Q. What is an Enrolled Agent (EA)?
A. An Enrolled Agent (EA) is a tax professional who is authorized by the Director of Practice to fully represent his/her clients in any tax manner pertaining to the Internal Revenue Service.

Q. How does one become an Enrolled Agent (EA)
A. There are two ways to become an Enrolled Agent:

• Those individuals who pass a difficult 2 day 11 hour exam, administered by representatives of the Internal Revenue Service, covering Individual, Sole Proprietorships, Partnerships, C Corporations, S Corporations, Estates, Trusts, Gifts and Generation Skipping Transfer taxation, as well as IRA’s, Retirement Plans for Small Businesses, IRS Administration and IRS Procedures. After successfully completing the Enrolled Agent exam, the candidate is subjected to a rigorous background check before he/she is authorized for enrollment to practice. The Enrolled Agent must also complete 72 hours of IRS approved continuing education over each 3 year period to retain his/her authorization to practice as an Enrolled Agent.
• Certain past employees of the Internal Revenue Service who apply within 3 years after separation from the IRS who were employed for a minimum of 5 years with the Service in which he/she was regularly engaged in applying and interpreting the Internal Revenue Code and the regulations thereunder relating to income, estate, gift, employment, or excise tax can be authorized to practice before the Internal Revenue Service as an Enrolled Agent.

Q. How does an Enrolled Agent’s credentials compare to a CPA’s?
A. In matters of taxation, both the Enrolled Agent and the CPA are equally credentialed in the eyes of the Internal Revenue Service because both the Enrolled Agent and the CPA are governed by the same rules (Treasury Circular 230) and both can fully represent clients before the IRS. The difference between the two is that the CPA is licensed by the state in which they practice, whereas, the Enrolled Agent is licensed by the Internal Revenue Service and can practice in all 50 states.

Q. Are Alimony and Child Support payments deductible?
A. Alimony payments are deductible for the spouse paying the alimony and are taxable to the spouse receiving the alimony payments. Child support payments are neither deductible for the payer nor taxable to the recipient of the payments.

Q. What are the benefits of filing my return electronically?
A. The primary benefits of filing your return electronically are (1) the return is validated for errors immediately, (2) you don’t have to remember to file your return, and (3) you receive any refund due much more quickly. By using the direct deposit election, you can generally receive your refund between 18 and 28 days.

Q. How long should I keep tax related records?
A. There are no hard fast rules concerning how long records should be kept. Some records such as property records should be kept until the period of limitations expires after you dispose of the property. The normal period of limitations for assessing additional taxes or filing a claim for a refund is 3 years. However, the period of limitations for under reporting your income by greater than 25% is 6 years. As a general rule, it is a good idea to keep most records for 6 years after filing the return.

Q. Getting ready for tax season is such a pain, how do I know which records I need?
A. Most tax preparers send their clients a tax organizer a month or so before the filing season begins. This really helps in getting your records together to deliver to your tax preparer. CWR recommends that its clients maintain a tax folder for the entire year, using the categories listed in the previous year’s tax organizer to organize their files. This eliminates losing needed documents to support your claims for deduction.

Q. Can you help me if my return is ever audited?
A. Yes, as an Enrolled Agent, authorized to practice before the IRS, CWR can represent you fully in the event of a return examination.

Q. How can I avoid being audited?
A. There are no easy answers to this question. The fact is that the IRS will exam a certain percentage of returns each year. Some years they focus on certain types of returns, other years they focus on other types of returns. While there is no guarantee that your return will never be audited, good supporting evidence will stand up against the scrutiny of any examination.

Q. I have a small business and operate out of my home. Can I deduct the expenses for a home office?
A. Much depends on the nature of your small business. In most cases, if you have a separate room in your home that is used exclusively for meeting yours clients or taking care of administrative functions of your small business, you can deduct the expenses associated with the use of that portion of your home, regardless of whether you rent or own the home. The best thing to do is to discuss this with your tax advisor who can advise you on the expenses you can deduct and the records you need to keep.

Q. Should I use a tax preparer to prepare my tax returns?
A. Much depends on your knowledge of the tax laws and your experience in preparing tax returns. If you have a fairly simple return which only involves recording your wages, tax withheld, and determining the amount of tax you owe, you should be able to prepare your own returns. However, if your return is more complicated, involving itemized deductions, business expenses, depreciation expenses, investments, etc., you would be well advised to seek the services of a professional tax preparer. The deductions he/she can find for you and the advice he/she can provide you is well worth the cost of services.

