Do you know what income is taxable and what income is not taxable? Generally, all income earned anywhere in the world is taxable unless the law specifically excludes it. That includes cash and non-cash receipts from sources such as bartering, discharge of debts, and illegal activities.

There’s no reference to amount in determining what’s taxable and what isn’t. So, although you might not get an information form for amounts under specified limits – the familiar $600 figure for Form 1099-MISC, for example – that income is reportable on your tax return.

Despite the broad nature of the term, not everything you receive is considered income. For instance, rebates, refunds, and purchase price adjustments are specifically excluded. Child support payments, welfare benefits, damage awards for physical injury or sickness, and reimbursements for qualified adoption expenses are also excluded from income. Gifts, inheritances, and proceeds from life insurance policies are other familiar exclusions.

However, in contrast to the definition of income, exclusions tend to be narrowly defined. For example, while proceeds from life insurance policies are generally not taxable to you as a beneficiary, interest earned on the proceeds typically is. Also, though income from a scholarship is normally not taxable, amounts used for room and board, rather than tuition and books, are taxable. Estate proceeds may not be taxed to the beneficiaries, while income in respect of the decedent (Inherited IRA’s, interest income, …) is.

California has been particularly covetous of tax revenue. The state has been chasing tax on income that, while earned in another state, has “nexus” within California. This connection to CA commerce enables the state to collect tax on the unwary.

Give us a call if you have questions about the tax effect of various kinds of income received during 2014.

Reach us at 209.599.5051


In recent years, more and more grandparents have found themselves raising their grandchildren. If you’re one of them, you may qualify for one or more of these tax breaks.

  • If you’re single and caring for a grandchild, you may be able to file your tax return as head of household, which offers lower tax rates than single status. Your grandchild must live with you for over half the year, be under age 19 at year-end (under 24 if a student), and have provided less than one-half of her own support for the year.
  • You may also be able to claim your grandchild as a dependent, if you’re the one providing more than one-half of her support. This will entitle you to an additional exemption ($3,950 for 2014) and will also enable you to include her medical and dental expenses when computing your allowable medical deductions.
  • If you’re working but must pay for your grandchild’s care to do so, you may qualify for a credit equal to a percentage of the expenses. Your grandchild must live with you more than half the year and be a dependent, either under age 13 or otherwise unable to care for himself.
  • Working grandparents may also be able to claim the earned income credit (EIC). Their grandchild must qualify as a dependent, except he may provide more than half of his own support. More affluent grandparents won’t be eligible for this credit, since income restrictions apply.
  • Child tax credits are available to most grandparents with dependent grandchildren under age 17. Although income limitations apply, they are less restrictive than those for the EIC.
  • Additional tax breaks may be available to grandparents who pay to educate their dependent or otherwise qualifying grandchildren. Contact us for more details about all of these tax-saving opportunities.

You can reach us at 209.599.5051


If you’re a sole proprietor, you have probably wondered at some point whether you’d be better off if you incorporated your business. Here are some facts for you to consider.

The single biggest benefit of incorporating a business is limiting an owner’s liability. In theory, a stockholder in a corporation risks only his or her investment in the corporation stock. A lawsuit against the company generally cannot be satisfied by attaching the stockholder’s personal assets. In practice, most small corporation stockholders must personally guarantee bank loans for their corporations. Thus, if the corporation fails, the stockholder’s personal assets are at risk. In addition, where personal services are involved, the individual performing the services may be personally liable for his or her actions even though the business is incorporated.

The second advantage of operating as a corporation is that it may be easier to raise capital because the business can do so by issuing stock and selling bonds. A third advantage is that ownership interest in a corporation is easier to transfer than in a sole proprietorship.

A C corporation files its own tax return and pays its own income tax. Therein lies the major drawback to the corporate form: Business profits may be taxed twice – once at the corporate level and again at the shareholder level when paid out as dividends or liquidating distributions. Double taxation can generally be avoided by electing S corporation status.

The corporate form does allow for more fringe benefits that are deductible by the corporation and tax-free to employees, including an owner-employee.

