.McQuade.Brennan.LLP.

As 2010 is coming to close, there is still time to maximize your federal tax savings for the year by using the following techniques.

• MAKE CHARITABLE CONTRIBUTIONS

Year-end charitable giving is always a smart way to reduce current year taxes. Be certain to retain receipts and any other documentation regarding your charitable contributions.

Gifts of appreciated stocks to a qualified charity generate a deduction in the amount of the fair market value of the stock, regardless of the basis you hold in that asset.  This creates a double benefit:  you avoid the capital gains tax while receiving a full deduction.

• CONVERT TO A ROTH IRA

For 2010,  you can convert a traditional IRA to a Roth, regardless of your income (prior to 2010, such a conversion was allowed only in a year in which your modified adjusted gross income (MAGI) didn’t exceed $100,000).  The IRS offers a one-time opportunity to spread the resulting taxable income evenly over 2011 and 2012, and thereby defer the related taxes.  You must act now – this opportunity is for 2010 only and disappears at the end of the year.

• SELL YOUR STOCK “LOSERS” TO OFFSET CAPITAL GAINS

Consider getting rid of your portfolio losers.  These losses can be a valuable tax planning tool by wiping out your realized capital gains for the year, plus another $3,000 in regular income ($1,500 if you are married filing separately).   If your net capital loss is more than the $3,000 limit, you can carry the loss forward to later years.

• PAY STATE INCOME TAXES AND DEDUCTIBLE EXPENSES BEFORE YEAR-END

Paying your state income tax estimate before December 31^st will generate a federal deduction for 2010.

• MAKE YOUR ANNUAL REQUIRED DISTRIBUTION FROM IRA’s AND 401(k)’s

If you are 70 years of age or older, you must take minimum distributions from your IRA and 401(k) accounts by the end of the year or face stiff penalties.  Failure to make the required minimum distribution results in a penalty of 50% of the amount required to be distributed.  You may delay your required distribution until April 1, 2011 if you turned 70 this year.  Keep in mind that all withdrawals are taxed at ordinary income rates.

• MAKE YEAR-END GIFTS

If you planning on making a gift to a family member(s) or a friend(s), take advantage of the annual exclusion from federal estate and gift tax in 2010. You may give up to $13,000 ($26,000 if you a filing a joint return)  per person to any number of recipients. In addition to not being taxed, the gift is not added back to the taxable estate at death.

• SPEND YOUR FLEXIBLE SPENDING ACCOUNTS

If you have a flexible spending plan (tax-free earnings put aside to cover medical and dental expenses through an employer), you need to spend the remaining money in your account before year-end or you’ll lose it.  Get new medical supplies, fill prescriptions early, get new glasses or contacts, and make doctor and dentist appointments that you have deferred earlier in the year.   You should also evaluate your medical needs for 2011 to ensure you maximize your benefit for next year’s FSA.

• GO GREEN FOR TAX SAVINGS

You can reduce your taxes dollar for dollar with the home-energy tax credit.    If you add insulation, energy efficient replacement windows, super-efficient hot water heaters, furnaces or boilers you qualify for a tax credit equal to 30% of the cost up to $1,500.  This tax credit is more valuable than a deduction, which merely reduces the amount income subject to tax.

• MAXIMIZE YOUR SECTION 179 DEDUCTION

If you own a business and bought property in 2010 you may elect to expense those items, instead of depreciating them over a certain life, to help reduce taxable income from your business for the year. The maximum deduction for 2010 is $500,000. The total cost of property that may be expensed during the year cannot exceed taxable income of the business for the year. Any amount that has been elected to be expensed but has been disallowed due to the taxable income limitation will be carried forward to 2011.

• MAXIMIZE YOUR PENSION CONTRIBUTION FOR 2010

Self-employed individuals can contribute 20 percent of net self-employment income, after the self-employment tax deduction is accounted for, to their defined contribution or SEP plan, however, contributions cannot exceed $49,000. Other participants of defined contribution plans may contribute 100 percent of compensation up to a maximum of $49,000 for 2010.

SEP plans must be set up by the due date of the return (including extensions) and contributions must also be received by that date for the contribution to be counted for 2010. Defined contribution plans must be set up by December 31, 2010 and contributions must be received by the due date of the return (including extensions) for the contribution to be counted for 2010.

Fed Chair Bernanke launched QE 2 Wednesday afternoon, and it’s as imposing as the real thing. The Federal Reserve announced it will buy up to $600 billion of U.S. government bonds over the next eight months.