Q. What can I do if I am not able to complete my tax returns by April 15?
A. By filing a Form 4868 you receive an automatic 6 month extension to file your tax return. (Effective January 1, 2006). The extension, however, is an extension to file, not an extension to pay. If you owe additional taxes when you file your returns, interest and penalties for late payment accrue from April 15 until you pay the taxes due.

Q. Is the interest that I pay on my student loan deductible?
A. Yes, the interest expense that you incur on a student loan is deductible. The maximum deductible per return is $2,500. If you are married filing joint, the full $2,500 is is deductible provided your Modified Adjusted Gross Income is $100,000 or less. For someone filing single, the full $2,500 is deductible provided your Modified Adjusted Gross Income is $50,000 or less. There is no deduction available for married filing separately. The amount of the deduction is the lesser of student loan interest paid for the tax year or $2,500 provided you are eligible to take the full deduction. The deduction is referred to as an “above the line” deduction, which simply means that you can take the deduction whether you itemize deductions or take the standard deduction.

Q. What are the differences between a traditional IRA and a ROTH IRA?
A. The primary differences between the two different IRA’s are:

Traditional IRA		ROTH IRA
• Contributions may be tax deductible			• Contributions are never tax deductible
• Distributions must begin no later than age 70 ½			• Distributions may begin whenever taxpayer chooses (after age 59 ½ )
• Earnings are taxed at distribution			• Earnings are tax free at distribution

Q. Can I deduct my vehicle mileage expense when I go to the doctor?
A. Yes. Code section 213 allows a deduction for “transportation primarily for and essential to medical care”. You may choose either the actual cost of operating the vehicle or the optional standard mileage rate. The standard mileage rate for medical expenses deduction for 2006 is 18 cents per mile.

Q. How do I know if I should pay estimated tax payments?
A. The Internal Revenue Code is structured to obtain at least 90% of the final tax for current year through withholding and estimated tax payments. If you are self employed and you show a net profit in your business, it is highly probable that you should be making estimated tax payments throughout the year. The four scheduled current year installment payments are due April 15, June 15, September 15, and January 15 of the following year. The annual estimated payment (either through withholding and/or estimated payments that must be made is equal to the lesser of:

a. 90% of the current year’s tax liability, or
b. 100% of the tax for the previous year.

However, if the adjusted gross income in the previous year exceeds $150,000, the estimated payments must be 110% of the previous year’s tax liability.

Q. What is the maximum gift amount that I can give this year to avoid incurring a gift tax?
A. In general, each calendar year any person may exclude the first $10,000, adjusted for inflation, of gifts made to an individual donee. The amount for 2006 is $12,000. However, the amount can be effectively doubled ($24,000 for 2006) if the donor’s spouse consents and elects to split gifts under the gift splitting provision of the Internal Revenue Code.

Q. Which business form should I use to set up my small business?
A. The business entity you choose should be carefully considered before making the decision to form your small business. The type of business you will be doing, tax issues, liability issues, and capital needs issues all enter into the equation of deciding how to organize your business. It is best to discuss this with an attorney and/or tax professional prior to deciding how to form your business.

Q. Why do I need an accountant?
A. Quite honestly, an accountant is a professional in record keeping, financial analysis, and tax law. The discipline requires continuous study to stay on top of the ever changing rules and procedures associated with the varied financial affairs of an individual or a business. The benefit of the services that an accountant can provide you far outweigh the cost of the services.

Q. How often do I need financial statements prepared?
A. Financial statements are summary reports of the financial condition of your business over a period of time or at any given point in time. Financial statements assist you in making financial decisions to correct or improve particular areas of your business. For financial statements to be effective in preparing year to date comparisons and to make timely financial decisions, CWR recommends that financial statements should be prepared on a monthly basis, regardless of the size of your business.

Q. Which accounting software should I use?
A. After reviewing many different accounting software programs, CWR has found that QuickBooks® offers the best accounting software packages for most small businesses. As a Certified QuickBooks ProAdvisor®, CWR can guide you in the selection of the program that is right for your business, assist you in its set up, and train you in the use of the program.