No business owner should incorporate without carefully considering the pros and cons of doing so. Call our office and your attorney if you would like more information about the advantages and disadvantages of incorporating your sole proprietorship.  You can reach us at 209.599.5051.


Are you pondering the question of whether or not to convert your traditional IRA funds to a Roth IRA? While your decision involves many factors, one wrinkle to consider is the five-year holding period for converted assets.

The time limit has nothing to do with distributions of regular contributions from your Roth. As you know, you can withdraw regular contributions at any time, tax- and penalty-free, no matter your age. That’s because you deposit those amounts into your Roth using money on which you’ve already paid income tax.

Rather, the five-year holding period comes into play when you’re under age 59½ at the time you make a Roth conversion. In that case, you’ll generally have to wait five years (or until you turn 59½, whichever comes first) before you can pull the “conversion assets” out penalty-free.

When you fail to meet the five-year rule, the penalty is the same 10% you’d pay if you took an early withdrawal from your traditional IRA. That’s the purpose of the five-year rule – to discourage premature distributions from retirement accounts.

Once you reach age 59½, the 10% penalty disappears, though the five-year holding period for converted assets may still apply. For example, say you use the conversion to fund an initial Roth. During the first five years your new account exists, you’ll pay ordinary income tax on withdrawals of the income earned from the converted amounts.

The five-year holding period can also affect your beneficiaries. For instance, if you had no prior Roth account before making a conversion, your beneficiaries will pay ordinary income tax on distributions of earnings. However, they can withdraw converted amounts with no federal income tax or penalty.

Give us a call to discuss this and other Roth conversion rules. Don’t let unawareness of the rules lead to an unpleasant tax surprise. Call us at 209-599-5051




Borrowing from your closely held corporation may seem simple, but without proper planning it can be painfully expensive. The IRS often reviews such loans to determine if they’re merely disguised cash withdrawals. For example, the IRS may treat an improperly structured loan as a dividend, which would be taxable to you and not deductible by the corporation.

The IRS generally asks the following questions when evaluating a corporation’s loan to one of its shareholders:

  • Does the borrowing shareholder control the corporation? The greater the degree of control, the more closely the loan will be scrutinized.
  • Did the corporation require adequate collateral for the loan?
  • Is the borrower financially able to repay the loan within a reasonable time period?
  • Did the shareholder sign a promissory note with an appropriate interest rate, a reasonable repayment schedule, and a fixed maturity date?
  • Has the borrower been making the required payments on schedule?
  • If the borrower missed one or more payments, has the corporation tried to collect?

When a corporation lends money to one of its shareholders, the transaction should be structured as though it were being made to an unrelated party – a stranger. The borrower should sign a promissory note that includes payment terms and a final due date. At a minimum, interest should be charged at the IRS statutory rate in effect at the time of the loan. Requiring adequate collateral will be regarded as a favorable indicator by the IRS, although it is not mandatory. The terms of the loan should be voted on by the Board of Directors, and the details should be entered into the corporate minutes. The borrower should make payments according to the agreed-upon schedule.

Since circumstances are different for each corporation and each shareholder, you should always consult your accountant before transferring money from your company. If we can be of assistance, call us at 209.599.5051




By Thomas L. Vermeulen, C.P.A

I’ll bet you never considered your farming operation to be an international business.  However, the U.S. government thinks that you just may be trading internationally… and that is a good thing!  If current production and crop prices continue, it may be well worth your effort to establish a corporation, and make an IC DISC election in time for the 2014 crop year harvest.  I have estimated that potential tax savings will range between 4 and 6 cents per pound for almond growers using this structure.

The IC-DISC is the singular remaining export incentive.  Others have been eliminated due to complaints by the World Trade Organization.  Further, the IC-DISC currently enjoys bi-partisan support within U.S. congress.  President Obama had originally targeted this incentive for elimination, however, that changed with the “Great Recession”.  Congress has turned its focus to U.S. jobs creation and has backed this incentive for internationally outbound transactions.  It is important to emphasize that the farming operation must remain profitable to realize tax savings from the IC-DISC.

