Moore Colson :: News & Resource Center

To get around the high cost of prescription medications these days, many consumers have resorted to filling their prescriptions online and in other countries. The benefits of shopping at cyber pharmacies are compelling: Customers often save significant amounts of money, online shopping offers convenience and privacy, and it’s easy to compare prices.

But while many online sites are legitimate — often simply extensions of national pharmacy chains or neighborhood pharmacies — others are not what they seem.

Know the risks
According to the U.S. Food and Drug Administration (FDA), numerous alleged pharmaceutical sites are putting consumers at risk by:

The problem begins with sites that disregard the need for consumers to be seen by licensed medical professionals to ensure proper diagnoses and ongoing patient monitoring. Customers often need only complete an online questionnaire to fill prescriptions. Consequently, failure to diagnose and factor in serious conditions, such as high blood pressure or diabetes, when filling prescriptions may pose dangerous, or even lethal, risks to consumers.

As for purchasing medications in other countries, it’s hard to ensure drug safety and efficacy due to potential differences in country standards.

Protect yourself
The FDA advises consumers to verify through the National Association of Boards of Pharmacy^® that an online site is licensed and in good standing. Additionally, avoid sites that:

The FDA’s site (www.fda.gov) provides more information on the risks and how you can protect yourself when filling prescriptions online and in other countries.

Back to top

More than just a trip to the mall
Planning for your 2006 asset purchases

The start of a new year is a great time to begin planning your asset purchases. Because many purchases will be big-ticket items, make the most of your business dollar — not only by getting a good deal, but by maximizing your tax savings.

You need to consider the cost and timing of your purchases, as well as special tax incentives and planning opportunities.

Cost may be higher than you think

An asset’s cost may be more than what the price tag reflects. For tax purposes, your cost or basis in an asset generally includes the actual purchase price including sales tax, delivery, labor, and any fees, commissions or other costs to acquire the asset.

Keep in mind that your basis may be less than what it would cost to buy the asset — such as an asset required in a like-kind exchange with a carryover basis.

Timing affects depreciation

Timing asset purchases is critical. The start of depreciation, and sometimes the eligibility for certain asset purchase incentives, is triggered when an asset is “placed in service.”

An asset is generally placed in service, for example, when it’s in place, fully functional and ready to be used — even if it’s not used for some time. This can be an important point for assets that are purchased at year end but aren’t used until the beginning of the following year.

For instance, you might purchase some machinery that is delivered and installed on Dec. 18, but then sits idle because of the holidays. In this case, you could perform a test run of the machinery right before year end — to establish that it was placed in service, even if you don’t actually use the equipment until the following year. Or, if installing it before year end would put you over the Section 179 phaseout limit or subject you to the midquarter convention (as described below), you could hold off placing it in service until after the start of the new year.

Timing affects the amount of depreciation in the first year. Assets, other than real property, are usually subject to the midyear convention. This means that a half-year’s worth of depreciation is claimed in the first year — regardless of when the asset was purchased. But, if more than 40% of your annual asset purchases are in the last quarter of the year, all the asset purchases for the year become subject to the midquarter convention — and less depreciation is allowed in that year.

Be aware that some states don’t follow the federal depreciation rules — meaning another calculation and possible diminution of benefit.

Special tax incentives available

Timing your asset purchases became especially important when the Sec. 179 expensing election was increased. Through 2007, this election is $100,000, adjusted annually for inflation. For 2006, the amount is $108,000. (For 2005, it was $105,000.) So, this year you can choose to deduct (expense) up to $108,000 rather than recover it ratably over the normal depreciation period for the asset.

Sec. 179 applies to tangible personal property such as furniture, equipment and machinery. And, at least through 2007, it also applies to “off-the-shelf” computer software, which would otherwise have to be amortized over three years.

If your asset purchases for the year exceed $400,000 — or $430,000 as adjusted for inflation in 2006 — the $100,000 expense amount will be reduced. And the expensing election is completely phased out once annual asset purchases exceed $500,000 (or higher amount as adjusted for inflation).