Q. What services can you provide?
A. The laundry list of accounting services that CWR can provide is long and exhaustive. Some of the more prominent services are listed as follows:

• New business set up, including entity selection and organizational filing requirements
• Accounting software selection, set up, and training
• Automated bookkeeping and accounting services
• Automated payroll services
• Financial Statement Preparation
• Monthly, Quarterly, and Annual Tax Reporting
• Monthly, Quarterly, and Annual Recap and Analysis Reports
• Bank reconciliations and cash balance reports
• Customized reports preparation
• Corporate minutes preparation

 

Q. Why are accounting policies and procedures necessary for my business?
A. Accounting policies and procedures establish a framework of controls to protect your business. They safeguard assets, ensure transactions are accurately recorded, and provide a system of checks and balances necessary to properly report the true financial condition of your business.

Q. How do I know if my business is doing well ?
A. Properly prepared financial statements reveal the financial condition of your business at any give time. In addition, basic financial ratios help you determine how you compare with others in your industry, as well as how equipped your are to maintain your current business or to secure financing to grow your business to the next level. Some of the more common ratios are:

• Working Capital and Current Ratios—These ratios measure the liquidity of your business, or more simply, your ability to pay your current debts.
• Net Profit Margin—Tells you how well your business is generating profits.
• Debt to Equity Ratios—Tells you how much of your business is funded by creditors.
• Net Worth—Tells you what your business is worth if all the business debts were paid.

 

Q. How can accounting make my business more profitable?
A. Properly used accounting procedures and financial statements can be very effective management tools. The results can be used to identify trends or to reveal cash drains on your business that do not produce profitable returns. The results can help you determine when and where you need to reduce costs or even if you need to increase your pricing. Accounting measures the financial pulse of your business to determine if your business is healthy or ailing, and if it is ailing what you might need to do to bring it back to health.

Q. What is the foundation of any accounting system?
A. The Chart of Accounts is the foundation of any accounting system. The Chart of Accounts is a listing of all accounts found in the General Ledger. The use of a consistent numbering system establishes uniformity, makes General Ledger accounts easier to find, and aids in the posting of entries.

Q. How often should I depreciate my fixed assets in my accounting system?
A. For the most accurate financial statements, depreciation expenses should be recorded on a monthly basis. In practice, however, many clients post depreciation expenses either on a quarterly basis or an annual basis.

Q. What are some useful reports that will help me in the management of my business?
A. Some of the most useful reports that can be used in the management of any business are

• Sales by Customer Report – This report tells you which customers provide your business with the most revenue.
• Job Profitability Report – This report tells you which jobs and/or customers have been the most profitable for your business and which ones have been the least profitable.
• Accounts Receivable Aging Report – This report tells you how well you are collecting monies owed to you and which customers pay the most effectively. It also tells you which customers need added encouragement.
• Accounts Payable Aging Report – This report tells you how effectively you are paying your bills.

 

Q. How can developing a cash flow projection help me manage my business more effectively?
A. Cash flow is the heart of any business – particularly a small business. Having sufficient cash flow to meet the liabilities of your business not only keeps you in the good graces of your suppliers, but also, enables you to grow your business to the next level. By projecting your cash flow needs out over several weeks, you can easily visualize what precautionary steps you need to take in order to meet the upcoming cash flow demands on your business.

Q. How can running a QuickBooks® Expert Analysis report help you in the management of your business?
A. A QuickBooks® Expert Analysis report will provide valuable meaning behind the numbers generated on your financial statements. The report can be run over multiple periods to provide comparative results over your selected period of time. QuickBooks® Expert Analysis develops this report by extracting financial data from your QuickBooks® program and looking at the following critical areas of your business:

• Liquidity
• Borrowing
• Profits & Profit Margins
• Fixed Assets
• Sales
• Employees

Q. What is financial planning?
A. Personal financial planning is the development and implementation of comprehensive plans for achieving your overall financial objectives. Some of these objectives might include: purchasing a home, preparing for your children’s college education, starting your own business, providing financial protection for family members in the event of death or disability, planning for your retirement, or planning for your estate.

Q. Why would I need the services of a financial planner to reach my financial objectives?
A. Most people are in need of some form of financial planning. They have certain financial goals they want to attain. How to get there becomes the real challenge. A bewildering array of investments, insurance coverages, savings plans, tax-savings devices, retirement plans, charitable giving arrangements, and others are constantly being offered to the public, but most often are presented in piecemeal fashion. The services of an independent, objective financial planner can help you assess your current position and can help you develop a coordinated plan to accomplish your financial objectives.

