In the past, residences were assumed to be owner occupied and receive a lower subsidized property tax rate but that assumption no longer prevails and owners who live in their homes must sign an affidavit affirming as much to retain a state subsidy that cuts their property-tax bill by up to $600 a year.

If they rent out their house or fail to return the affidavit, they will lose the subsidy and face a higher bill.

The idea is that, by weeding out people who wrongly get the subsidy, the savings will be used to offset a property-tax break for businesses.

No one knows how many homeowners this will affect, though legislative analysts estimated that 25 percent of the rental homes in the state are misclassified and 6.5 percent of homes are second homes. Officials involved in Arizona's real-estate community fear the new requirement could trigger undeserved property-tax hikes as they suspect many property owners will ignore or overlook the requirement to sign the affidavit, which will be attached to the notice of valuation mailed to all property owners each year.

The requirement to declare that a property is owner-occupied, as opposed to a rental, is part of the tax-cut and jobs bill Gov. Jan Brewer signed into law in 2011.

One section of the legislation reduces the rate at which business and agricultural properties are assessed for taxation.

Because of the way Arizona's property taxes work, a cut in one category forces an increase in another - in this case, residential properties - so that there is no net loss in tax dollars collected. But lawmakers, not wanting to see residential taxes rise, increased the amount of the state subsidy, which has been 40 percent of the property-tax bill.

To cover the cost of the business-tax breaks and the increased rebate, lawmakers had to find money to fill the gap. The solution: Crack down on property owners who wrongly claim the rebate.

To do that, the legislation puts the burden on owners to attest that they actually live in the house they own. If they don't, the county will reclassify it as a rental, and the homeowner rebate will no longer be used to reduce the property-tax bill.

Currently, property owners indicate if a home is their residence when they buy a home, and they continue to receive the tax break indefinitely. The new legislation will require them to affirm that every other year, beginning in 2012.

Lawmakers figure they can save $39 million a year by withholding the rebate from people who rent out their properties.

Once the program begins, people will have 60 days to return the affidavit or the assessor will classify the property as a rental.

Lawmakers advise there will be a remedy. People have up to three years after getting a tax bill to provide the proper documentation to restore the homeowner rebate.

Many assessors question whether the policy will yield the $39 million that budget analysts predict.

First, some rentals are eligible for the homeowner rebate. If a house is rented to a direct relative of the owner, it qualifies. Second homes, or vacation homes, also qualify as long as they are not used for more than three months.

Second, assessors say they've already weeded out many properties that shouldn't be getting the state subsidy. In Maricopa County, the Assessor's Office last year removed 4,700 rental properties from the rebate list.

Still, no one has a good handle on how many homeowners are wrongfully benefiting from the long-standing state rebate.

That's all the more reason to use the affidavit, said Kevin McCarthy, executive director of the Arizona Tax Research Association, a business-supported advocacy group.

He also said the process, although almost guaranteed to cause unwarranted angst with some taxpayers, should provide a clearer view of how taxes work.

"I think it would be healthy for people to understand this system is in place and their taxes are being subsidized by the state of Arizona," McCarthy said.

Read more: http://www.azcentral.com/news/election/azelections/articles/2011/03/14/20110314arizona-property-tax-hikes.html#ixzz1lAQPXSEQ

Have you ever bought anything though the internet or though a catalog and not been charged state sales tax on your purchase?  Arizona thinks you may have and has added a line to the 2011 tax returns requiring you to pay use tax on those purchases.  

Use tax is technically the same thing as sales tax except it is charged on out of state purchases where you do not pay state sales tax.  There are two reasons Arizona is pursuing this tax (which has been around since 1955).  First, Arizona is trying to raise revenue and sales taxes are a major source of revenue.  Second, purchases from out-of-state sellers who do not charge a sales tax puts Arizona sellers at a disadvantage.  The use tax puts all retailers on a level playing field.

The Arizona use tax is 6.6% of the total of your out-of-state purchases where you do not pay state sales tax.  The use tax does not apply to purchases that would be exempt from Arizona sales tax such as medical prescriptions, medical supplies, and food for home consumption.

When you send us your information for your 2011 taxes make sure you answer the question on what for your total out-of-state purchases were for purchases where you did not pay state sales tax.  If you have questions on the use tax or whether a purchase needs to be reported, please contact us.

WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged. Highlights include:

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.