Keep in mind that the higher Sec. 179 expensing election amount is scheduled to drop to $25,000 in 2008. So, by monitoring your asset purchases each year and planning significant purchases before the 2008 deadline, you can accelerate your depreciation deduction.

Although Sec. 179 is the most commonly used incentive for asset purchases, it’s not the only one. State and local taxing authorities often have tax incentives or other benefits for businesses whose startup or relocation are accompanied by significant asset purchases or for existing businesses that expand or have major asset purchases.

Accelerate deductions with a cost segregation study

If you have recently purchased or built a new building, you may be able to accelerate some of your depreciation deductions through a cost segregation study.

Real property is generally depreciated over 27.5 or 39 years using a straight-line method. Shorter “lives” may be available, however, for certain parts of a building. A cost segregation study identifies any property components, and their related costs, that can be depreciated over five or seven years using 200% of the straight-line rate, or 15 years using 150% of the straight-line rate.

Assets that typically qualify for faster depreciation include decorative fixtures, cabinets, shelves, security equipment, parking lots, landscaping and architectural fees allocated to qualifying property.

If you expand a facility or make significant asset purchases you may also qualify for state incentives. The benefits may be limited, however, if your business is subject to alternative minimum tax or is located in a state that doesn’t follow federal depreciation rules.

Timing is everything

Many tax deductions and incentives are available year-round; but others depend on timing, such as when you place assets in service or take advantage of the Sec. 179 expensing election.

Make sure your timing is perfect so you can maximize your tax deductions in 2006.

Back to Top

Tax Tips
When can you write off bad debts?

Regardless of the business you’re in, sometimes customers or clients simply can’t pay you. Fortunately, the tax code eases the pain somewhat by allowing you to take a tax deduction for debts that become “wholly worthless” during the tax year.

There’s no standard test or formula for determining whether a debt is worthless; it depends on the facts and circumstances of each case. To qualify for the deduction, your business must use the accrual method of accounting and you must have no reasonable expectation of repayment. It’s not enough that the debtor lost his or her job or became insolvent. You must be prepared to show not only that the debt is uncollectible at the time you take the deduction, but also that it has no “future value,” considering factors such as the debtor’s age, educational status, income and earning potential.

The deduction also requires you to exhaust all reasonable means of collecting the debts. If you think you may claim a bad-debt deduction this year, start your collection efforts early and document those labors to support your position.

Capture tax benefits while reducing insurance costs

As insurance costs continue to skyrocket, an increasing number of businesses are fighting back by forming captive insurance companies. A captive — an insurance company owned and controlled by the businesses it insures — can provide a number of valuable benefits. For example, captives typically offer more stable premiums and lower fixed costs than traditional insurance companies. They also allow you to participate in the insurance company’s underwriting profits and investment income.

In addition, if the captive is properly structured as an “insurance arrangement” for federal income tax purposes, you’ll enjoy some significant tax benefits. Unlike other forms of “self insurance,” you and the other owners will be able to deduct your premiums. In addition, the captive will be taxed as an insurance company, allowing it to deduct most of its loss reserves (that is, funds set aside to pay claims).

If this strategy is right for you, you may want to team up with other businesses to form a group captive or join an existing captive operated by a trade association or other industry group.

The gift that keeps on giving

Making regular gifts to your loved ones — always a valuable estate planning strategy — just got a little better. This year, the annual gift tax exclusion, stuck at $11,000 for several years, increases to $12,000 per recipient ($24,000 if you split gifts with your spouse). Annual exclusion gifts allow you to reduce the size of your estate tax-free and without using up any of your lifetime gift or estate tax exemptions, all while keeping your wealth in the family.

Back to Top

Breathe new life into a traditional IRA
Careful planning can provide continued tax-deferred growth for your beneficiaries

As the name “individual retirement account” (IRA) suggests, the primary purpose of an IRA is to save for retirement. But IRAs — which often accumulate enormous amounts of wealth — can also be a significant part of the legacy you leave to future generations.

Unfortunately, that legacy may be burdened with a huge tax liability if your IRA is a traditional one, not a Roth. With careful planning, however, you and your heirs can stretch a traditional IRA’s tax-deferred growth for years or even decades while minimizing the tax impact.

