The Potts Report

Simply Looking At Your Financial Statements Will Make You Money!

Simply looking at your financial statements and paying attention to them will make you money. If you are one of the many small business owners who doesn't even prepare financial statements until the end of the year and then only to appease your commercial loan officer and prepare a tax return, this obviously isn't simple for you. But the rest of you, if you will just pay attention, you can make more money.

In today's business world, everybody and everything competes for your attention. Employees have to be fired, employees have to be hired, past due receivables have to be collected, censuses have to be completed, equipment has to be purchased, and your spouse needs some attention. "Just give me the bottom line," you say, "That's what is really important." And I agree with you. Your bottom line is important. Important enough to watch, protect and improve.

Simply by paying attention to you income statement you might see a decreasing trend in your gross profit margin. Do you need to cut costs? increase prices? or check to see if somebody is stealing from you? You might notice that equipment repairs are twice as high as the previous year. Do you need new equipment? Financial statements give you immediate feedback on how well your business plan is working. Financial statements act as an early warning system when business sours. They give you information to make better decisions. Financial statements shouldn't be ignored.

For those of you who don't prepare monthly financial statements, your loosing out. Don't know how? I can help. 479-648-2846 or davidpotts@potts-cpa.com. If you need help reading your financial statements... same thing. Call me.

The American Opportunity Tax Credit

It’s August. The Fall semester of college starts at many universities this month. Although it is not as generous as the first time homebuyer’s credit or the cash for clunkers vouchers for buying a new car, the American Recovery and Reinvestment Act of 2009 expanded the credit allowed for higher education expense. Technically a modification and expansion of the Hope Scholarship Credit, the American Opportunity Credit allows a credit for qualified tuition and expenses paid in 2009 and 2010 of up to $2,500. The credit equals 100% of the first $2,000 paid for qualified tuition and related expenses and 25% of the second $2,000 paid.

Where the Hope Credit was limited to the first two years of post-secondary education, the American Opportunity Tax Credit is allowed for the first four years of post-secondary-education.

The original Hope Credit was allowed only on tuition and fees paid. For 2009 and 2010, course materials are included with tuition and fees.

The credit is not allowed to individuals over certain income levels. For unmarried individuals, the credit phases out starting when your adjusted gross income reaches $80,000 and is complete disallowed when your adjusted gross income surpasses $90,000. For married individuals filing jointly, the income levels are $160,000 and $180,000, respectively.

40% of the credit will be refundable. In other words, up to $1,000 will be refunded to you even if you owe no income tax.

What didn’t change is the credit is allowed on a per student basis, you must be taking at least 1/2 the normal full-time work load, you can’t be married and file separate returns, and the student must be your dependent.

Good News, Bad News

Follow this link to read an interesting and informative opinion piece published yesterday’s Wall Street Journal: The Economy Has Hit Bottom

The City Wire

Although The City Wire is read by many people in the greater Fort Smith region, I find there are still those who haven’t yet learned this most excellent online “newspaper” exists. That’s a shame. Therefore do yourself a favor and click this link. But before you do let me point out one thing I think readers of The Potts Report will be interested. Every two weeks I write an article about a topic concerning small business issues or income taxes in The City Wire’s Guest Commentary section. Today’s article, Cash is King, will give you tips on how to increase your business’ cash flow. After you have read my commentary take time to explore the rest of The City Wire. It has become the prime source for business news in the greater Fort Smith region. And it has much more content than business news. It’s worth your time. Check it out.

If you would like to read my past articles published in The City Wire, find the search box in the upper left corner of The City Wire’s home page and type “Potts commentary”. This search will return a list of links to my past commentary articles in The City Wire.

Nonbusiness Energy Property Tax Credit

The American Recovery and Reinvestment Act of 2009 reinstated and amended the non-business energy property tax credit. The credit is for people who spend money on their principal residence for new improvements or certain new equipment that increase the energy efficiency of their home. The credit equals 30% of the amount spent on qualified improvements in 2009 and 2010, but the credit cannot exceed $1,500 over both years.

What type of expenditures qualify?  Expenditures for insulation materials, exterior windows, exterior doors, asphalt or metal roofs, natural gas furnaces, propane furnaces, oil furnaces, natural gas hot water boilers, propane hot water boilers, oil hot water boilers, advance main air circulating fans, central air conditioners, electric heat pumps, and stoves  that burn biomass fuels qualify IF they meet certain specifications. How do you know if they meet specifications? You can consult the Internal Revenue Code and the 2000 International Energy Conservation Code or you can ask the person selling you the equipment or materials. The manufacturers will have told the distributors whether or not their product qualifies for the credit. But therein lies a problem.

Your salesman can tell you whether the equipment or materials will qualify for the credit based on energy efficiency, but that doesn’t guarantee you can take the full amount of the credit on your tax return. Why? You may not have $1,500 worth of tax liability for the credit to offset. The non-business energy property tax credit is not a “refundable credit”. I.e., you must have a tax liability to benefit.

