HEARTBLEED BUG

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The “Heartbleed” bug has sent businesses and individuals into attack mode in order to prevent passwords from being disclosed, personal information from being compromised — and ultimately, assets from being stolen.

The IRS issued the following statement about Heartbleed:

“The IRS continues to accept tax returns as normal. Our systems continue operating and are not affected by this bug, and we are not aware of any security vulnerabilities related to this situation. We continue to monitor the situation and remain in contact with our software partners.”

The problem, which was disclosed last week, involves encryption software called Open SSL, which is extensively used by thousands of websites. The Heartbleed bug can cause sensitive information stored on servers to be disclosed, including passwords, usernames, personal information and credit/debit card numbers.

The vulnerability “can potentially impact Internet communications and transmissions that were otherwise intended to be encrypted,” according to an alert issued by the U.S. Department of Homeland Security (DHS).

The nature of the bug is complex and it is not yet clear exactly how long it has been a security flaw.

Many websites quickly applied patches to fix the vulnerabilities. CNet, an Internet consumer technology site, compiled a list of the 100 most popular websites and checked whether the Heartbleed bug was patched. According to the site, Google, Facebook, YouTube, Yahoo!, Reddit, Yelp, Dropbox and others have fixed the vulnerability.

However, as with any hacking threat, you should take the Heartbleed bug seriously and consider following these steps:

1. Change your passwords. This is a good idea to do periodically, but in the wake of Heartbleed, you should do it ASAP. The DHS says that you should only change passwords after the vulnerability has been fully addressed at individual websites. Use strong passwords with letters (including capitals), numbers and symbols. Keep passwords long, 10 or 12 characters if possible. To keep track of your various passwords, use a password manager.

2. If you have the option to do “two-factor authentication,” take it. This security feature is just as it sounds — to access accounts, you have to type in two factors. For example, it might require a password and then a code sent to your smartphone. It’s not available everywhere yet but it can add protection to help keep your data safe.

3. Clear your Internet browser cache, history and cookies. Again, this is a good idea to do on a regular basis. Exactly how to do this depends on the browser you use but here are some instructions for a couple of popular browsers:

  • For current versions of Internet Explorer. Go to Tools (an icon with gears). Choose “Safety” and then “Delete Browsing History.” There you can check “Temporary Internet files, Cookies, History,” etc.
  • For current versions of Firefox. Click the Firefox button at the top of the window. Select “History,” then select “Clear Recent History.” This opens up a pop-up box that asks for a time range to clear. Select “Everything” and check “Browsing and Download History, Cookies and Cache.” Then, click “Clear Now.”

4. Beware of e-mail messages promising instant solutions. Unfortunately, when crisis strikes, many unscrupulous people try to take advantage of others. In the coming days, you may receive e-mails that ask you to click on links to rid your computer of Heartbleed. Don’t fall for it.

5. Check your credit card and bank accounts and statements thoroughly. If you see suspicious or false charges, contact the issuer or institution immediately to limit your liability.

6. Closely monitor your e-mail accounts, social media accounts and other online assets for irregular or suspicious activity, such as abnormal purchases or messages.

7. Ask businesses that have your data if they are vulnerable and what they have done to patch the bug.

8. Check for the “s.” After a website you are visiting has addressed the vulnerability, the DHS states you should “ensure that if it requires personal information such as login credentials or credit card information, it is secure with the HTTPS identifier in the address bar. Look out for the “s,” as it means secure.

These are general Internet security tips. There is no way to guarantee that you will not be affected by Heartbleed or other attacks but you can make yourself less vulnerable by taking certain steps.

 

© Copyright 2014. All rights reserved.
Brought to you by: Vaughn CPA, LLC

 

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INTEREST RATES

On the heels of the financial crisis, banks tightened their lending policies and many companies couldn’t qualify for inexpensive fixed-rate loans. Instead, they took on variable-rate loans. Interest payments that fluctuate based on the U.S. prime rate or London InterBank Offering Rate (LIBOR) index are a viable option, as long as rates continue to hover near historic lows. But if market indices rise, borrowers with substantial variable-rate loans could be in for a rude awakening.

Ready to Make a Deal?