Tax considerations

Inherited IRAs are treated differently than other assets. For example, if you leave appreciated stock or real estate to a loved one, he or she receives a “stepped-up basis” in the asset. In other words, your heir’s cost basis is equal to the asset’s fair market value on the date of your death. If he or she immediately sells the asset, no taxable gain will be recognized, even if the asset’s value has appreciated significantly since you acquired it.

But there is no stepped-up basis with an IRA. Instead distributions to your heirs are taxable at their ordinary income tax rates, as high as 35%. And with estate tax rates currently topping out at 46%, taxes can quickly consume a substantial portion of your nest egg.

One way to avoid this problem — especially if your estate plan includes charitable donations — is to name a charity as the beneficiary of your IRA and bequest other assets to your loved ones. As a tax-exempt entity, the charity pays no taxes on the gift, and your heirs enjoy a stepped-up basis in the non-IRA assets they receive.

Required distributions

Once you reach age 59¹⁄₂, you can withdraw as much as you want from your IRA without penalty. Although you’ll still have to pay income taxes on your withdrawals, there will be no penalty. The key to maximizing an IRA’s benefits is to leave the funds in the account, growing tax-deferred, for as long as possible. But by April 1 of the year following the year you reach age 70¹⁄₂ (the “required beginning date”), you have to start taking annual required minimum distributions (RMDs). The penalty for failing to take an RMD is severe: 50% of the amount you should have withdrawn.

To calculate the RMD for a given year, divide your IRA balance by the distribution period provided by the appropriate IRS life expectancy table. For example, if you’re 70 years old and your account balance is $1 million, your distribution period is 27.4 years under the Uniform Lifetime Table. So your RMD is $36,496 ($1 million / 27.4).

If your sole beneficiary is your spouse and he or she is more than 10 years younger than you, however, your distribution period is based on the Joint Life and Last Survivor Expectancy Table. Let’s say your spouse is age 55. Your distribution period would be 31.1 years, for an RMD of $32,154.

Naming a beneficiary

You can name anyone as beneficiary of your IRA including your spouse, children, grandchildren, friends, trusts and charities. The point is to name someone, because dying without a designated beneficiary could be problematic for your loved ones.

For example, if you’ve already started taking RMDs and pass away without having named a beneficiary, your heirs must take distributions based on your remaining life expectancy at the time of your death. If you haven’t reached your required beginning date, your heirs must withdraw the entire account balance, subject to ordinary income taxes, within five years.

By designating one or more beneficiaries, you enable your heirs to stretch distributions over their own life expectancies, spreading the taxes over many years and allowing the IRA to continue growing tax-deferred for as long as possible. To avoid negative tax consequences, name a primary beneficiary and one or more contingent beneficiaries.

Leaving it to your spouse

Passing your IRA to your spouse is a logical choice and gives him or her three options:

Take all of the funds and pay income tax on the withdrawal,
Leave the IRA in your name, or
Roll the funds over into a new or existing IRA in his or her name.

Let’s suppose your spouse is under age 59¹⁄₂ and needs the funds for living expenses. What should he or she do? It’s probably best to leave the IRA in your name. That way, your spouse can take money out without paying a 10% early withdrawal penalty.

If your spouse is older than age 59¹⁄₂ or doesn’t need the money right away, it’s preferable to roll the funds into an IRA in his or her name. This way, your spouse can name new beneficiaries and defer RMDs until he or she reaches age 70¹⁄₂.

But if you’re not sure whether your spouse will need the money in your IRA, play it safe by naming him or her as your primary beneficiary and your children or other heirs as contingent beneficiaries. After your death, if your spouse has sufficient funds to live on, he or she can disclaim the IRA assets, allowing them to pass to your contingent beneficiaries.

Covering all the bases

To preserve the life of your IRA, review your documentation to be sure you’ve designated beneficiaries and talk to your family about their options for dealing with an inherited IRA — so, when the time comes, a tax advisor can help them choose the best course of action.

Back to Top