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| Question
: How much of a donation deduction can I take on inventory? According to section 170 (e) of the IRS code, a C corporation can deduct the fair market value of inventory, but the amount may not exceed twice the cost basis. For example, if you want to donate 1000 toys that cost $1.00 and normally sell for 5.00, then the fair market value of your donation would be 5,000, but the deduction would be limited to only 2,000 (twice the limit of the cost basis). For entities other than C Corporation the deduction is the fair market value of the property less the amount that would have been ordinary income if the property had been sold at its fair market value on the date of the contribution. In this case 4,000 realized on the sale of the toys is considered ordinary income so the deduction allowed would only be $1,000. |
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| Question:
Can I pay Salaries to my own children and legally deduct them? Owners of unincorporated businesses owe no social security and medicare taxes on wages paid to their children who are under the age 18. But, state taxes and labor laws may apply to the children, as will federal income tax withholding and wage reporting. IRS Publication 15, Circular E, can help inform you about federal rules. Strategy: Because of these tax and admin. costs, it is best to hire children to do work that you would otherwise be required to hire outsiders to do. Then pay reasonable compensation for work actually performed. From Tax Hotline, May 2001 issue. |
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Get bigger tax
savings from business meals and entertainment. |
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| The
following are examples on situations when the 100% deduction is allowed: -Convenience of the employer meals: These are meals taken on the employer's premises, and paid for by it, for a business reason that benefits the employer. For instance, for security reasons a casino required all its employees to remain on its premises during their full shift, and paid for the meals they ate while doing so. If employees are required to eat meals in a short period, such as 30 or 45 minutes, and can't be expected to go off the premises, eat and return within that time, fully deductible meals can be provided to them. For instance, if a bank is busiest during lunch hour, so it limits its employees' lunches to 30 minutes and provides lunches. -Meals are otherwise available: When nearby eating facilities are insufficient for employees to get meals at lunch and return within the lunch hour, employer can provide fully deductible meals. -Restaurant and food services employees: Meals furnished to restaurant and food service employees during and immediately before or after working hours are for the "employer's convenience". -After work meals: Meals provided to employees immediately after work are for the employer's convenience if it would have furnished the meals during working hours, for a business reason, except that work duties prevented employees from eating during work hours. -The cost of employee activity meals and entertainment: Meals are fully deductible when provided in relation to a social or recreational activity for employees. For example, holiday parties, retirement dinners, meals and entertainment celebrating business accomplishment, etc. From Tax Hotline, August 2002 |
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| Be
aware of the methods of fraud that your business can be exposed to. Since small companies don't have the resources that large companies may have, they are more vulnerable to fraud. The following are instances where companies incurred losses before fraud was found: Skimming: The business manager of a church stole nearly $200,000 from the collection plate until the volunteer treasurer noticed a trend: While church attendance was increasing, weekly contributions were decreasing. The church hired a CPA/CFE to look into the matter. She counted Sunday's contributions and compared them with the business manger's Monday Deposit. When the deposit total was lower, she used video surveillance in the manager's office, which caught him opening the safe on Monday Morning-before funds were counted- and helping himself of handfuls of cash. Dual control over the cash function would have easily prevented this scheme. |
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| Billing:
Internal auditors were doing a routine purge of dormant vendors when they
noticed activity in two of the accounts. Although the company hadn't done
business with the vendors in years, there were recent payments to them on
the books. After an investigation the auditors discovered a warehouse manger
had caused $535,000 in checks to be issued to the dormant vendors, which
he deposited into a bank account he controlled. The scam was made possible
by a basic violation of computer security practiced by one company supervisor:
The warehousemen knew the supervisor didn't log off the system when he went
to lunch, so he used that computer to make the fictitious entries. Proper
controls over computer access might have prevented this loss. Fictitious Refunds: A cashier for a government agency managed to steal $150,000 in two years by issuing fictitious refund slips to nonexistent purchasers of inventory and removing an equal amount of currency from the cash register. This could have been easily detected by using analytical techniques that would have shown the agency's inventory shrinkage was high. Cash Larceny: The office manager of a 24-employee business insisted on handling certain bank transactions such as deposits and reconciliation by herself. She removed currency from the deposit, then altered the bank's copy of the deposit slip to reflect the lower amount. However, she left the company's copy unchanged. Because she also reconciled the checking account, she was able to conceal $ 180,000 in thefts until the company ran out of cash and checks started bouncing. An independent examination of the cash by an accountant would have discouraged this scheme. Check Schemes: The controller for a 400-person company liked to brag to employees that he was winning big the gambling casinos because of his "foolproof system." The winning gave him quite the lifestyle: racehorses, expensive cars and a mansion. But the boss was skeptical. He found that the controller was losing big-time and hired fraud examiners to take a close look at the books. They discovered the controller had forged checks totaling 2.5 million and deposited the proceeds in his own checking account, which he withdrew for gambling. The controller had coded the checks to a variety of expense accounts, making his thefts easier to conceal. This scheme could have been detected early by an independent review of the bank statements. |
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| Inventory
Fraud:
The purchasing manager of a large company dreamed of starting a hardware
store in another state. Since he was short on cash, he decided his employer
could help out. The manager rented a warehouse, began approving merchandise
purchases of behalf of his employer and had the merchandise shipped to the
warehouse. From there he reshipped out of state. Since the purchasing manager
had authority only to approve purchases up to $5,000 he was careful to keep
his transactions under that amount. But a sharpe-eyed accounts payable clerk
noticed a distinct pattern. On many occasions, merchandise purchases in
the tens of thousands of dollars were being split into smaller amounts.
The clerk notified the company's fraud examiners, who uncovered several
hundred thousands of dollars in phony inventory purchases. The auditors
could have uncovered this scheme earlier by conducting a detailed review
of disbursements under $5,000. From Journal of Accountancy - April 2002 |
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