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The Impact of the Stock Market on Your 401(k)

The U.S. financial markets crisis reached a critical stage during September 2008 when the global credit markets experienced severe contracted liquidity after the bankruptcy of investment house Lehman Brothers and the $85 billion government bailout of insurer American International Group on September 16.

With the credit crisis taking out some of Wall Street’s biggest players, it had yet to really affect Main Street America until September 29 when the House of Representatives rejected the original $700 billion bank bailout package proposed by President Bush. This rejection triggered a 777 point drop in the Dow Jones Industrial Average, the largest decline in history. Over $1 trillion worth of stock market value was wiped off the books in a matter of minutes. And the stocks belonged to those on Main Street, who suddenly had a tangible stake in getting a bailout bill passed that would hopefully shore up the American financial system.

If you are one of the ordinary Americans who saw your stock funds and the value of your 401(k) plan evaporating before your eyes, you are probably wondering whether you should keep contributing to your 401(k) plan. Your best bet, even in these uncertain times, is to continue to contribute each pay period on a consistent basis. Keep in mind that when you are contributing during a down market you are buying everything at lower prices. If you are tempted to stop contributing during a bad market, think about continuing to contribute but allowing your new money to go into the money market account. More importantly, remain calm. You may be tempted to act rashly, but please remember, this too shall pass.

Like every other financial crisis our markets have faced, this situation is part of the cycle that has allowed so many investors to generate great wealth in the markets. Warren Buffett and his teacher, Benjamin Graham, are right: over time, the market is a weighing machine. Companies cannot make poor financial decisions without eventually having to deal with the consequences. During the next few weeks, the markets promise to be extremely volatile. The response from Wall Street and the financial press will range from euphoric to despondent, and much of the advice you hear will be emotional and short-term in focus.

We also recognize the very real risks in the market today. More companies are sure to struggle. But at the same time, we urge you not to panic or react in haste. If we retain our wits, we can’t help but make better decisions than the majority of investors.

A New Business Plan — Featured in Commercial Investment Real Estate Magazine

These strategies will help to design a recession-proof business model.

In our current economy, it’s important that commercial investment real estate professionals devise a new business plan to survive, both now and in the future. Currently, business planning is less about expansion and more about survival as customers, vendors, and competition begin to disappear. It also is about doing more with less and being more balance-sheet focused rather than profit and loss driven.

Many commercial real estate professionals would prefer to look past 2009 to 2010 and beyond, when recovery is more certain. However, even the most seasoned companies may not be able to survive without a revised business strategy. Shoring up a company to ride out a recession requires action in many areas to be effective. Below are eight strategies to help commercial real estate professionals and their companies function smarter during the current economic downturn.

1. Remain Positive. A company’s top leaders usually will set the tone that drives the organization. Keeping this in mind, it is important that business owners remain positive, recognizing that failure is not an option. Any hint of the company’s instability could result in the loss of both uneasy clients and valuable employees.

2. Evaluate Assets. Scaling back operations to meet lower demand will yield some idle assets. Whether its extra trucks in a fleet or vacant office space, disposing of the asset or converting it to another income-producing use is a smart plan. If there is extra product, evaluate the market value of vehicles and equipment if sold versus the carrying costs to maintain anything that is not fully utilized. If the decision is to keep the equipment, commercial real estate professionals should cultivate alternative streams of revenue with other billable uses or functions possibly aimed toward a different client base.

Another idea to consider is leasing furnished vacant offices along with shared services to convert excess to income. One way to do this is by determining if obsolete inventory is using valuable warehouse space. Don’t assume that because inventory is paid for that there isn’t an ongoing cost related to storing and handling the items beyond their average turnover or conversion periods.

3. Examine Credit. With billions of bailout dollars transferred from the government to banks through the Troubled Assets Relief Program, credit should slowly become more accessible. While developing a new business plan, it’s essential to accurately estimate cash and credit requirements for the next three to five years using several likely scenarios. Simply getting a loan will not be adequate in supporting a business until a recovery occurs. In the end, it must be the right loan with the right terms and attainable covenants. Keep in mind that restructuring debt along with re-evaluating future cash needs may require outside help from specific TARP task forces along with solid business planning expertise.

4. Eliminate Excess Waste.
 Launching a company-wide campaign to locate and eliminate waste is a smart strategy to incorporate into the new plan. Review every line item in the budget to see how cuts can be made through elimination or re-negotiation. Now is a great time to convert to a paperless work environment since most contracts are awarded based on qualifications that include a company’s sustainable footprint policy.

5. Reorganize Payroll. Payroll is often the first to go under the knife when budget cuts are necessary. Rather than down-sizing, commercial real estate professionals should consider right-sizing. To do so, it is important to review skill sets the most reliable employees have accumulated over their entire careers. An employee may have been hired for one unique talent but may also have experience to perform additional tasks. When combining and eliminating positions an organization will benefit from the continuity in retaining experienced personnel.

In addition to combining jobs, commercial real estate professionals should recalculate the total compensation package and cost to the company versus the benefit and/or revenue derived from each employee when making decisions about temporary layoffs.

6. Cut Back on Auto Expenses. Aside from where gasoline prices are headed, having an auto-expense policy that makes economic sense to the company can be a big savings strategy. Rein in gasoline and other company credit cards issued to employees and brainstorm about which job functions could be performed effectively by way of telecommuting. Additionally, certain states offer tax credits to businesses offering telecommuting options to their employees.