Blue Diamond Growers estimates that “70% of the industry’s sales are to foreign markets bringing new wealth to California and the nation as a whole”. Other exporters may have higher ratios of export sales.  The higher the export ratio, the greater benefit provided by the IC-DISC.

The IC-DISC benefit is essentially the difference between ordinary income rates and qualified dividend rates plus net investment income tax rates.  The result is a potential tax savings of 15.8% of amounts paid to an IC DISC.  To qualify as an IC-DISC, a domestic corporation must pass several tests known as the qualified export receipts test and the qualified export assets test.  Your handler/broker will provide substantiation of the ratio of export sales each year.

The IC-DISK is a “paper” entity used as a tax savings vehicle.  It does not require many of the typical corporate formalities such as an office, employees, or tangible fixed assets.  It simply serves as a conduit for export tax savings.  Shareholders within an IC-DISC can be other corporations, individuals, partnerships, trusts, estates, or a combination thereof.  This adds flexibility to the types of entities that may benefit from this structure.

The way the IC-DISC works can be summarized as follows:

  • The owner-managed exporting company (The Farmer) forms a special U.S. corporation that elects to be an IC-DISC.
  • The Farmer pays a commission to the IC-DISC.
  • The Farmer deducts the commission from ordinary income – at tax rates between 28% and 39.6%.
  • The IC-DISC pays no tax on the commission income.
  • Shareholders (Also The Farmer) of the IC-DISC are not taxed until earnings are distributed as dividends.  However, shareholders must pay annual interest on any tax deferred.
  • The results may save taxes ranging from 4.2% to 19.6%, depending on your Federal tax bracket.  The higher Federal tax rates, the greater the savings.

There are other tax benefits that may result from the IC-DISC.  There are also several requirements and qualifications that must be met by the IC-DISC.  These are beyond the scope of this article.

The tax benefits of an IC-DISC begin once you have formed the corporation and made the election.  I recommend that you look into the potential for tax savings at your earliest opportunity before the 2014 crop year harvest.

If you need help pondering globally, just give us a call  at 209.599.5051




Starting a new business can be many things, including fun, stressful, exciting, and hopefully profitable. But each new business startup presents unique challenges that could trip up the new business owner, especially when it comes to taxes.

● Business Entity. There are several tax entities that can be selected including sole proprietor, partnership, limited liability company (LLC), corporation, and small business corporation (S corporation). Each entity has its own tax reporting requirements, and each is unique with respect to liability protection and owner benefits.

● Accounting Method. The type of business and entity selected will generally determine if you can use the “cash basis” method (income/deductions reported when received/paid) or the “accrual basis” (revenue reported when earned, deductions claimed when incurred). Next to selecting a business entity, this is probably the most critical decision you’ll have to make.

● Employer Identification Number (EIN). Once the entity is selected, it will require its own identification for virtually all federal tax purposes. You will need a federal EIN, and you may also need various state ID numbers to report specific state/local taxes.

● Types of Taxes. The type of entity you select will determine the types of taxes that you’ll have to deal with. They could include income tax, payroll tax, and self-employment tax. But you could also have to deal with excise taxes, state and/or local business license taxes, and sales taxes. Each type of tax requires a different set of forms.

● Recordkeeping. Keeping excellent records will allow you to file your monthly, quarterly, and annual tax reports, including your annual federal/state tax returns, on a timely and accurate basis. Understanding how to document your business deductions and confirm your business income can’t be overlooked. Choosing the right computer accounting system will greatly assist you in your recordkeeping and tax reporting obligations.

Contact us if we can be of assistance with tax issues in your new business – 209.599.5051


Brand new moms and dads and parents returning to school or work are reminded that they may be eligible for a valuable tax credit to help pay for expensive summer child care. Though the tax credit is good for year-around child care expenses, it is especially important when school is out and full-time care is required. Here is what you need to know.

