Tax Tips for Small Businesses

Corrections or additions?

These articles by Kathleen McGinn Spring were prepared for the

March 28, 2001 edition of U.S. 1 Newspaper. All rights reserved.

Stocks Are Still the Way to Build Wealth

The Federal Reserve has taken an ascending stock market,

built on a wonderfully sound U.S. economy, and plunged it into a

totally

unnecessary period of pain. This is the view of Ram Kolluri,

owner of Global Value, an Alexander Road-based financial consulting

firm.

"My goodness," Kolluri says, "what we’re going through

now was inflicted by the Federal Reserve for no reason." Alan

Greenspan, the Fed’s much-watched leader, was looking at Japan’s

model,

he conjectures. "Japan let a bubble build in all its assets —

stock, real estate. They paid $62 million for that Iris painting.

They paid $2 billion for Rockefeller Center." When he raised

interest

rates last year, Greenspan believed the United States was building

a similar asset bubble. "He thought he was serving the long term

interests of the country by not letting it go on," Kolluri says.

Kolluri says inflation was not a problem here. "The bond markets

have been saying for the last year `What inflation?’ The federal

government

is running huge surpluses. Now in the last two months the Federal

Reserve Board cut interest rates. Let someone explain to me what

changed

in six months in inflation. Nothing."

Kolluri says the stock market, feeding on a strong economy and low

inflation, will rise again, probably in 12 to 18 months. But there

is another factor that is working to erode portfolio value. "There

has been more damage done to people’s finances," he says, "by

AOL — or any other Internet service you want to name. People go

to their computers first thing in the morning. They check their

portfolios

before they look at the news. They follow their stocks minute by

minute,

move their 401(k)s from pillar to post. It’s sheer madness."

Kolluri, whose company has $200 million under management, urges a

much more disciplined approach on his clients. He is a proponent of

long term investing, and is not ready to give up on the stock market

as the best way to build wealth.

When the market was "sky high," Kolluri began looking for

larger offices for his company, which has grown from three employees

to nine during the current bull market. After looking for larger

offices

in Carnegie Center for over a year, he has moved Global Value from

1,750 square feet in 130 Carnegie Center to 6,000 square feet of new

construction at 821 Alexander Road.

The new offices are "just 700 feet from the train station,"

Kolluri says. This is a big plus because the company maintains a small

office in Manhattan. "I’ve been in five, six times in the last

two weeks," he says. Besides a location that doesn’t require a

parking spot in the Princeton Junction lot, the new building offered

Global Value a chance to design its own space. The firm hired

Tarantino

Architect of Millstone to create its interior. The builder

incorporated

the design into the new building, which sits on the corner of Vaughn

Drive and Alexander Road.

Global Value is counting on growth, according to Kolluri, who says

he is just as glad the firm made the move during a slowdown. This

period will give his company time to gear up, he says. The new offices

were designed to hold 17 people, which would nearly double the firm’s

current personnel roster.

Kolluri, a native of Rajahmunbry, India, who studied business at Pace

University, started Global Value in 1982 after leaving Merrill Lynch.

He clearly recalls the panic that followed the 1987 market crash.

"I was on Nassau Street then," he recalls. "People were

saying, `We’re living in a bubble! Oh my God, the Dow should never

have traded more than 1,000!’"

Fears were overblown then, and they are overblown now, he says. Some

of his clients are worried, and have been calling. But no one has

liquidated so far. Kolluri puts his clients on a course toward

financial

security using "building blocks," and if they don’t hold,

he doesn’t think anything will. His recipe for wealth includes the

following:

Pay off all debts. Kolluri says his clients typically

pay off everything, including their mortgages. "If you minimize

short term financial needs," he says, "your portfolio can

worker harder. It can work longer for a higher yield." Nothing

beats stocks, he says, but they are not for any investor with a short

time horizon. "If you have one day less than five years, do not

buy stocks." Banishing the pressure of bills buys investors

liquidity

and frees their dollars to be put to work for the long haul.

Stash cash in a safe spot. Before investors put money

into the markets they should salt away the equivalent of two years’

salary in CDs or money market funds, Kolluri says. No matter what

the markets do, these cash equivalents will give investors flexibility

— and a significant hedge against worry.

Buy the S&P. With this cushion in place, Kolluri says

the investor is ready to move into the markets. The best way to do

this, he says, is to invest in the S&P 500 through an index fund.

"Buy all the companies," he says.

Move into blue chips. The next move is into a diversified

portfolio of 25 to 35 blue chip stocks. "Stay with the blue

chips,"

Kolluri says. "They’ve been around for a long time for a

reason."

While he is opposed to chasing hot tips on technology stocks, Kolluri

says "America’s future is technology," and many blue chips

are technology stocks in disguise.

"Wal-Mart is a technology company," he says. "They’ve

written the book on logistics. It’s more a logistics company than

an old-line retailer. Wal-Mart could be selling cars, anything."

The same is true for many pharmaceutical giants, he says, which are

really "huge information technology companies on the frontier

of research using computer simulations."

