5 STEPS TO BETTER COLLECTIONS

The effects of a tough economy often show up first in accounts receivable. Payment cycles slow as more companies struggle to make ends meet. While you can't force customers to pay their bills, you can improve the odds of receiving payment by taking heed of these five essential practices:

1. Set payment expectations. Lay the groundwork by putting your expectations in writing in a contract, proposal or estimate. Make it explicit what you'll charge, when you'll bill, and how and when payment is expected - and ask customers for written acknowledgement of your terms. This is your first line of defense in dealing with customers who later claim ignorance about payment policies.
2. Bill promptly. Invoice immediately rather than on a preset schedule, unless services are delivered over an extended period. In these instances, bill periodically during the service period rather than in one lump sum at the end. Prompt billing ensures that customers recall what the bill is for, making them more likely to pay quickly.
3. Don't skimp on details. Detailed invoices make it harder for customers to cite an unclear invoice as an excuse for withholding payment. Conversely, a $10,000 invoice that merely refers to "services rendered" will probably not be paid without a customer query. Especially when billing for services, it's important to reiterate the various tasks or steps that were involved.
4. Request immediate payment. "Payable upon receipt" invoices are increasingly common. And bills with immediate payment terms aren't as likely to get set aside and forgotten.
5. Address questions or disputes promptly. You're more likely to get paid - and in a timely manner - by dealing head - on with customer questions. If it's necessary to have cooperation from others in the business to resolve billing questions, make sure these individuals understand the importance of responding quickly to requests for additional information.

Finally, you may want to explore the use of automatic payment by credit card or electronic bank debit, particularly with regular customers. Some might also be receptive to electronic invoicing. Anything you can do to eliminate payment barriers and reduce your payment cycle is sure to improve your collection statistics.

PLAN TO TAKE ADVANTAGE OF JGTRRA

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) delivered many favorable provisions to investors and business owners that can provide valuable tax planning strategies. Here are some ways you can take advantage of the new act.

Invest in your business. JGTRRA is a boon for business owners who have been deferring capital expenditures, thanks to an increased bonus depreciation (50% for assets acquired between May 6, 2003 and 2005) and liberalized first - year expensing deduction (now $100,000 under Section 179). Therefore, a business that purchases a qualifying asset valued at $300,000 can deduct $100,000 of the asset as a Section 179 expense and write off an additional $1000,000 "bonus depreciation" in year one.

Optimize capital gains; offset losses. The long - term capital gains tax rate for assets held more than a year dropped to a maximum 15% from 20% effective May 6, 2003, making it now more attractive to sell stock that has appreciated significantly. It also makes sense to use short - term gains against any capital loss carryforwards first, rather than use them against the lower tax rates afforded long-term gains.

In addition, if there are no capital loss carryforwards, it's still generally advisable to sell losing stock to offset gains and to take advantage of the $3,000 capital loss deduction.

Consider shifting from interest - earning to dividend - paying investments. Interest - earning investments are even less attractive now with the maximum tax on dividends reduced from 38.6% to 15%. Additionally, interest is taxed as ordinary income, with a 35% top rate.

Pay out C corporation profits. The 15% dividend tax rate makes it an opportune time for C corporations (and S corporations with former C corporation earnings) to distribute dividends at a substantially reduced tax cost than was possible before. Distributing dividends in lieu of compensation has advantages. Wages are taxed at an individual tax rate as high as 35%, compared to the 15% dividend rate, and wages are subject to payroll taxes. But before taking action, ask your tax advisor to calculate the impact of dividend distribution on your alternative minimum tax liability.

Reevaluate C corporation status. Despite the ability to distribute dividends at lower rates, the new law should spur C corporations to reevaluate their choice of entity. Lower individual tax rates, combined with unchanged corporate rates, mean that income earned at the corporate level is potentially subject to tax rates as high as 50% (a top corporate rate of 35% combined with a maximum 15% dividend rate if owners receive profits as dividends).

On the other hand, earnings that flow thorough pass - through entities, such as S corporations, partnerships and limited liability companies, are taxed at ordinary income rates, now at 35% maximum.

Buy a sports utility vehicle for your business. To the certain dismay of environmentalists, there's never been a better time to buy heavy SUVs for business use. Those that weigh over 6,000 pounds are not considered luxury automobiles subject to depreciation limitations. Therefore, they're eligible for a first-year deduction of up to $100,000 under the liberalization Section 179 expensing rules.

Business owners and the self-employed should also act on long-standing but reliable tax planning strategies, such as deferring income into the new year, stepping up business expenses and paying state income taxes before year-end.

With most JGTRRA provisions set to expire in coming years, the new law provides a compelling reason to meet with your tax advisor to learn about additional tax benefits and planning opportunities that may apply to your situation.