• The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.

• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

• The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2012 from $49,000 to $50,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.


The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $16,500 to $17,000.

The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions    remains unchanged at $5,000.

There are four categories of donations

First is a $400 ($200 for single and heads of household filers) donation to a working poor organization.  Click here for a list of Working Poor organizations and here for Pub 710 working Poor Contributions.

Second is a $400 ($200 for single and heads of household filers) donation to a public school. Click here for Pub 707 - School Tax Credits.

Third is a $1,000 ($500 for single and heads of household filers) donation to a school tuition organization. Click here for a list of School Tuition Organizations and click here for Pub 707 - School Tax Credits

Fourth is a $400 ($200 for single and heads of household filers) donation to the Arizona Military Family Relief Fund. Click here for MFRF Brochure.

Each of these donations works as a credit on your Arizona tax return and a deduction on your Federal tax return.  This means that you could potentially receive up to a 135% return on your donation. 

The only list that we did not provide is the public schools.  That is because you can donate to any public school.  However, for your convenience, you can go to the Osborn District Donation Website where a donation can be made online with your credit card.  This is a school district which we work closely with and support (learn more here). 

Additionally, you can go to Arizona Department of Revenue Tax Credits and learn the who, what, where, when, why and hows.  Disclaimer: you only get the credit if you pay Arizona income taxes.  If you do not have a liability in the current year, the credits (except for MFRF) can be carried forward for a maximum of five years. To be eligible for the working poor credit you must claim itemized deductions on your Arizona return for the same year the credit is claimed.

As always, Price Kong and Co. is here to assist with your year-end tax planning and answer any question you might have.  Please feel free to contact us at 602-776-6300.

Income Tax Records

Generally, I recommend seven years from the date of the tax year in question if the returns were filed on time.  That covers the statute of limitations for grossly understated taxes (more than 25%)  The problem is that the statute doesn't start to run until the return is filed. In serious cases of fraud the statute doesn't start to run until the fraud is discovered.  If you are confident that the IRS has accepted your returns then you can safely destroy all supporting tax documents three years after the returns are filed.  There are special rules for documents relating to worthless stock, bad debts, and employment records.

Bank Records

Keep what you need to support your tax returns (see above) and destroy the rest.

IRA Contribution Records

Probably forever (until the account is closed) if you make a contribution to a ROTH IRA.

Retirement Plan Statements

Keep the quarterly statements for one year then replace them with the annual statement. Keep the annual statements until you close the account.

Pay Stubs

Keep them until you receive your W-2 and compare them to the W-2 for accuracy then destroy.

Real Estate and Other Property Records

Keep purchase and mortgage documents for at least seven years after you have sold the property.

Credit Card Statements and Receipts

I would keep any receipt that support your tax returns for seven years and the same for the corresponding statements.  However, once I had satisfied myself that the credit card statement is correct and not needed for tax purposes I recommend shredding both.

General Bills and Receipts

Review your saved bills and receipts annually,  you may want to shred any that you don't need for tax reporting.  However, it is a good idea to keep bills that support purchase dates for warranty service or big ticket items in case you need to prove their cost for insurance.

One Size Does Not Fit All

As you can see, how long you keep your records depends on your individual situation.  No matter which records you destroy, it is important to completely destroy those records to protect your credit by avoiding identity theft.

To learn more about your personal situation consult your CPA and read more at the links below:

• http://www.irs.gov/businesses/small/article/0,,id=98513,00.html
• http://www.irs.gov/publications/p552/ar02.html
• http://www.kiplinger.com/columns/ask/archive/how-long-to-keep-tax-records.html
• http://www.consumerreports.org/cro/money/personal-investing/conquer-the-paper-piles/overview/
• http://money.msn.com/how-to-budget/how-to-purge-your-financial-clutter-weston.aspx

Related news:  Price Kong Hosts Shred Party Food Drive

 

Scott A Mitchem CPA, CVA, CFE
Price Kong CPAs, Consultants
ScottMitchem@pkcpa.com
(602) 776-6313

• Relax, take a deep breath and calm down you cannot operate effectively if you are upset.  It is natural for you to be upset.  Understand that most serious fraud is committed by someone we trust and it is natural to be upset when our trust is violated.

 The next thing to do is to take control of your assets

•  Make certain that you have plugged the hole so that  assets and money are no longer going out the door.  Often we are slow to react and we do not act on our suspicions giving dishonest employees more time to steal and to cover up their theft.