Consider bonds as a sleep aid. Bonds belong in the

portfolios

of older investors, says Kolluri. They also can be part of an

investment

strategy for anyone who experiences motion sickness and sleeplessness

during market swings like this one. The trade off, he says, is lower

return. The advice on who should buy bonds has been tempered to some

extent by changing demographics. Where 50 was seen as old not too

long ago, Kolluri, who puts "old" at more like 75, sees people

in their 50s as being middle aged. This being the case, a longer

investment

time frame, one with room to let stocks grow might cut the percentage

of bonds held even by those in their 50s and 60s.

While Kolluri is optimistic about both the U.S. economy and

the stock market, he urges investors to be patient. Recent interest

rate cuts can work, but he says the economy is like a sick man just

been given some much needed medicine. "Give the body some

time,"

he says. "You can’t expect him to be up and jumping around."

Top Of Page
Tax Tips for Small Businesses

On its website (www.njscpa.com) the New Jersey

Society

of Certified Public Accountants offers help with a multitude of vexing

tax questions that arise at this time of year. Among the group’s most

helpful advice is that for small businesses grappling with the

complexities

of complying with tax laws while at the same time trying to take

advantage

of all the tax benefits of owning a business. Some of the issues

facing

entrepreneurs:

Expenses of going into business The cost of investigating

the potential for a new business and getting that business started

are capital expenses, which can be recovered by depreciation or

amortization.

Under tax law, you may elect to depreciate or amortize your start-up

costs over a period of 60 months or more if two conditions are met:

(1) the costs are ones that would be deductible if they were paid

or incurred to operate an existing business and, (2) the costs were

paid or incurred before you actually began business operations. In

the event you decide not to go into business, any costs you paid to

investigate the possibility of going into business are considered

personal costs and are not deductible. Costs you paid in your attempt

to actually start or purchase a specific business can be claimed as

a capital loss.

Charitable contributions. Businesses may contribute cash

or property to charities. Unincorporated business owners may make

and fully deduct cash gifts of up to 50 percent of adjusted gross

income and may contribute appreciated property of up to 30 percent

of adjusted gross income. Unless your business is a C Corporation,

you deduct charitable contributions made by the business on Schedule

A of your personal tax return. A corporation may deduct on its

corporate

return charitable contributions that total not more than 10 percent

of the corporation’s modified taxable income. A considerable tax

advantage

exists for business owners who donate property that has appreciated

in value. In addition to a deduction for the full market value of

the property, the donor avoids tax on the appreciation that has built

up.

Tax credits. In addition to taking advantage of tax

deductions,

you may be able to further trim your business’s tax bill by claiming

business tax credits for which your business is eligible. Tax credits

are generally more advantageous than tax deductions, because credits

are subtracted from your tax bill, while deductions are subtracted

for the income on which your tax bill is computed. Tax credits are

available for certain taxes and investments, for hiring certain

disadvantaged

workers, and for actions that benefit the environment. The tax credit

rules are complicated and typically require professional advice.

Hiring your children. Assuming your children perform

actual

services and are paid according to the value of their work, there

are several benefits to employing your children in your business.

First, the taxpayer receives a tax deduction for compensation

expenses.

Second, if the business is a sole proprietorship, payments for the

services of your child under 18 are not subject to social security

taxes. Third, the wages the child earns are not considered earned

income and are not subject to kiddie tax rules.

Casualty losses. Business owners who suffer damage or

loss to business property as a result of a natural disaster are

eligible

for tax breaks to offset those losses. Special rules apply if the

losses occur in a location declared a federal disaster area. In such

cases, a business owner can treat the casualty loss as if it occurred

in the year immediately preceding the tax year in which the disaster

actually occurred. This action expedites the taxpayer’s refund.

Medical Savings Accounts. Medical Savings Accounts (MSAs)

are designed to work in conjunction with high-deductible health

insurance

plans. They are available to self-employed individuals and owners

and employees of small businesses. MSAs are similar to IRAs in the

sense that employers and employees can make tax free contributions

to the MSA. Instead of withdrawing the funds at retirement, the

taxpayer

withdraws the funds to pay for qualified medical expenses. Assets

not spent on medical expenses accumulate from year to year and can

remain invested on a tax deferred basis to fund future medical

expenses

or to supplement the taxpayer’s retirement savings.

Obsolete inventory. Goods that can not be sold at normal

selling prices or in the usual way because of changes of style or

damage may be valued for deduction purposes at bona fide selling

prices,

less the direct costs of disposition. To realize expected losses,

take steps to dispose of obsolete inventory.

Retirement plan contributions. Retirement plans are one

of the most valuable tax breaks available to small business owners.

As a business owner, you can personally deduct contributions to your

own qualified plan, and your company can deduct contributions made

on behalf of its employees. The government has a number of retirement

plan alternatives in place for small business owners. SEPs, Keoghs,

and SIMPLE plans all offer significant tax advantages. Depending on

the plan and your earnings, you may be able to shield as much as

$30,000

of your income.

Home office deduction. The Taxpayer Relief Act of 1997

redefined the term "principal place of business" to include

a home office that is used by the taxpayer to conduct administrative

or management activities if there is no other fixed location where

the business owner conducts such activities. In doing so, the act

opened the home office deduction to those people who manage a business

from their home, but also provide a service and meet clients at

another

location. Under previous tax law, unless you met with clients,

customers,

or patients on a regular basis in your home office, you could not

claim the home office deduction. However, the crucial requirement

that your home office be used "regularly and extensively"

for business remains in effect.


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