Q. How much do financial planning services cost?
A. The costs of preparing a financial plan to reach your objectives depends largely on the level of planning you require and/or desire. CWR can assist you in any level of financial planning services from basic services such as helping you develop a family budget to more comprehensive services involving risk management assessment, planning for your children’s education, planning for your retirement, and estate and gift planning.

Q. What is meant by the term personal risk management?
A. The term risk management normally means consideration of all alternative methods for dealing with a person’s exposure to risks. Personal risks can include anything from personal liability to potential losses that can arise from health issues, disability or death. While not all risks are insurable, there are many potentially serious events that a person can be insured against. In essence, insurance is a means of eliminating or reducing the financial burden of such events by dividing the losses they produce among many individuals exposed to any number of risks and developing a comprehensive program to insure against those risks.

Q. When should I begin to develop a personal financial plan?
A. Personal financial planning is essentially a process that should be practiced a person’s entire life. The key is to begin where you are presently. To understand how to get to where you want to go you have to understand your starting point. As in business, financial statements give you a snapshot of your current financial position and offer insights into how to accomplish the financial goals that you have established. Two personal financial statements that CWR recommends developing are a personal budget and a personal cash flow statement. While these two personal financial statements are not exhaustive and other statements are often used in the planning process, the personal budget is an advance plan for anticipated expenditures and income and the cash flow statement shows the sources and timing of a person’s or family’s cash receipts and of cash outlays.

Q. What are some basic steps in the personal financial planning process?
A. While the answer presented below is not exhaustive by any means, primarily because each person’s circumstances differ to some degree, it is our desire that you might gain an overview of the overall personal financial planning process. Hopefully this overview will encourage you to either seek out the services of an objective financial planner or, at a minimum, to begin to develop a workable plan to address the financial responsibilities that you will encounter in your lifetime.

Step 1 Gathering information and Preparing Personal Financial Statements.

While the kinds of information needed varies with each person’s situation, some of the more common information you would want to look at would be:

• Personal investment information
• Insurance Policies—life, health, long term care, disability, and property and liability policies
• Retirement and other employment benefits
• Tax Information—income taxes, estate taxes and gift taxes
• Wills, Trusts, and other Estate Planning Documents
• Powers of Attorney and related instruments

In summarizing your present financial position, it is helpful to prepare some simplified personal financial statements, much like those businesses use. A good starting point would be to develop a personal balance sheet, helpful in assessing your current net worth, and a personal income statement, to determine your overall ability to meet your present expenses and your ability to achieve short term objectives. Two other statements that might prove to be helpful in your planning process, as suggested by CWR in an earlier question would be developing a personal budget, which would provide an advance plan for anticipated expenditures and income, and a cash flow statement, to show the sources and timing of a person’s or family’s cash receipts and of cash outlays.

Step 2 Identifying Objectives

A considerable amount of time should be devoted to this area of the planning process. Some of the areas of consideration should include:

• Protection against personal risks
• Capital Accumulation
• Provision for educational responsibilities
• Provision for retirement income
• Reducing your tax burden
• Planning for your heirs
• Investment and property management

Individual circumstances play a large role into how detailed the planning should be in this area. Suffice it to say, however, that each of the above mentioned items play some role in all of our planning at some point in our lives.

Step 3 Analyze your present position and consider alternatives to reach your objectives

After identifying and setting your personal objectives, you need to analyze your present financial position in relation to these objectives and then consider alternative ways of remedying any deficiencies found.

Step 4 Developing and Implementing your personal financial plan

Once you have set your objectives, analyzed your present financial position and considered alternative ways to correct any deficiencies, you need to develop a workable plan to accomplish those objectives and then to put that plan into action. This is the discipline portion of the financial planning process. It requires commitment, a vision of the objectives that you desire to achieve, and the determination to stay focused on the plan that you have established.

Step 5 Periodically Review and Revise your plan

No plan should be considered “cast in bronze”. Circumstances change that are unpreventable. There are births, marriages, divorces, deaths, job changes, changing economic conditions, health changes and a host of other factors that may require revision in your original financial plan.

