in data storage is a switch from physical devices like backup servers and tape to online systems. Online data storage can provide several benefits such as automated file backup, data encryption and 24/7 access — not to mention the relief in knowing your data is safe from potential disasters.
— CCH Small Firm Services
E-Filing: A Step Forward
Treasury regulations require tax preparers to keep a copy of any tax return or claim for refunds they complete. Copies of returns must be retained and kept available for inspection for three years following the close of the return, which is the day that the return was presented to the taxpayer for signature. Failure to comply with this retention requirement can result in a $50 penalty for each failure, unless that failure was due to reasonable cause and not just willful neglect.
Tax preparers must also supply taxpayers with a copy of the tax return no later than when the return is presented for signature. The copy can be presented in any media, including a form of electronic media (for instance, a PDF version of the return saved on a CD or flash drive) that is acceptable to both the taxpayer and tax preparer.
The most efficient way to comply with these record retention and distribution requirements is to have a system that stores records as a by-product of the preparation cycle. This can be most easily accomplished by using tax software that includes an electronic filing system. The tax software produces the tax return (as a printed or electronic document) for the taxpayer, while the filing system stores all documents and helps the preparer meet the document retention requirement. Tax software also helps the preparer comply with the new federal e-file mandate.
Incorporating an electronic filing system into your tax-preparation business is an important step forward into the era of digital tax preparation.
— Drake
Tips for the Unemployed Seeking Work
The U.S. economy and the job market are showing signs of improvement. You may have clients who are looking for work or are engaged in work-related training. The government provides several tax incentives that might put some money back in their pockets when they file their returns. The Internal Revenue Code allows for certain expenses to be categorized as employee business expenses.
Tax professionals can deduct client’s expenses incurred in connection with searching for employment in his/her present occupation, even if he/she didn’t land the new job. The deduction will be disallowed if 1) the client is looking into a brand new occupation; 2) there is a significant time lapse between the end of his/her previous job and the search for a new one; or 3) the client is looking for his/her very first job. The following expenses qualify for the deduction: employment agency or counseling fees; resume preparation and postage; and travel and transportation.
Education expenses can be deducted even if the training eventually leads to a degree. However, the training must maintain or improve the client’s skill set in his/her current position and the training must be required by an employer or the law in order to maintain the client’s current salary or status. Deductible expenses include tuition, books and supplies. On the other hand, the deduction will be denied if the education is 1) needed to meet the minimum education requirements in your client’s position or 2) the program will qualify him/her for a new trade or business. For example, a person would not be able to deduct the cost of a medical degree if he/she had not already entered into the profession.
— Intuit
Reporting Roth IRA Conversions
A change in the tax rules led many taxpayers to convert traditional IRAs (or other eligible retirement plans) to Roth IRAs in 2010 even though the conversion is taxable. You must file Form 8606 to report a conversion from a traditional IRA to a Roth IRA. On Part II of Form 8606, you report conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs. Rollovers from qualified retirement plans to Roth IRAs and in-plan rollovers to designated Roth accounts are reported on Part III of Form 8606.
Unless you elect otherwise, half the income from a rollover or conversion in 2010 is included in income in 2011 and the other half in 2012. Normally, you want deferral. But there are times when deferral may not be the best choice. If, for 2010, you have deductions that could offset the income and/or credits that could reduce or eliminate the tax on the income, you may want to elect to include the income from the conversion on your 2010 return. Also, if your income was low in 2010 and will be higher in 2011 and 2012, electing to be taxed on the conversion in 2010 may be the better choice.
You elect to be taxed in 2010 by checking a box on Form 8606 and entering the taxable amount of the conversion on the appropriate line of your return. If you choose to be taxed in 2010, you must do so for all 2010 conversions and rollovers to Roth IRAs. Once you make the election, you cannot change it after the due date (including extensions) for your 2010 tax return.
File for a six-month automatic extension, which gives you until Oct. 17, 2011, to have a clearer picture of your 2011 income. This will help you decide whether to make the election.
— Thomson Reuters — Tax & Accounting
More Plan to Spend Refunds on Vacations
According to a new survey, 30% of taxpayers plan to spend their anticipated federal and state tax refunds on vacations. This is up dramatically from 16% from a similar poll in 2006.
In comparing results of the 2011 and 2006 surveys, the new poll also found that of the 59% of Americans who expect to receive tax refunds:
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More people plan to spend their refunds on savings or investments this year than in 2006 (66% v. 55%) or to pay off debts (59% v. 52%).
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Fewer people plan to give their refunds to charity (15% v. 20%).
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About the same percentage plan to make home improvements (31% v. 30%); buy products such as cars, electronics, or furniture (23% v. 24%); or pay mortgages or education loans (19% v. 20%).
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Those who plan to “do something else” with their refunds rose to 38% in 2011, up from 27% in 2006.
(Note: respondents could choose more than one way on how they plan to spend their refunds; percentages have been rounded up or down.)
Millions of Americans apparently see a light at the end of the economic tunnel. This poll shows they are confident enough in the economy or their own jobs to already be planning to use tax refunds for vacations or to save, invest, or lower their debts. These are encouraging signs of the times that will likely have favorable ripple effects on other segments of the recovering economy.”
The online survey was conducted Feb. 1 — 3, 2011 by Synovate, and has a margin of error of plus or minus four percent. The survey consisted of 1,000 responses by adults 18 years of age or older in the contiguous United States.
— Taxsoftware.com
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