To qualify for the credit, both parents must be working or actively looking for work. In addition, a parent can be a full-time student. Depending on your income, you can deduct up to 35% of your out-of-pocket expenses, based on a maximum expense of $3,000 for one child, $6,000 for two or more. Qualifying children are those under age 13 who live with you and can be claimed as your dependent. Care for a dependent live-in adult or spouse who is not capable of self-care may also be eligible for this credit.

You might be pleased to know the credit is the same whether the care is at a daycare facility or in your home. Summer day camp expenses also meet the test as long as the camp is not overnight. Keep in mind that tutoring expenses and payments made to older dependent children to care for a younger sibling do not qualify.

Be sure to keep all payment receipts for your tax return, including the name, address, and social security or federal identification number of the care provider. This information must be reported on your tax return to claim the credit. If your employer pays for part of the cost of your child care expenses you will need to deduct that amount from your eligible expenses.

For more guidance on how to maximize the child care tax credit, give our office a call. 209.599.5051


Does your business offer a retirement plan for employees? If not, consider setting one up. A retirement plan may be beneficial for several reasons. It can help you to recruit employees as part of your overall compensation package. You can help your employees by giving them a tax-advantaged way to save for their retirement. A plan can also provide tax credits or deductions for your business. Finally, it can help you provide for your own retirement.

Small businesses and the self-employed can choose from a variety of plans specially designed to keep costs low and administration relatively simple.

SEP-IRA Plans. Perhaps the easiest plan to set up is a simplified employee pension plan (SEP). With a SEP, you make retirement plan contributions for your employees. The contributions are a percentage of their earnings, generally up to 25 percent, subject to dollar limits. The contributions you make go into individual retirement accounts set up for each employee. Employees manage the investments in their accounts, just like a traditional IRA. You don’t have to contribute every year, but if you do, you can’t discriminate among employees. You have until the due date of your tax return to set up a plan for the previous tax year.

SIMPLE Plans. SIMPLE plans allow your employees to defer part of their salary into their retirement accounts. You, as employer, can either match those contributions up to certain limits, or you can make non-elective contributions to each eligible employee.

Generally, you can set up a SIMPLE plan if you have 100 or fewer employees, subject to some additional restrictions. The plans come in two varieties – SIMPLE IRAs and SIMPLE 401(k)s. Generally, they’re slightly more complex than SEPs to set up and administer.

Qualified Plans. Qualified plans come in many flavors. Generally, they require a trustee and are more complex and costly to administer.

I always recommend that your planning take Roth contributions into consideration. Roth is basically a plan where, while there is no up-front deduction, there is also no tax on the investment including earnings.

For more information and guidance in selecting a retirement plan for your business, give us a call 209.599.5051


Did you receive a big refund check from last year’s taxes? If so, you’re not alone. Many of us deliberately pay extra taxes throughout the year so we can enjoy a nice bonus early the next year. Sometimes it’s insurance against having to come up with extra cash when you file your return. That’s a valid concern. But sometimes it’s just a form of enforced saving. Or perhaps you’ve simply never bothered to adjust your withholding. Those aren’t such good reasons. After all, when you overpay your taxes, you’re making an interest-free loan to the government.

Should you adjust your withholding? Reducing your withholding is as simple as filing a new Form W-4 with your employer. The form comes with a worksheet to figure out how many allowances you should claim. Don’t forget to allow for other taxable income besides wages, such as dividends or investment gains.

If you’re worried about underpaying tax, there are a couple of rules you should know. Generally, you’ll escape a penalty if you pay, through withholding or quarterly estimated payments, at least 100% of last year’s taxes (110% if your adjusted gross income is over $150,000), or if you pay at least 90% of what you owe for this year.

If you reduce withholding, here are some ideas on how to use your extra take-home pay:

• Contribute more to your employer’s 401(k) plan, especially if your company matches contributions. You’ll enjoy a double benefit because the extra contributions will reduce the tax on your wages as well as provide tax-deferred savings.

• Pay down balances you’re carrying on your credit cards. That’s equivalent to earning interest on your extra payments, often at double-digit rates.

• Put the money in a tax-favored Coverdell IRA or Section 529 plan for your child’s education.

Contact our office if you’d like help figuring out your withholding level.