Many Baby Boomers are planning to sell their businesses over the next few years. If you’re contemplating a sale, rising interest rates could affect the price you’ll fetch in the marketplace. As long as debt is cheap, buyers can afford to pay higher prices. But if the cost of debt suddenly increases, it could reduce your probable selling price — all else being equal.

While interest rates are at historic lows, it might be a good time to put your business on the market. Conversely, it also could be a good time to shop around for businesses to invest in. If you’re looking to expand, you might be able to afford to buy more while rates are low.

However, the cost of debt is just one factor that affects a business’s value. Consult with your financial adviser to determine how rates might affect a firm’s market value and the optimal time to buy or sell.

Putting ‘Low’ Into Perspective

Just how low are today’s rates compared to historic levels? To put current interest rates into perspective, consider the U.S. prime rate, which is the basis for many companies’ variable-rate loans. It’s been set at 3.25 percent since 2008 — its lowest level since the mid-1950s.

By comparison, its 50-year high was 21.5 percent in 1980. The median prime rate from 1947 to present is 8.75 percent. And the most common prime rate (or mode) is 7.5 percent over the same period. If the prime rate jumps to 7.5 percent over the next few years, many companies will be unprepared to absorb the incremental interest expense.

How Long Can Low Rates Last?

A key determinant of prime and other variable-rate indices is the federal funds rate, which is the rate banks charge each other for overnight loans. In January, the Federal Open Market Committee (FOMC) voted to keep the federal funds rate near zero percent until unemployment falls below 6.5 percent. That unemployment level isn’t expected to occur until 2015.

Don’t let low rates lull you into complacency, however. Long-term commercial loan rates are influenced by more than the federal funds rate. And a spike in inflation or a faster-than-expected economic rebound could cause the Fed to tighten its monetary policy sooner rather than later. So, borrowers may need to have a backup plan in case interest rates start to climb.

Do You Need a Back-Up Plan?

If the following conditions apply, you might benefit from converting some of your variable-rate debt into fixed-rate debt:

  • Your balance sheet includes long-term debt;
  • Interest on your loans fluctuates according to changes in an index rate, such as LIBOR or the prime rate;
  • Interest expense is a significant line item on your income statement; and
  • You lack sufficient assets and cash flow to repay variable loans over the next 12 to 24 months.

Refinancing with a conventional fixed-rate loan is the most obvious way to lock in your rates. But what if you only want to lock in a portion of your variable-rate debt or prefer a different amortization period? In that case, a simpler, more flexible option might be an interest rate swap.

How Swaps Work

Swaps are derivative contracts that operate similar to insurance policies against rising interest rates. Essentially, a borrower can hedge its bets by placing a swap contract on top of a variable rate loan, effectively locking in a fixed rate. If index rates increase more than the bank expects them to, the swap agreement generally pays off for the borrower.

As an added bonus, the Financial Accounting Standards Board (FASB) recently made it easier for non public companies to report simple interest rate swaps. Now small and mid-sized businesses can opt to use settlement value rather than fair value when updating the value of the swap each period, under Accounting Standards Update 2014-13, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Accounting Approach.

This update reduces compliance costs and income statement volatility, especially for companies with large swaps subject to lengthy durations. Private firms — except for not-for-profits, financial institutions and employee benefit plans — can elect to apply the simplified hedge accounting method on a swap-by-swap basis to new or existing swaps that qualify.

Finding the Optimal Strategy

Today’s interest rates are low by historic standards, but they won’t last forever. Many borrowers may find it prudent to convert variable-rate payments into fixed-rate payments, using traditional fixed-rate loans, swaps or a combination of the two. Many variables factor into the decision, including your company’s sensitivity to interest rate volatility, the cost of swaps and expected future cash flows. A financial professional can help you develop an effective strategy to minimize your long-term debt costs.