TREAD CAREFULLY WHEN HIRING INDEPENDENT CONTRACTORS

In a start-and-stop economy, it can make sense to use independent contractors. Contingent workers allow employers to respond to swings in demand without incurring the costs of permanent hiring.

But businesses must tread carefully in this area. Relationships with independent contractors must be carefully defined to avoid misclassifying workers. Both the Internal Revenue Service and state authorities audit in this area, and violators may be subject to back taxes, benefits and penalties.

IRS Revenue Ruling 87-41 lists 20 factors for distinguishing between employees and independent contractors, such as whether the employer:

• Controls how and when work is done,
• Provides supplies,
• Integrates the worker into the business,
• Pays the worker by the hour, week or month, and
• Has a continuing relationship with the worker.
  

Consider all factors
These factors generally determine whether there is an employer-employee relationship, but no one factor is determinative. All 20 factors - as well as the nature of the business and the work performed - should be considered. But as a general rule: The more control exercised over the worker, the more likely there is an employer-employee relationship. Particularly when independent contractors perform work similar to an employee, employers need to carefully delineate how the two workers differ.

Before using contractors, familiarize yourself with the 20 factors and consult with a CPA or other business advisor to ensure your relationships are structured appropriately. You can also enhance your protection by taking the following actions:

Use a written agreement. Having an agreement between both parties before work begins that explains the nature and specifics of the relationship can afford some protection as long as it's properly drafted.

Get a signed IRS form W - 9. Ask contractors to complete this "Request for Taxpayer Identification Number and Certification."

File Form 1099. Do this for each contractor you pay $600 or more annually.

Ideally, these steps are taken before using independent contractors. If you have not taken precautions in hiring contractors, or you're unsure if your arrangements would withstand scrutiny, ask your business advisor to perform a compliance review to help you steer clear of trouble.

ANNUAL GIFTING BENEFITS BOTH PARTIES

When it comes to the annual gift tax exclusion, it's equally good to give and receive. An individual can give up to $11,000 per recipient each year ($22,000 for married couples) without triggering gift or estate taxes to the giver or receiver.

For many with sizable estates, annual gifting is an excellent way to transfer appreciable assets, thereby reducing future estate taxes. These gifts do not count toward the gift or estate tax lifetime exemption, and they're also generally exempt from the generation-skipped transfer (GST) tax.

For a gift to qualify for the annual exclusion, it must be considered a gift of "present interest" - that is, an unrestricted gift that the receiver can immediately use. Although gifts to trusts are not typically eligible for this treatment, an exception is a gift to a so-called "Crummey trust." (The odd name stems from a court case involving a taxpayer who prevailed in using this type of trust.) These trusts can be established for multiple beneficiaries, and donations of up to $11,000 per donor per beneficiary are allowed.

To meet the present interest requirement, beneficiaries must be notified of the gift and given the right to withdraw it within a reasonable period, usually 30 days. Beneficiaries do not typically exercise this right, though, for various reasons. Although Crummey power gifts to trusts qualify for the annual gift tax exclusion, they typically will not qualify for the annual exclusion for purposes of the GST tax.

Another major exception to the present interest requirement is if the gift is put into a trust for a minor's benefit. For gifts to a minor's trust to qualify for the annual exclusion, however, the trust assets must pass to the recipient upon reaching the age 21. If the recipient dies prior to that time, the trust assets must be payable to the recipient's estate, or he or she must be able to appoint the trust assets under a general power of appointment.

Gifting other assets
Although many people give cash gifts because it's easy and effective, donors can potentially transfer assets of even greater value by gifting interests in a closely held business, family limited partnership or limited liability company. These assets are entitled to valuation discounts based on factors such as a lack of control or marketability. For instance, a valuation discount of 40% in a closely held business is not unusual. With a 40% discount, an $11,000 gift can be leveraged into one that represents $18,333 in underlying assets. To use a valuation strategy, you must first obtain an appraisal of the assets to be transferred from a valuation specialist.

Another gifting alternative is to make donations to Section 529 college savings plans. You can donate $11,000 to such a plan each year or take advantage of an unusual option involving 529s: You can give up to $55,000 per beneficiary ($110,000 for a married couple) in a single year. The only drawback is you must wait five years before making additional annual exclusion gifts to the beneficiaries.

You can also give an unlimited amount in the form of payments to tuition or medical expenses - another valuable exception to the annual exclusion limit. One caveat: These gifts must be made directly to the educational institution or medical care provider, not the beneficiary. An added benefit is they don't count against the annual exclusion.

Although estate taxes are set to decrease while the exempt amounts increase in coming years, estate planning remains important, especially for those who anticipate significant asset appreciation. Individuals are generally advised to make gifts early in the year because they can begin providing recipients with appreciation; this strategy also guards against the possibility of the donor becoming incapacitated or dying during the year. But if you have not yet made annual exclusion gifts, you have until the stroke of midnight on Dec. 31.