Q. Why do most people fail to develop a comprehensive financial plan?
A. There are many reasons why some folks may not undertake financial planning on their own. The following includes a list of some of the more common reasons:

• Some prefer to put off those things that are complex, time consuming, and worrisome
• Some don’t want to consider unpleasant events, such as death, disability, unemployment, or property loss
• Some think they have insufficient assets or income to warrant comprehensive financial planning
• Some think that financial planning is too expensive
• Some assume because they have a steady job with good income and benefits that their financial situation is in order

Q. What are some consequences of failing to plan ahead financially?
A. The following is an abbreviated list of the many consequences that could occur:

• Inadequate protection against personal catastrophes, such as death, disability, serious illness, accidents, prolonged unemployment, or other negative events
• Too little money set aside for retirement or for the family’s educational needs • Higher than necessary income or gift taxation
• Inability to reach financial goals
• Unplanned estates, creating higher than necessary taxes or settlement costs

Q. Who are the target clients for CWR Financial Services, LLC?
A. CWR targets the middle income client, from newly married to retirement. Realizing that financial planning is a life long process, CWR is positioned to be able to provide goal/need based planning services throughout the client’s wealth accumulating life cycle.

Q. What, in your opinion, is the most underestimated core discipline of personal financial planning?
A. In my opinion, cash flow management service is the most underestimated discipline in financial planning. I believe it is a mistake to underestimate the importance of this discipline because solving problems in this area can play a significant role in the client’s ability to reach a wide range of financial goals. The three primary components of cash flow management are Budgeting, Cash Flow Planning, and the determination of Net Worth.

Q. What are the other financial planning services offered by CWR Financial Services, LLC?
A. In addition to cash flow management services, CWR offers the following financial planning services:

• Insurance Planning
• Investment Planning
• Income Tax Planning
• Education Planning
• Retirement Planning
• Estate Planning

Q. What is a contingency Fund?
A. A contingency fund (also known as an emergency fund) is a group of liquid assets (assets that are easily convertible into cash) that is set aside to be able to meet your financial needs during an emergency or a disruption of your income. The rule of thumb is that your contingency fund should equal from 3-6 months of your monthly expenses. The size of the contingency fund will depend upon the nature of your work and the variability of your income.

Q. What is dollar cost averaging?
A. Dollar cost averaging is a system of consistently investing a specific amount each month in your investment program. Because stock prices are always changing, some months you would pay more per share purchased, other months you would pay less per share. The theory behind dollar cost averaging is that your average cost per share purchased would be less, over your investment horizon, than if you tried to “time” the market.

Q. How important is asset allocation to my investment portfolio?
A. Asset allocation means investing in different types of assets so as to have a diversified portfolio with the highest expected return at a given level of risk. Properly balancing the classes of assets that you invest in is thought to be more important than the individual assets that are in the portfolio.

Q. Why is investment asset diversification so important?
A. Diversification theory is based on the premise that market values of some assets tend to rise and fall together, whereas the market value of other assets move in opposite directions. Constructing a diversified portfolio that contains a mix of asset types whose value tends to balance each other out over a period of time greatly reduces your risk and optimizes your potential return in your investment portfolio.

Q. What are junk bonds?
A. A junk bond is the slang for a high yield bond. These bonds are corporate bonds characterized by low credit ratings and consistently higher than average interest rates. This is due to the greater amount of risk of default by the company issuing the bonds.

Q. What is the best way to reduce the risk in purchasing bonds?
A. By purchasing high quality bonds (A- to AAA bonds) that mature in no more than 5 years, the bonds are less likely to be subject to interest rate risk or default risk.

Q. What are some practical steps to implement a savings plan to reach my overall financial objectives?
A. The key to building wealth successfully through savings is to develop a plan. And while there are many ways to accomplish this goal, here is a method that many people find useful:

1. Start as Soon as Possible
2. Forecast Your Cash Flow
3. Project Monthly Savings
4. Pay Yourself First
5. Contribute More Whenever Possible
6. Review Your Plan at the Same Time Each Year

Disclaimer

The information presented in these frequently asked questions is provided as a public service to provide clients and other visitors with general financial information. Every effort is made to provide accurate information, however, errors may occur due to the nature of the subject matter and interpretation of any laws and regulations involved. The information provided on this site should not be construed as legal, tax, accounting or investment advice. You should consult with a legal or financial professional familiar with your circumstances for appropriate financial advice before making any decision. CWR does not warrant the completeness, accuracy or timeliness of the information provided and offers no warranties regarding the content of this site, either expressed or implied.

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