QE 2 (Quantitative easing) is a euphemism for the (second) monetization of government debt this year, and is the electronic equivalent of printing money. The Fed’s goal is to create an environment where interest rates are so low that investments in fixed income (or cash) are so unattractive that it will result in a rising stock market by stimulating demand through a “wealth effect”. Some economists believe the Fed is exchanging one bubble (the bond market) for another, the stock market.

For investors, they have their marching orders. The Fed’s have provided the most compelling environment for equity investments in many years.

All aboard!

On July 1^st, I commented on Apollo Group’s 34% increase in earnings (The Next Big Short: Part 3 – The Apollo Group Announces Third Quarter Earnings).  I also noted that Apollo Group was the largest recipient of federal student aid (to the tune of $1.8 billion in 2008), so the earnings report was no surprise.  What prompted my commentary were the analyst reports from Barrington and FBR.  Even a cursory review of the legislative activity last summer, particularly that of the Senate Committee on Health, Education, Labor and Pensions, should have  alerted the analysts at both firms that the game was about to drastically change for the for-profit higher education industry.  I noted the industry will soon be facing new standards that many schools will fail to comply with.  I also suggested that Barrington and FBR review their target prices for Apollo ($65 for Barrington and $49 for FBR), which were bizarre even back in July.

Today, FBR downgraded Apollo to “underperform”, and gave a target price of $40.  Thanks.  As of this writing, I have no information for Barrington.  However, investors should not expect an upgrade.

Check out the price action of the following publicly traded for-profit/internet schools over the past five months:

On Monday, October 11, 2010, Thomas Heath commented on “The Intelligent Entrepreneur: How Three Harvard Business School Graduates Learned the 10 Rules of Successful Entrepreneurship”, a book written by Bill Murphy, a former Washington Post reporter and aspiring entrepreneur. 

Murphy’s 10 rules for success include:

1.) Be committed to entrepreneurship, the act of creating something, rather than a single idea.

2.) Solve a problem.

3.) Think big. Think new. Think again.

4.) You can’t do it alone.

5.) You must do it alone. Be decisive.

6.) Manage risk.

7.) Lead.

8.) Learn to sell.

9.) Persistence is everything.

10.) Time, not money, is the key resource.

I work with many small- and medium-sized businesses.  I’ve seen the bad, the good and the ugliest of outcomes from entrepreneurship.  Murphy is right “you can’t do it alone”.  Your support team should not only consist of a business partner and trusted friends, but also a trusted financial advisor to help you construct a business plan.  A lot of entrepreneurs have good ideas, but formulating a business plan is outside their skill set.   A financial advisor can give a clear description of how one will make money, including a time table of when the cash flow is going to start and what is the expected rate of return.  You need to have an advisor that’s going to explain to you the facts of life – not tell you what you want to hear.  They’ve got to tell you the bad news and the good news. 

Lastly, you must work hard and hire the best and brightest people you can find.

The results of a recent survey of nonprofit organizations conducted by GuideStar and another survey of associations conducted by Marketing General Inc. (MGI), both conclude that there has been a decline in revenues for nonprofits and associations for multiple, typically prosperous, funding channels.  These reports provide considerable insight into the affect of the current economic conditions on organizations. 

The results of a recent survey conducted by GuideStar on the impact of the economy on nonprofit organizations (primarily 501(c)(3) organizations) shows that the current recessive state of the economy continues its unrelenting drain on the funding lifeline of the sector, where four out of 10 organizations reported a decline in contributions for the first five months of this year (January 1 – May 31, 2010), as compared to the same period in 2009.

In addition, 28% of the respondents reported no change in contributions and out of the 40% reporting declines in funding, 26% categorized the decline to be significant. Furthermore, 66% of those surveyed attributed the declines to reduction or discontinuation in funding from private foundations, and 30% contributed the decline to reduced government support. However, the number one reason for the decline was reportedly in individual giving at 67%.

The survey was primarily focused on mission oriented organizations with 92% of the respondents being public charities.

The study conducted by MGI surveyed associations (primarily 501(c)(6) organizations) to determine their largest revenue source, also reported declines, although not in contributions as expected, but in membership dues. Over 400 associations were surveyed and the report shows that one out of two associations experienced some level of member attrition in 2010, as compared to 2009.

The report presents grim news for association executives with losses in recruitment and retention (retention more than recruitment). Of all respondents, 44% reported declines in membership dues over the past year with a significant number of respondents reporting “lack of value” as the top reason for not renewing by members.