7. Be Careful of Fraud. Economic hardships often lead to an increased risk of fraud within offices. In fact, a recent fraud investigation survey shows that 70 percent of fraudsters were between the ages of 36 and 55 years old; 85 percent were male; 36 percent had been with the company two to five years; and 67 percent participated in fraudulent activities between one to five years prior to being exposed. In almost all cases, the perpetrators were individuals who were highly regarded and trusted by their superiors and peers. Slow time provide a perfect opportunity to document, implement, and monitor stepped-up internal controls.

8. Develop an Exit Strategy. Commercial real estate professionals should recall what the business goals were before the economic crisis occurred. If selling the business or transferring it to a family member through succession planning was the vision, they should seek professional assistance to keep those goals in place.

IRA to Roth Conversion

Now that 2010 is upon us, a significant opportunity is available for individuals. Taxpayers can now to convert a traditional IRA to a Roth IRA, regardless of income level or filing status. This is an exceptional opportunity for many. Here is how it is going to work and what the implications are.

First, here are some basics on a Roth IRA. The Roth IRA contribution is not deductible for tax purposes, so assuming certain age and holding period requirements are met, it is not taxable upon withdrawal. Also, there are no required distributions at any age, so unlike a regular IRA you are not required to begin taking distributions when you turn 70½. At death, there really are no differences as both are still taxed in your estate and a beneficiary has the same distribution requirements from either the Roth or the regular IRA.

Now, let’s look at the conversion of the regular IRA to the Roth. Any part, or all, of your IRA can be converted to a Roth; it doesn’t have to be an all or none situation. However, the conversion does create taxable income which is taxed as ordinary income at your regular marginal rate. Effectively, this accelerates the taxable income that you would eventually have begun once you were 70½ and were required to take distributions from your IRA. However, it does cap the amount you will have to pay tax on. This is significant.

Congress did provide different options to pay the tax on the conversion. You can either pay all of the tax in 2010 or you can average it over 2011 and 2012. However, you will be subject to the applicable income tax rates in 2011 and 2012 so you must consider what effect the applicable tax rates will have on your conversion income. For planning purposes, it may make sense to wait until October of 2011 to file your 2010 tax return. By that time the tax rates for 2011 and 2012 should be published. Then you can decide which year to include the income.

Why would you want to convert to the Roth and pay the tax early? There are many reasons that make this a very important opportunity. Once you meet certain holding period requirements a Roth distribution is tax free, so all earnings and appreciation after the conversion are free from tax. For example, assume that you have a $100,000 IRA that you convert to a Roth. You pay the tax at conversion on the $100,000 (probably $28,000 to $35,000 in tax). If you keep the account for 20 years and let it continue to grow tax free it will be worth about $466,000, assuming an 8% growth rate. However, the tax paid up front would have been worth about $95,000 after 20 years. Effectively, you would have $370,000 net. The additional growth of $366,000 will not be subject to tax and the full balance will be free from tax. That is quite a bargain! Of course, the higher the growth rate on the retirement account, the more benefit there is in converting. Assuming a 15% return, the value of the account in 20 years would be $1,636,000, which means you would receive $1,536,000 tax free. The longer the time horizon, the greater the benefit would be to your family.

Because the Roth does not have the required minimum distribution requirements that a regular IRA does, you will not be required to begin taking distributions from the Roth when you turn 70½ . This will allow the account to continue to grow tax free. This is particularly important for those who do not need the retirement account to live on. You can let it continue to grow tax free and have a tremendous impact on the amount of money you are passing on to your family.

Converting from a traditional IRA to a Roth IRA should be strongly considered in 2010. Advance planning and strategizing should be on your agenda. Contact us and we will assist you in determining if an IRA conversion makes sense for your financial plan.

Coming to Work In The US? You May Need an ITIN

Do You Need an Individual Taxpayer Identification Number (ITIN)

The ITIN is a nine-digit number issued by the IRS to individuals who are required to have a U.S. taxpayer identification number for tax purposes but who do not have and are not eligible to obtain a social security number. The ITIN is for federal tax purposes only. It does not entitle the holder to social security benefits or change an immigration status or the right to work in the U.S. ITINs are issued regardless of immigration status because both resident and nonresident aliens may have U.S. tax filing responsibilities. An ITIN is needed when a nonresident alien wants to claim the benefit of a reduced withholding rate under an income tax treaty. An alien spouse or dependent eligible to be claimed as an exemption on a U.S. tax return but who is otherwise not eligible for a social security number needs an ITIN.

Before you apply for an ITIN, you must first make an application for a social security number, Form SS-5, and receive a rejection notice that you are not eligible for a social security number. Once you receive the rejection you must apply for an ITIN on Form W-7 and attach a copy of the rejection letter. Form W-7 also requires original, notarized or certified proof of identity documents. There are very specific requirements for completing Form W-7. An incorrect application may lead to a rejection. If you qualify for an ITIN and your application is complete then it can take anywhere from 6 – 10 weeks to receive an ITIN. Applications mailed from abroad may take longer. Let us know if we can assist you with your ITIN application

Changes to Electronic Filing Requirements

Are You Required to Pay and File Your Business Tax Returns Electronically? New requirements affect many more businesses

Since July 1, 2006, all businesses submitting sales tax returns or withholding returns where the tax amount exceeds $5,000 have been required to submit those returns electronically.  Effective January 1, 2010, the threshold drops to $1,000 and effective January 1, 2011, the threshold drops to $500. In addition, any taxpayer required to submit returns electronically who fails to do so and does not have written exemption from the Georgia Department of Revenue will be subject to a 5% penalty plus loss of the Vendor’s Compensation.

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