You have the money, and someone in your family needs
assistance. It feels great to help, but be careful or your
loan could create tax problems for you. The IRS pays special
attention to loans between family members.
You may ask, why the IRS cares if you lend money to a
relative. Over the years, some taxpayers took advantage of
the difference between their tax rates and those of their
children. They would make interest-free loans to children
who would then invest the money. The resulting income would
be taxed at the children's lower tax rates. The IRS
effectively closed this loophole with new regulations that make
using this strategy more difficult.
There are now rules that
apply to loans between family members. The principal tax
issues to be concerned about if you lend money to a relative are
loan amount, loan interest rate, the use of loan proceeds, and
loan documentation.
Loan amount and interest rate. The IRS rules
generally do not apply to loans under $10,000. On such
loans, you general may decide if you want to charge interest or
not. If you decide to charge interest, you will pay tax on
the amount of interest you receive each year.
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On loans you make that exceed $10,000, you must calculate a
required minimum rate of interest, even if you do not charge or
receive interest from the borrower. The IRS provides some
help here with monthly tax tables that indicate the minimum rate
to charge based on the term of the loan. For example,
short-term loans (3 years or less) make in January 2003 could be
made at 1.81%, mid-term loans (3-9 years) could be made at 3.43%,
and long-term loans (9 plus years) could be made at 4.90%.
On loans larger than
$10,000, you are required to pay income tax on the interest you
actually charge or the minimum rate, whichever is greater.
There is, however, a special
rule for interest-free loans on amounts
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between $10,000 and
$100,000. for loans in this range, the IRS allows you to pay
tax on the lesser of the minimum rate of interest or your
borrower's net investment income.
For example, if you made a
five-year, $50,000 interest-free loan to your son in January of
2003, you would pay tax on $1,715 of interest each year. If
your son's net investment income was less than $1,715, you would
pay tax on only
that lesser amount. If his net investment income was less
than $1,000, a de minimus exception applies and no tax
would be due.
Loan documentation. You should always have a written
loan agreement on family loans to document the transaction for the
IRS. Without a formal agreement, the IRS may consider your
loan a gift, and you could be subject to gift tax. A written
agreement will also reduce misunderstandings among family members.
Be cautious when dealing
with the tax implications of any famly loan. Please call us
before you make your loan. We can help structure the terms
to ensure your helpful act is gratifying and tax-smart for the
entire family.
June 16 - Second quarter
2003 individual estimated tax is due.
July 15 - Deadline for
filing extended 2002 calendar-year partnerships returns.
August 15 - Deadline for
filing extended 2002 individual tax returns.
September 15 - Third quarter
2003 individual estimated tax is due.
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What's
new in taxes...
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Need
to track your refund?
If you're still waiting for a 2002 tax refund, you
can check its status on the IRS website www.irs.gov.
IRS issues meal rates
for daycare providers
The IRS has announced a new standard meal and snack
deduction rate that will lessen the recordkeeping burden
for taxpayers who provide daycare services in their homes.
The rates for daycare providers in the continental
U.S. are $0.98 for breakfast, $1.80 for lunch or dinner,
and $0.53 for snacks. In alaska the rates are $1.55,
$2.93, and $0.87 respectively; for Hawaii they are $1.13,
$2.11, and $0.63.
Records must still be kept showing the names of
children cared for, dates and hours of
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attendance,
and the meals and snacks served.
New form required for
money transactions
If your business handles certain money
transactions, you need to know about a recent form
change made by the IRS.
Businesses that issue or redeem money orders or
traveler's checks or that transmit money are required to
report "suspicious" transactions to the IRS if
they involve $2,000 or more. Convenience stores,
service stations, drug stores, liquor stores, and even the
US Postal Service are included in this requirement.
The new forms (TDF 90-22.56) are available by
calling 800-829-3676 or can be downloaded at www.irs.gov. |
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Calculate profits
with breakeven |
Running a business is hard work. Making a profit is
the reward. Wouldn't it be nice to have a tool that
shows where the profits begin and how they will
grow? Well, breakeven analysis is that tool.
As all business owners know, everyone else gets
paid before the company makes a profit. Breakeven
analysis shows the relationship between the costs of doing
business and the revenues and profits of a business.
Breakeven is simply the point at which costs equal
income - no profit, no loss. It's an excellent
starting point for finding out where the business is and
where it can go. it's the first step in planning
future growth.
How to compute breakeven. "Dynamic
Dolls" is a regional toy company that sells a variety
of action dolls. Each of the action dolls sells for
$10, and each costs the company $6 to produce. The
other monthly costs of doing business (rent, insurance,
etc.) are $50,000. How many dolls must the
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company
sell before it makes a profit?
The company makes $4 on each doll it sells ($10
minus $6). Let us assume that for every doll sold
the company throws $4 in a large bucket that has a $50,000
capacity. How many times must it throw $4 in the
bucket to fill it? If we divide $50,000 by $4, we
get 12,500 times. At that point the bucket is full,
and we have enough to pay the monthly costs of doing
business. The company has broken even. It
hasn't make money, it it hasn't lost money either.
Once the bucket is full, the next $4 causes the
bucket to overflow. The bucket has "runneth
over," and each $4 falls to the floor as
profit. If the company sells 20,000 dolls, it will
make a profit of $30,000 ($4 for each of the additional
7,500 dolls past the 12,500 breakeven point).
Breakeven analysis can help you plan and manage
your business. For assistance in using breakeven
analysis to improve your profits, call
us.
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A century apart...
What a difference 100 years can make...
In 1900, one in ten U.S. Adults couldn't read or
write. Only 6% of all Americans had graduated from high
school.
In 2000, 81.6% of Americans had graduated from high
school. 25.1% had college degrees.
In 1900, the everage U.S. worker earned between $200 and
$400 a year.
In 2000, median household income was $41,343.
In 1900, the total number of cars in the U.S. was 8,000
In 2000, 18.3% of households owned three or more vehicles.
In 1900, the population of Las Vegas, Nevada, was 30
In 2000, the population of Los Vegas, Nevada was 508,300
In 1900, California ranked #21 in population among the
states.
In 2000, California was #1 in state population with
33,871,648 inhabitants.
| All
material presented in this newsletter is for
general information only and should not be acted
upon without further details and/or professional
assistance. |
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