 

© Copyright 2014. All rights reserved. Brought to you by: Vaughn CPA, LLC

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Don’t inadvertently miss filing deadlines

If you still file a paper return, it’s important to know the IRS’s “timely mailed = timely filed” rule: If your tax return is due April 15, it’s considered timely filed if it’s postmarked by midnight on April 15. But just because you drop your return in a mailbox on the 15th doesn’t mean you’re safe.
Consider this example: On April 15, Susan mails her federal tax return with a payment. The post office loses the envelope and, by the time Susan realizes what has happened and refiles, two months have gone by. She’s hit with failure-to-file and failure-to-pay penalties totaling $1,000.
To avoid this risk, use certified or registered mail. Alternatively, you can use one of the private delivery services designated by the IRS to comply with the timely filing rule, such as DHL Same Day service. FedEx and UPS also offer a variety of options that pass muster with the IRS. But beware: If you use an unauthorized delivery service — such as FedEx Express Saver® or UPS Ground — your document isn’t “filed” until the IRS receives it.
If you haven’t filed your return yet and are concerned about meeting the deadline, another option is to file for an extension. Doing so has both pluses and minuses, depending on your situation. Please contact us if you have questions about what you should do to avoid penalties for failing to file or pay.
© 2014

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Your 2013 return may be your last chance for 2 depreciation-related breaks

 
If you purchased qualifying assets by Dec. 31, 2013, you may be able to take advantage of these depreciation-related breaks on your 2013 tax return:

1. Bonus depreciation. This additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With only a few exceptions, bonus depreciation isn’t available for assets purchased after Dec. 31, 2013.

2. Enhanced Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets — including both new and used assets — up to $500,000, but this limit is phased out dollar for dollar if purchases exceed $2 million for the year. For assets purchased in 2014, the expensing and purchase limits have dropped to $25,000 and $200,000, respectively.

Even though this may be your last chance to take full advantage of these breaks, keep in mind that the larger 2013 deductions may not necessarily prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations, future deductions could be more valuable, such as if you move into a higher marginal tax bracket.

Let us know if you have questions about the depreciation strategy that’s best for your business.

© 2014

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2013 higher education breaks

Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:
1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.
But income-based phaseouts apply to these credits. If your income is too high to qualify, you might be eligible to deduct up to $4,000 of qualified higher education tuition and fees. The deduction is limited to $2,000 for taxpayers with incomes exceeding certain limits and is unavailable to taxpayers with higher incomes.
If you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2013 tax returns — and which will provide the greatest tax savings — please contact us.

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Health Care Update

Recently released IRS final regulations for the Affordable Care Act’s (ACA’s) employer shared-responsibility provision provide some short-term relief for midsize and large employers. Under the ACA, the shared-responsibility provision (commonly referred to as “play-or-pay”) applies to “large” employers — those with the equivalent of 50 or more full-time employees. Play-or-pay had been scheduled to go into effect in 2014 but last year the IRS pushed that out to 2015. Now, under the final regs, eligible midsize employers that otherwise would be considered large employers under the ACA won’t be subject to the provision until 2016. To qualify for the midsize-employer relief, an employer must:

  • Employ on average fewer than 100 full-time employees or the equivalent during 2014,
  • Maintain its workforce size and aggregate hours of service,
  • Maintain the health care coverage it offered as of Feb. 9, 2014, and
  • Certify that it meets these requirements.

The final regs also provide some relief for large employers that don’t qualify for the midsize-employer relief: In 2015, they can avoid the penalty for not offering minimum essential coverage by offering such coverage to at least 70% of their full-time employees, rather than the 95% originally scheduled. The 95% requirement will apply in 2016 and beyond. The final regs also clarify certain aspects of the play-or-pay provision. Please contact us if you’d like more information on the final play-or-pay regs or other ACA provisions.

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Reinvested Dividends, don’t forget them when calculating basis.

One of the most common mistakes investors make is forgetting to increase their basis in mutual funds to reflect reinvested dividends. Many mutual fund investors automatically reinvest dividends in additional shares of the fund. These reinvestments increase tax basis in the fund, which reduces capital gain (or increases capital loss) when the shares are sold.

If you neglect to include reinvested dividends in your basis, you’ll end up paying tax twice: first on the dividends when they’re reported to you on Form 1099-DIV, and again when you sell the shares and the reinvested dividends are included in the proceeds.

To help ensure you’re properly accounting for dividend reinvestments when you’re filing your 2013 tax return — or for other tax-smart strategies for your investments — contact us today.

