Moore Colson :: News & Resource Center

Don’t be led astray by loan scammers

Many consumers take out personal loans at one time or another, whether it’s to fund college for the kids, make home improvements or simply to have a financial safety net. Especially during tight economic times, the number of individuals seeking loans often goes up — and so do the number of loan scams.

Beware of wolves in sheep’s clothing

How do these scammers catch their victims? There are numerous variations of loan schemes, but many involve individuals posing as loan brokers who request payments upfront for processing fees. These predators may claim that advance fees are needed to help pay a third party for credit insurance or a related service.

Loan applicants are instructed to sign and fax back fake contracts, and then wire transfer the payments to the lender using a passcode, which keeps the scammer’s identity concealed. As soon as payment is received, the fraudster is never heard from again.

Another common tactic involves fraudulent use of established, legitimate financial institutions’ company names and logos to attract consumers seeking mortgage or other personal loans. The victims respond to fake ads — often placed in smaller community newspapers — and have their applications quickly approved over the phone. The scammer then faxes them loan forms to complete on stolen or bogus stationery.

Worse yet, these fraudsters also get away with personal identity and financial information obtained during the application process, such as Social Security numbers, and credit card and bank account information.

Tread wisely

To avoid being bitten by scammers, check the lender’s background and reputation before providing any personal information. Verify that the company’s telephone number and address are listed in the phone directory. Also check with your local Better Business Bureau and state attorney general’s office to see if any complaints have been filed against the business.

In addition, be highly suspicious of anyone who:

Guarantees a loan without checking your credit and references,
Pressures you to make a decision on the spot,
Requests payment for loan fees before processing the application, or
Instructs you to make a payment to an individual instead of a business entity.

While a reputable lender may charge application, credit report and appraisal fees, you generally shouldn’t have to pay until after your loan application is processed. Also, don’t wire transfer your payment, as it will be difficult to remedy any problems with the transaction.

Don’t follow their trail!

Loan scammers not only will steal your money, but they can also wreak havoc on your personal credit rating and future ability to obtain loans or credit. Don’t become a victim; otherwise, the mess could take you months, if not years, to resolve.

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Charitable contributions face scrutiny

The IRS has stepped up its examinations of both donors and charitable organizations, and Congress has enacted a law limiting the tax deduction for donating a car to the amount actually received by the charity, if and when it sells the vehicle. (This law is in response to allegedly excessive deductions being claimed for donated automobiles.)

These actions serve as a reminder that to obtain a valid deduction you may need to do more than simply keep a canceled check or receipt for your records. Here are some pointers for ensuring your charitable donations receive the deduction they deserve:

Get a receipt. You need a receipt if your donation is greater than $250, or you donated property, paid for admission to a charitable event or received property in exchange for your donation. In this case, the charity must indicate the amount you paid over and above the cost of the goods and services provided. (Amounts paid for raffle tickets are not deductible.)

Donate to qualified charities. Only donations to qualified charitable organizations may be deducted. If you are uncertain whether an organization qualifies, check the IRS listing online at http://apps.irs.gov/app/pub78.

Don’t deduct contributions to individuals. These donations are not deductible, no matter how worthy the cause or how great their need.

Attach an appraisal. Donations of property — other than publicly traded securities — valued at more than $5,000 must be supported by a qualified appraisal. Be sure you attach the appraisal summary to your personal tax return.

Take the proper deduction for services. If you contribute your services to charity, you may deduct only your out-of-pocket expenses and not the fair market value of your services. If you use your car for charity, you may deduct 14 cents per mile as a contribution.

Don’t have too much fun. Travel expenses, including meals and lodging, may be deducted unless there is a significant element of personal pleasure, recreation or vacation involved.

Abide by rules for personal property. Contributions of tangible personal property that aren’t related to the charity’s tax-exempt function are deductible, but the amount is limited to the property’s basis. For example, if you donate property to be sold in a charity auction, your deduction is the property’s basis — not the fair market value.

Following these rules could make the difference between receiving the deduction you expect and not receiving one at all.

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8 steps to maximizing your retirement savings

We’ve all heard that Americans aren’t saving enough for retirement. In a recent study by Putnam Investments, over 78% of retirees surveyed regretted not saving more during their working years. The 2004 Retirement Confidence Survey states that while seven in 10 workers have saved for retirement, they may not have saved enough. The survey found that 45% reported total household assets, excluding their home’s value, of less than $25,000.