Then take control of your records

• Make certain that the thief has no access to Company records.  Change their passwords, take control of their computers.  Cut any remote computer access.
• You will want to preserve the record if you have any hope for prosecution and restitution from the thief.  For these records to qualify as evidence and to prevent your business from being interrupted or the records being altered you need to make back-up copies of your data.  That data should be stored in such a way that no one can accuse you of altering it.

Make a preliminary estimate of your losses

• You need an immediate idea about how much has been stolen so that you can decide what resources you are willing to commit to try and reclaim you cash or property.
• You may need to dig deeper than your original discovery.  Employees who steal often use multiple tactics and are often not detected for years.

 Meet with your other employees

• Ask lots of open ended questions, be careful at this point not to accuse the perpetrator of a crime because if you cannot prove it you might get sued by them somewhere down the road.  Instead refer to the crime as an alleged violation of company policy.

 Contact the police

•  It is important to log your complaint as soon as possible.  By prosecuting you send the correct message to your employees that you have zero tolerance for fraud.

• If convicted judges usually order restitution as part of the sentence and you can make the world a better place by doing your part to prosecute dishonest employees and making it less likely that they will steal from someone else.

 Make an insurance claim

• Most business insurance packages include some sort of protection against employee dishonesty unfortunately it usually is not enough.  
• You need to contact your insurance company early in the process they may be willing to help fund your investigation.

It is a good idea to get help through this entire process.  A trained fraud investigator and your attorney can help you during the very first steps. Certified Fraud Examiners have been trained and have seen lots of fraudulent schemes.  They can be very useful assessing the damage, protecting the data, and interviewing the remaining employees.

The best approach to dealing with fraud is to prevent it.  Please contact our office and we will provide you with a free consultation to determine whether your business is vulnerable and suggest some steps to limit that vulnerability.

Scott A Mitchem CPA, CVA, CFE
Price Kong CPAs, Consultants
ScottMitchem@pkcpa.com
(602) 776-6313

Got Nexus?
State tax payments are based on a concept known as “nexus,” which asks whether sufficient business activity has occurred within a state that would allow it to subject an out-of-state business to its tax laws. There are different standards of nexus for state sales taxes and state income taxes.
Specific business activities that could trigger nexus from an income tax standpoint include:

• Owning or leasing real or personal property in the state, including inventory.
• Leasing to customers in the state (including pre-purchase inspection).
• Installations, repairs, training or meetings performed by your employees or agents in the state.
• Participating in trade shows in the state.

According to federal law, businesses must perform activities beyond the following in order to be required to pay state income taxes in the state in which they are doing business:

Soliciting the sale of any tangible personal property in the state, whether by its employees or independent contractors. Not all types of solicitation and property are protected from nexus, though.

Among those that are protected:

• Taking orders
• Carrying samples and promotional materials
• Checking inventory levels
• Autos used by salespeople in the state

Among those that are not protected:

• Accepting orders and product returns
• Collecting on delinquent accounts
• Performing credit checks
• Restocking inventory
• Securing deposits
• Publishing phone book listings and performing advertising campaigns
• Possessing in-state phone numbers

Accepting the orders from customers out of state.

Filling orders from inventory outside the state.

To help provide some consistency from state to state, the Multi-State Tax Commission has created a model states can choose to follow that specifically defines nexus for income tax purposes. According to the model, nexus exists for state income tax purposes if a company:

• Possesses $50,000 of in-state property.
• Processes $50,000 of in-state payroll.
• Makes $500,000 worth of sales into a state in one year.

In this model, nexus also exists for state income tax purposes if 25 percent or more of the business’ total payroll, property or sales take place in the state. So far, seven states are using this nexus model: California, Colorado, Connecticut, Kansas, Michigan (sales threshold is reduced to $350,000), Ohio and Washington (sales threshold is reduced to $250,000).

Nexus and Sales Taxes
The key criterion for determining nexus from a sales tax standpoint is a little simpler: If a company has any kind of physical presence in a state, then it has nexus in the state. This includes, but is not limited to:

• Having employees or independent contractors who reside in the state.
• Exhibiting at a trade show in the state. (Some states allow up to 14 days at a trade show before nexus is established.)
• Using company vehicles for delivery in the state.