The bottom line: Many people will make a decision to buy a more energy efficient central air conditioning unit if they believe they will get $1,500 back on their income taxes at the end of the year. For money people, this $1,500 might not materialize. It depends on your particular tax situation. Ask your CPA.

Change is Coming. Get Ready!

2009 is just past its midpoint. The long 4th of July weekend allowed me the time to consider the course of action Potts & Company should take over the next six months. Then that sleight feeling of anxiety arrived. The magnitude and impact of the changes our government are attempting to pass into law this year creates a level of uncertainty that hasn’t existed in my lifetime. Well, that last statement isn’t totally true. The government is certain to cause change, change that affects small businesses and their owners. Will the impact of this change be good or bad? I don’t know. (I do believe the government is certain to raise taxes in the near future on everybody and not just the rich).

The government is spending and committing to future spending in the trillions of dollars. The speed at which they are trying to pass new laws is worrisome. Economic stimulus packages, health care reform, educational reform, and environmental regulations are being pushed so fast that I doubt that anybody except lobbyist really now the details. Nobody can reliably predict the impact of of these changes on your finances or your company’s economic future. Inflation? Higher interest rates? Who knows. But change is coming. Get ready.

If you own a business, you have more demands on your time than most people.When was the last time you hid from everybody just to think about your business. Do you have a plan to manage the impact of health care reform on your business? What is the government implements an eight percent payroll tax on wages to finance health care? What impact will new “green” laws and regulation have on the cost of energy?

Creating plan “A” may not be enough. You may need a plan “B” and “C” too. Do yourself a favor. Find a quiet place and take time to think.

Want to Know What’s In Your Future?

Higher taxes! Read the following paragraph, the last paragraph in the summary, from the publication titled The Long-term Budget Outlook – June 2009 published by the Congressional Budget Office.

CBO’s long-term budget projections raise fundamental
questions about economic sustainability. If outlays grew
as projected and revenues did not rise at a corresponding
rate, annual deficits would climb and federal debt would
grow significantly. Large budget deficits would reduce
national saving, leading to more borrowing from abroad
and less domestic investment, which in turn would
depress income growth in the United States. Over time,
the accumulation of debt would seriously harm the economy.
Alternatively, if spending grew as projected and
taxes were raised in tandem, tax rates would have to reach
levels never seen in the United States. High tax rates
would slow the growth of the economy, making the
spending burden harder to bear. Policymakers could mitigate
the economic damage from rapidly rising debt by
putting the nation on a sustainable fiscal course, which
would require some combination of lower spending and
higher revenues than the amounts now projected. Making
such changes sooner rather than later would lessen
the risks that current fiscal policy poses to the economy.

It is going to take the Republicans (lower spending) and the Democrats (higher taxes) to put the United States back on the path to fiscal health. How optimistic are you?

The Potts Report Returns

The Potts Report has been inactive for several months. I began The Potts Report without a clear vision of what I wanted it to achieve. Who was my audience? Who was I writing for and on what topics did I know enough to write intelligently. I’ve been to the sweat lodge and received my vision for The Potts Report. When writing The Potts Report, the primary audience addressed will be the clients of Potts & Company. I will address topics that I feel will primarily benefit small businesses and their owners and professionals. The topics will be varied and address income taxes, reading financial statements, small business finance and management, marketing, creativity and innovation, technology, security, and just about anything else that I think my clients will find interesting and beneficial. Although my primary audience will be the clients of Potts & Company, I bet any small business owner or professional will benefit from reading The Potts Report.

Keep in mind I am a CPA, not a professional writer. I attended school in the seventies when the English curriculum was written, I believe, by educators still recovering from the sixties. My writing skills and grammar are weak. However, my ideas are strong. I will post at least once a week and it will be worth your time to read. Read On!

The Tax Enforcers

This morning I read an article in the Wall Street Journal titled, White House Leans Toward Tighter Enforcement of Taxes . It said…

White House officials disclosed the tax initiative on Tuesday, saying they intend to explore ways to better enforce the current code as well as improve it by eliminating corporate subsidies and untangling its many complexities.

Everybody is in favor of a simpler tax code and a more fair tax code. But toward the end of the article was this paragraph…

Back home, one of the biggest remaining problems is underreporting by small businesses that deal in cash -- as many contractors do. Among the possible further steps: requiring small businesses to use bank accounts, and using the tax code to encourage homeowners to report to the IRS the money they have paid to contractors.

Having grown up in the cold war era, this type of enforcement seems more appropriate for a communist country. A communist government would force you to conduct your business a certain way. A communist country would tell you it was your duty to tell on your neighbor.  It just doesn’t feel right. Why is it that all these rules and regulations are imposed on honest people? Dishonest people won’t comply anyway.

Sunday Reading

It is tax season. That means I need to focus on preparing income tax returns which leaves me short on time to write blog posts. However, I still read and the following links might be worth your time for some leisurely Sunday reading.

Forbes.com: Tax Moves for Tough Times 

Wall Street Journal: Cracking a Valuable Homebuyer Credit

Intuit Future of Small Business Report

Rolling Stone: The Big Take Over (The article has language that might be offensive to some).

Skeptical CPA Blog: McKinsey Strike Again