If you’re concerned that you haven’t been putting enough aside for retirement, here’s an 8-step program for maximizing your retirement savings:

Start saving as soon as possible. Most young people don’t think about socking away money for retirement. But, if a 25-year-old worker starts making annual retirement contributions of just $2,000, by age 65, he or she could save more than $250,000 (assuming a 5% earnings rate). That amount could multiply if annual contributions increase over the years along with the worker’s salary.
Contribute the maximum. Money editor Jean Chatzky says in her book, You Don’t Have to Be Rich, that more than 40% of all Americans save less than 5% of their annual household income; 16% save between 5% and 10%; and only 9% save more than 20% of their annual income.
To reap the benefits of compounding, contribute the maximum allowed. The 2005 maximum 401(k) contribution, for example, is $14,000. The relatively new “catch-up” contribution amounts for people age 50 and over allows an additional $4,000 contribution this year.
Take advantage of a company match. Many companies match retirement plan contributions up to a certain percentage. This is free money from your employer. If you aren’t getting the maximum employer matching funds (because you aren’t contributing enough of your own money), try to increase your contribution.
Don’t borrow from your 401(k). Some plans allow for loans against your account. However, loans must be paid back with after-tax dollars, plus interest. You also lose compounding time, so you will have less saved by retirement.
Keep your money in the plan. If you tap into your tax-deferred retirement account before retirement age, you’ll not only have less money for retirement; in most instances, your withdrawal also will be subject to taxes and penalties. Exhaust all other resources before taking money out early.
Consider the risks of putting too much money in your employer’s stock. Some employers offer incentives for investing in company stock. Though convenient, if anything goes wrong in the company, your retirement will be at risk.
Diversify investments. Too much company stock is a no-no, but too much of anything can be bad. Spread your risk by diversifying your retirement account investments across industries, types of investment classes (bonds vs. stock) and location (domestic and foreign). This also gives you a greater opportunity to benefit from increased returns in an industry or investment type that suddenly takes off.
Monitor your account. Even if you contribute the maximum amount possible and follow all the steps for maximizing your retirement funds, you aren’t finished. Regularly check on your investment choices, adjust your asset allocation and make sure everything is on track for a great retirement.

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Feeling experimental?
Discover the R&E tax credit before it expires

The research and experimentation (R&E) tax credit may conjure up images of white lab coats and test tubes. In reality, any type of business — not just science-oriented firms — can qualify for this credit, which is available for a surprising variety of activities.

For example, service companies have obtained the credit for software development while manufacturers’ product and process improvements have also qualified. Let’s see what requirements your business must meet.

Who qualifies?

Congress introduced the R&E credit more than 20 years ago as an incentive for U.S. businesses to invest in research and development. The dollar-for-dollar tax-reduction potential of a credit, as opposed to a deduction, can be substantial.

Still, many companies haven’t claimed the credit because they’ve been unsure which expenses qualified and 1998 regulations imposed a restricted definition of qualified research. But changes over the past year, which we discuss below, are more business friendly.

If your company invests in new product development, process improvement or software development (even for internal use), it pays to determine whether you’re eligible for the R&E credit. Organizations in a broad range of industries have qualified, including those in manufacturing, distribution, construction, health care, technology, finance, agriculture and retail.

How much can you save?

The R&E credit applies to qualified research expenditures (QREs) such as:

Salaries of employees conducting research (or at least a portion thereof),
A portion of salaries or fees paid to workers or consultants supporting those activities,
Supplies, and
Computer leasing or time-sharing costs.

The credit is generally equal to 20% of the amount by which QREs exceed a base amount. Under a complex set of rules, the federal tax benefit of the credit is generally capped at 6.5% of current-year QREs. You can carry forward unused credits for up to 20 years and carry unused amounts back one year. State credits may be available, too.

What activities qualify?

To qualify for the R&E credit, an activity must:

Qualify as a deductible business expense,
Be aimed at discovering information that is technological in nature — for instance, it involves research in the physical or biological sciences, engineering or computer science,
Relate to a new or improved “business component,” such as a product, process, computer software, technique, formula or invention, and
Involve a process of experimentation.

Several types of activities are excluded, including research:

Conducted after commercial production begins,
Used to adapt or reproduce existing business components,
Related to style, taste, cosmetic or seasonal design factors,
Performed outside the United States, or
Funded by grants or contracts.

Keep in mind that this credit has been extended only through 2005.

Is the discovery test still required?

Regulations finalized in 2003 help businesses qualify for the R&E credit. For example, the changes eliminated the restrictive “discovery test,” under which a company could qualify only if its research was intended to discover information that “exceeds, expands or refines the common knowledge of skilled professionals in a particular field of science or engineering.” This standard made it very difficult for ordinary businesses to claim the credit.