While sales taxes are actually paid by your customers, your business is responsible for collecting and remitting them to the proper state authorities. So your cost is primarily an administrative one. But if you fail to collect and remit sales taxes, the liability shifts to your business, and your financial exposure can be significant.
States also differ when it comes to determining nexus with regard to sales taxes paid on drop shipments outside of your state. There are three parties to a drop shipment: the manufacturer (or seller), its reseller, and the reseller’s customer (or end buyer of the product).
Some states will accept any resale certificate from a reseller of a company’s products, even if the reseller is not registered in the customer’s state, while others will only accept their own resale certificate. In these states, the seller must collect sales tax from the reseller.
Note: If a reseller asks a seller to ship product directly to the end customer, and this customer lives in a state where the seller does business, the seller will be subject to the state’s sales tax rules.

Income Apportionment and Revenue Sourcing
To accurately apportion business income among states, states historically used a three-factor method that took into consideration sales volume in the state, property owned in the state (e.g., plant, equipment, offices) and payroll in the state. Each of these is divided by the company’s total sales, property and payroll nationwide to come up with the right apportionment for each state.  In recent years, however, many states have moved to a sales-weighted formula, counting sales more heavily than the other factors, or toward a single-factor method based just on sales. Currently, about half of the states are single-factor and half are three-factor, with sales weighted more heavily than the other factors.  Sourcing revenue in the different states where you do business can be tricky, because not all states follow the same rules. In most states, you must distinguish between revenue from the sale and rental of tangible personal property (both stationary and mobile), rental of real property, and receipts from intangibles (e.g., patents) and services.
There are two different methods used by states to source revenue from services performed in multiple states:

1. The cost of performance method — This is the method currently used by most states. If the majority (or preponderance) of costs are incurred in one state, then all of the revenue generated from the service is sourced to that state. If costs are spread out more evenly over multiple states, each state is allocated an appropriate percentage of the revenue based on how much of the work is performed with it.
2. The market states method — Alternatively, this method is based on the state in which the services are delivered to the customer. It does not consider the states where the costs were incurred.

State tax payments and nexus can be very confusing. If you’d like to discuss your situation in more detail, please give us a call.

Current Ratio (current assets/current liabilities) – This compares the availability of current assets to satisfy current liabilities. A minimum ratio of 1.0 is usually desirable.

Return on Assets (net pretax earnings/total assets) – This shows how effectively your company is using its assets. It’s usually stated in percentage terms (i.e., a 5 percent return on assets).

Debt to Equity (total liabilities/total net worth) – One of the most important financial ratios, this measures how highly leveraged your company is. A higher ratio creates additional risk. A ratio of 3.0 or lower is usually acceptable.

Months in Backlog (backlog/average monthly revenue) – This measures the number of months it will likely take to complete all contracted work. A drop in backlog is an obvious cause for concern.

Backlog Profit to Overhead (projected gross profit in backlog/fixed overhead) – This tells you if the projected profit in your committed jobs will be adequate to cover your ongoing operating costs.

Backlog to Working Capital (backlog/[current assets – current liabilities]) – This is another measure of leverage. A higher ratio may indicate you will need additional working capital to complete the work for which you are committed.

Days in Accounts Receivable and Days in Accounts Payable – In addition to regularly monitoring these two key measures of liquidity, compare the two side-by-side to be alerted to coming cash flow problems.

Financial ratios should not be viewed in isolation. Compare them to industry benchmarks and monitor them over time to identify trends and changes.

1. Maintain your retirement plan. Company contributions to retirement plans are among the first things cut when budgets are tight. Remember, however, that retirement plan contributions can be a useful way for owners to move funds out of the business and into their own nest eggs. Moreover, to claim a tax deduction for retirement plan contributions, you usually are not required to actually deposit the funds until the due date of your tax return, with extensions. So, for ex-ample, you might be able to postpone your contribution until as late as September 15, 2011, while still claiming the deduction on your 2010 return. Of course, make sure you’ll be able to fund the contribution when the due date arrives.
2. Host quarterly employee meetings. These do not have to be elaborate or expensive. Consider an office potluck luncheon with a short program on the state of the business. In addition to keeping everyone informed, quarterly meetings can also serve an internal control function. If you still handle payroll with paper paychecks, use the occasion to hand them out. Or, if you use direct deposit, deliver some other personalized communication to each employee face-to-face. This is a simple but effective way to guard against phantom employees.
3. Support employee health. Even if health insurance benefits are unaffordable, you can contribute to your employees’ physical and mental health in other ways. One contractor launched an exercise program for its employees and their spouses, combined with a weight loss contest designed by a health professional. Quarterly employee meetings can help in this effort too. Hospitals, other health care providers and local organizations like the YMCA often will supply free speakers for such company events.
4. Get everyone involved. Solicit employees’ opinions on which benefits are most valued and which may be expendable. Not only is the input useful, but this practice also builds a sense of ownership and mutual respect. Above all, communicate with employees and explain the reason for any change in benefits.