© 2014

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Substantiating Contributions for 2013

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services. “Contemporaneous” means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So if you made a donation in 2013 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2013 return. Contact the charity and request a written acknowledgement. And don’t take the substantiation requirements lightly. In one U.S. Tax Court case, the taxpayers substantiated a donation deduction with canceled checks and a written acknowledgment. The IRS denied the deduction, however, because the acknowledgment failed to state whether the taxpayers received goods or services in consideration for their donation. The taxpayers obtained a second acknowledgment including the required statement, but the Tax Court didn’t accept it because it wasn’t contemporaneous. Additional substantiation requirements apply to some types of donations. We can help ensure you meet them so you can enjoy the deductions you’re expecting.

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Tax Planning, Business Tax Planning, Individual Tax Planning

Tax planning and preparation are two separate activities, but are definitely connected.

Tax planning is the art of thinking out of the box about what your activities are and how they are accepted by IRS. This is mostly about listening to a client talk about their family, there business, their goals, and what they actually do to earn their money. Sometimes a person beleives they are running a business, but in actuallity they do very little; the children may have taken over the business, and the owner is really retired. BING! A possible tax planning opportunity.

After listening, then asking the questions is important. Get to the details on what the business is actually doing, does it manufacture something, when the owner thought it just installed something? These types of details and perspectives are what Tax Planning is all about.

The Tax Planning process then lays out different alternatives and compares them against the true taxes. It should be done for a period of years, projecting what will happen in the coming years. Some decisions may make sense for the first year, only to be a real problem in the second or third year. Depreciation is a good example of this…often a businessman will ask if he should buy a piece of equipment at the end of the year. Might be the right decision and it might give a good tax benefit. But, maybe the next year would need the benefit more, or maybe the method of depreciation should be looked at over a number of years. This is why tax planning and preparation must be done for more than one year.

Once several alternatives are presented, the tax planning has to step back to the business planning. Is the tax saving more than the actual economic cost. To go back to the depreciation question…is the business better off to have that new vehicle than to get by with its current vehicle for another year? Determine the real cost of that tax saving tool, and don’t forget to factor in the cost of capital required to either buy the equipment for cash or the interest on a loan used to buy the equipment.

And it is not just the business that needs to do tax planning. Selling of stocks, taking dividends in cash or stock, maxing out the 401K or planning in a Roth account…all part of the long term tax planning.

Tax Planning is so much more than you probably thought.

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Accounting and Bookkeeping

Accounting and Bookkeeping, what type of person should I be hiring for my accounting-bookkeeping needs?

There are several parts to an accounting and bookkeeping system and one of the best ways to determine what type of accountants or bookeepers you need is to do a flow chart of how the paperwork flows through the office or business. Sit down and draw boxes and lines to show who needs to handle each part of the work.

For instance, say you have a home repair business and the accounting-bookkeeping is just now working out. Flow chart the entire system. First, probably a customer calls in with a job request. A clerical person may take an order, this could create a paper or electronic record (which is best?). A job number may be attached to this accounting and bookeeping record. The tech is then dispatched to the job and when finished, an invoice may be hand or electronically written and given to the customer. This may have the job number attached to it.

Usually, the tech will pick up a check or process a credit card (on his phone) to record the payment and give a receipt to the customer. Then he is off to the next job.

From an accounting-bookkeeping point of view, this transaction has so far involved two people, the order taker and the producer. Now some additional parts need to be added to the system. The job has to be recorded as a sale in the books. The payment has to be recorded as an increase to the cash account. If the payment was by check, someone has to take it to the bank. If parts were purchased to do the work, those have to be recorded as a purchase and then they have to be paid for.

Many transactions like this eventually must be recorded in a set of books, and financial statements and tax returns are produced.

Accounting and bookkeeping are involved in all of these steps and they may be done by one person or each job may have a separate person, depending on the size of the business. It is important to discuss the accounting and bookkeeping flow with your outside, independent CPA to set out your flow chart of tasks so that it includes a system of checks and balances. Maybe the person who took the order should log that order and another person should record the payment. This “segregates” the duties so that there is less chance that one person could pocket the money and delete the transaction all together.

Most people are honest, but setting up your system to encourage honesty and keep those tasks separate is easier if you use that flow chart to show each step in the process.

Once the system is flow charted, you will be able to determine what the skills and background need to be for each task. Often a person calls themselves a “full charge bookkeeper” when they really are a good clerk. A clerk generally takes charge of one area, like paying the bills, whereas an accountant will probably be the one to do the financial statements. Again, your CPA should be able to help you set up the skills needed for each position.

 

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