The changes also affected these areas:

Process of experimentation. Previously, experimentation was limited to scientific laboratory research, typically excluding commercial and industrial research. The 2003 regulations more broadly define the experimentation process, making it easier for businesses conducting commercial and industry research to qualify.

“Substantially all” test. For the IRS to consider activities related to a business component as qualified research, substantially all — at least 80% based on cost or another appropriate measure — of the activities must be elements of an experimentation process related to a qualified purpose. The regulations also clarify that if a business meets the “substantially all” test, all of the activities will be eligible for the credit.

Where should you start?

If you’ve never claimed the R&E credit before, analyze your business activities in light of the changes to determine whether you may qualify in the current and previous tax years. If you’re already claiming the credit, or have done so in the past, review your activities to identify additional areas that may now qualify and make sure you have the documentation required under the new regulations.

By doing so, you may be able to reduce your taxes for the current year and future ones — and even get refunds for years past. A qualified tax advisor can help you with this.

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Double up on tax savings
Combine the home-sale exclusion with a like-kind exchange

Homeowners can qualify to exclude from income up to $250,000 ($500,000 for joint filers) in gain when they sell or exchange their principal residences. This is a very attractive tax break, but it doesn’t go as far as it used to. In many parts of the country, real estate prices have increased dramatically, so home-sale profits that exceed the exclusion are more common.

In some cases, homeowners can reduce their tax bite by combining the benefits of the home-sale exclusion with a like-kind exchange. The IRS gave the green light to this strategy in a ruling earlier this year.

Get the lay of the land

Internal Revenue Code (IRC) Section 121 allows you to exclude gain from the sale or exchange of property (up to the limits described above) if you used the property as your principal residence for at least two years during the five-year period preceding the sale. You can claim the exclusion as many times as you want, so long as you satisfy the residency requirements and don’t use it more than once every two years.

IRC Sec. 1031, on the other hand, lets you exchange one property for another without recognizing any gain, provided you use both properties in a trade or business or for investment purposes. To qualify, you must meet a number of requirements, including identifying replacement property within 45 days after the relinquished property is sold and completing the exchange within 180 days.

There are two key differences between the provisions. Sec. 121 permanently excludes the gain from income while Sec. 1031 defers the tax until you sell the replacement property. Also, the former applies to principal residences and the latter is limited to investment and business properties.

Apply both breaks

It’s not unusual for homeowners to meet the qualifications for both the home-sale exclusion and a like-kind exchange. You may have lived in your house for two years, for example, and then rented it out for three years. Or perhaps you used part of your home as a home office and the rest as your principal residence.

If you find yourself in either situation, the IRS has good news. Earlier this year, it issued Revenue Procedure 2005-14, which allows you to boost your tax savings by applying both tax breaks to the same property. The IRS offers a number of examples to help you determine whether you qualify, including this one:

Joe buys a house for $210,000 in 2000 and uses it as his principal residence until 2004. From 2004 to 2006, he rents the house to tenants, claiming $20,000 in depreciation deductions. In 2006, Joe exchanges the house for $10,000 in cash and a townhouse worth $460,000 that he also intends to rent to tenants. According to the example, Joe’s realized gain is $280,000: $460,000 + $10,000 cash – adjusted basis of $190,000 ($210,000 purchase price – $20,000 in depreciation).

Joe qualifies for the $250,000 home-sale exclusion because he used the house as his principal residence for two out of the five years before the exchange. He also qualifies for Sec. 1031 treatment because he converted the house into investment property and exchanged it for another investment property.

Under the Revenue Procedure, Joe applies Sec. 121 first to exclude $250,000 of the $280,000 gain. Then he defers the remaining $30,000 gain under Sec. 1031 (including the $20,000 gain attributable to depreciation, which isn’t excludable under Sec. 121).

Check the holding period

Until recently, Joe could have used a popular technique to avoid tax on the $30,000 deferred gain. All he would have had to do is rent out the townhouse for at least a year (to establish his intent to hold the property for investment), move in and use it as his principal residence for two years, and then sell or exchange the townhouse. Doing so would have allowed him to claim another $250,000 exclusion.

But last year’s American Jobs Creation Act increased the holding period from two years to five years for property acquired in like-kind exchanges. Although this doesn’t eliminate the technique altogether, it hampers your ability to reap this benefit — especially if the property appreciates substantially during the five-year holding period.

Review your options

If you’re planning to sell highly appreciated real estate, and its gains will exceed the home-sale exclusion, explore your tax-saving options. One to consider is combining the exclusion with a like-kind exchange. With some resourcefulness and a little patience, you may be able to qualify.

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