Signs of Vulnerability
Internal process problems can hide the warning signs of a job that’s starting to run into trouble. You have reason to be concerned about your early warning system if any of the following describe your company:

• Every project manager has his or her own way of estimating job progress. Without a standardized company-wide method for calculating and reporting the percentage of completion, you are at great risk for last-minute profit fade.
• Your job progress tracking system focuses on labor hours alone. Many contractors focus too narrowly when estimating job progress. A more effective system employs a comprehensive, “earned value” approach, which tracks quantities for all key budget items including materials, equipment and supplies in addition to labor hours, and then compares installed quantities against projected budget.
• Your job tracking system is not integrated with your accounting system. Freestanding spreadsheets can be easily manipulated, which is why work in process (WIP) reporting should be integrated into your main business accounting software — not tracked separately.
• Your projects are constantly and continually underbilled, and there are frequent modifications of progress billings by those responsible. These indicate a risk that the work completed to date is less than the costs incurred.

This is only a representative list, of course. These days, almost every contractor is at risk of cost overruns.

What to Measure
Accurate and timely measurement is essential to effectively managing job costs and cash flow. Several especially critical metrics should be tracked closely:

Overbillings vs. underbillings. Overbillings (projects on which billing is running ahead of earned value) should always exceed underbillings (projects on which billing is lagging behind earned value). Perform regular project cash flow analysis to ensure you maintain healthy net overbillings, and be particularly watchful for underbilling as jobs near completion.

Aging of receivables. In the current economic climate, some contractors have allowed the average age of their receivables to creep up to as much 75 or 90 days — a recipe for trouble. As a rule, fewer than 60 days in accounts receivable is acceptable.

Project manager WIP accuracy. Cost projections naturally become more accurate as the job nears completion when fewer variables remain. By the time a job is 80 percent complete, the project manager should be able to project the total costs with considerable accuracy — say, a margin of error of 3 percent or less.

Even more important, though, is the ability to accurately project total job costs early in the project — at 25, 50 and 65 percent completion, for example. Benchmark your most successful project manager’s cost projection accuracy and use this to establish company-wide standards.

Conditional performance benchmarks. Job cost reports should include flags to alert you to potential problems. For example, contractors are often advised to have commitments for 80 percent of a job’s material and subcontractor costs by the time 10 percent of the labor is completed. Your own benchmarks will vary, of course, based on your experience or specific business conditions.

Getting Started
Most contractors these days are focused on generating new business, so it’s tempting to put off internal management improvements — even for something as important as improving job cost management. One way to overcome this tendency is to break the process down into smaller steps. Here are seven steps to get you started:

1. Make it a priority. Emphasize the importance of timely reporting and processing of project costs, and ensure there is good communication between project management and accounting about when to run reports and perform analysis.
2. Update your cost tracking and reports. Define what you want your reports to include and how you want them to appear. Color code the most critical information and job performance benchmarks so they are visible at a glance.
3. Pilot the process. Use the new tracking and reporting system on several projects to make sure it works, and fine-tune as necessary.
4. Train your staff, both in the office and in the field, on how to use the new system.
5. Set a “go live” date when you will convert all open projects to the new reporting system. The only exceptions might be jobs that are very near completion.
6. Publicize the new standards and let the rest of the company know how they’re doing. While an individual project manager’s performance should be discussed one-on-one, consider posting a lunchroom chart that tracks net overbillings, receivables (as days sales outstanding) and labor productivity on a company-wide or division basis.
7. Incentivize and train as necessary. Link a portion of project managers’ compensation to their accuracy in job costing and achieving critical benchmarks. Use the new system to identify any weaknesses, and provide training to project managers who need extra help.

Call us today to discuss job cost control and other important management tools.