OCTOBER 2011
Khaas Baat : A Publication for Indian Americans in Florida

Accounting

Is your business adequately diversified?

By Kamlesh H. Patel, CPA

The market ride of the past few years underscores the risks of not maintaining a diversified investment portfolio. In business, relying on a few customers, vendors, or key employees also makes for risky business.

Companies that depend on just a few customers for the majority of their sales can easily find themselves in hot water. What will happen to your business if your largest customer can't pay its bills, requests a major price reduction, starts buying from your competitor, gets bought out, or closes its doors?

Even if your company sells to many customers, you aren't adequately diversified if most of your customers are in the same industry. Remember the banking crisis, the downturn in the real estate market, and the problems with the tech industry.

Relying on only one or two suppliers is risky as well. What will happen to your business if your key vendor suddenly raises its prices, can't provide enough product, or simply goes out of business? If you ship product to customers, it’s also a good idea to do business with more than one shipper.

Business diversification doesn't occur overnight. It's common for new businesses and smaller companies to rely on a few significant customers, suppliers, or key employees. To help ensure long-term success for your business, implementing a plan to make your company more diversified is a good idea.

To reduce concentration risk, target some customers in different industries. Sharing information and allocating responsibilities among your company's employees reduces your dependence on just a few key people. Keeping all aspects of your business properly diversified is an ongoing process.

AGE MATTERS IN THE TAX LAW
Many tax provisions are linked to age, so whenever there’s a birthday in the family, check for changes your tax planning should take into account. Some of the major tax milestones include the following:

Age What it means for your taxes.
13 Beginning at this age, your child no longer qualifies for the child care credit.
17 From this age on, your son or daughter no longer qualifies for the child tax credit (different from the child care credit, above).
18 When your child reaches this age, his or her Coverdell education savings account is not permitted to accept new contributions.
18 Beginning at this age, you must pay Social Security taxes for any of your children that you employ in an unincorporated business.
19 Is your child a full-time student? Unless you answer “yes,” you could lose the dependency deduction once your child reaches this age.
24 Upon reaching this age, none of your child’s investment income will be taxed at your rate under the “kiddie tax” rules.
30 By this age any amount remaining in your child’s Coverdell education savings account must be distributed or rolled over to an education savings account for another qualifying family member.
59½ You may start withdrawing money from your IRA, 401(k), and other retirement plans without penalty.
65 Beginning at this age, you generally qualify for a higher standard deduction.
65 Also at this age, low-income seniors may qualify for a special tax credit.
70½ You must start withdrawing at least the minimum amount from your IRA each year, or you face a stiff penalty. (This requirement doesn’t apply to Roth IRAs.)

THE IRS PROVIDES A GUIDE TO CHARITABLE DEDUCTIONS
With tax agencies, even the simplest concepts become complicated. The IRS recently provided no less than these nine questions to consider before deducting charitable donations.

1. Is the donee really an exempt charity? To find out, go to the IRS website (www.irs.gov) and download “Publication 78, Cumulative List of Organizations.”
2. Do you itemize deductions on Form 1040, Schedule A? If not, you can’t claim your donations.
3. How much is deductible? You can claim actual cash contributions or the fair market value of property you donate. (Determining “fair market value” may require some research.)
4. Did you get anything in return for your donation, like a discount book or free tickets to an event? If so, you can only deduct the excess of your contribution over the value of the item you received.
5. Did you document your contribution? Without proof (e.g., a canceled check or receipt), your deduction may be disallowed.
6. Did you pledge your contribution? Only the amount paid, not pledged, is deductible, and only in the year that you paid it.
7. When did you contribute? When you donate by credit card or check, the donation qualifies immediately, even if the card statement or check debit shows up in the following year.
8. How large were your contributions? For donations of $250 or more, you need a receipt from the donee. Property gifts worth $500 or more require completion of IRS Form 8283. Property worth over $5,000 also requires an appraisal.
9. Has the IRS revoked your charity’s exemption? Contributions made from the date of revocation forward can’t be deducted. A list of revoked agencies may be found on the IRS Web site.

Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail kpaccounting@verizon.net or kpinsurance@verizon.net.


Finance

Is a Cash Balance Plan Right for Your Business?

By SEEMA RAMROOP

A cash balance plan is a type of tax-qualified defined benefit pension plan. If you and other highly-compensated employees are currently maximizing contributions to your company’s 401(k) and profit-sharing plans, it can be a valuable plan addition to your retirement program.

As with traditional defined benefit pension plans, cash balance plans are subject to minimum funding standards, and must provide a specified accrued benefit at retirement. However, unlike traditional defined benefit pension plans, hypothetical “individual accounts” are used to communicate the current value of each participant’s accrued benefit. Participants receive periodic statements showing the accumulation of “contribution credits” based on compensation, age and service, and “interest credits” based upon a market rate of return. Employer contributions are based upon actuarial projections, and earnings are credited to the plan’s trust based upon actual investment performance. Distributions from cash balance plans are normally paid as an annuity, but lump sum benefits may also be available (with spousal consent) upon termination of employment.

A cash balance plan allows the plan sponsor to make tax-deductible contributions for eligible employees determined under a nondiscriminatory formula, which may exceed the dollar limits for defined contribution plans. Cash balance plan contributions are in addition to amounts contributed for an employee to a defined contribution plan.

Potential candidates are companies with owners, partners or other highly compensated employees who may have neglected retirement savings to grow their business, or otherwise desire to catch up on retirement savings. Businesses should have consistent cash flows and profits since contributions are required on an ongoing basis to meet the minimum funding standards of the Internal Revenue Code. Cash balance plans require the services of an actuary to determine appropriate funding levels.

Your current retirement program may not be taking advantage of the additional benefits, which can be provided through a cash balance plan. Now may be the time to review your current retirement program design to make sure you are fully maximizing your tax savings and retirement contributions.

Seema Ramroop, financial advisor, Morgan Stanley Smith Barney, can be reached at Seema.Ramroop@morganstanleysmithbarney.com or call (727) 773-4629.

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