What you are referring to is the new 3.8 percent Medicare surtax that beginning in 2013 will be applied to high-income taxpayers who have “net investment income”. Taxpayers subject to this new tax include joint filers with Modified Adjusted Gross Income (MAGI) over $250,000, and single taxpayers with MAGI above $200,000. This tax is intended to fund future Medicare benefits under the Health Care and Education Reconciliation Act of 2010.

The term, “net investment income,” includes interest, dividends, royalties, rents and capital gains, less deductions properly allocable thereto. Net investment income does not include income earned from a trade or business. However, business income is included if the business is considered a “passive activity” (discussed below). Furthermore, net investment income does not include distributions from qualified retirement plans, such as employer-sponsored pension plans, profit sharing plans, 401(k) plans, 403(b) plans or 457(b) plans, nor does the term include distributions from an individual retirement account.

Mindful of the fact that the constitutionality of the health care law is being challenged, it may still be wise to assume the tax will take effect in 2013 and plan to manage your income to stay below the MAGI thresholds and to minimize your net investment income. Here are some ideas along those lines:

Tax Exempt Income.  Municipal bond income is exempt from federal tax and is not considered net investment income for the surtax. Therefore, consider moving some of your investments to muni bonds.

Retirement plans.  Maximize your contributions to IRAs, 401(k), 403(b) and 457 plans which will lower your MAGI. In addition, when you take distributions from these retirement plans they will be excluded from gross income for purposes of the surtax.

Business Income.  If possible, plan to avoid the “passive activity” classification of your business incomes. As mentioned, business income could be subject to the tax if it is from a “passive activity”. A passive business activity is one in which the taxpayer does not “materially participate”. Material participation can be met by satisfying one of seven tests. Three of the tests are most often used to satisfy material participation, they are: (1) the taxpayer spends more than 500 hours working in the activity; (2) the taxpayer is the only one working in the activity, and (3) the taxpayer spends at least 100 hours working in the activity and no one else spends more hours.

Capital Gains.  Capital gains from the sale of property are subject to the surtax, including gains from the sale of property in a passive business. Also included are gains from the sale of C corporation stock. Gain from the sale of stock in an S corporation or an interest in a partnership are included if the businesses are passive activities to the seller. Therefore, if you plan to sell property, C corporation stock, or your interest in a business in which you have passive ownership, consider selling before Jan. 1, 2013.

Roth IRA Conversions.  Converting traditional IRAs to Roth IRAs prior to 2013 can reduce MAGI in 2013 and beyond, thereby reducing or eliminating surtax exposure. However, you must be able to pay the tax on the conversion in 2012.

Sale of Residence.  In you are thinking about selling your home and the gain will exceed the IRS home sale exclusion amounts ($500,000 for married couples and $250,000 for singles), do so before the end of 2012. The gain over the exclusion amounts is considered capital gain and is subject to the Medicare surtax if your MAGI is over the $250,000 or $200,000 threshold.

A Note to Our Readers:  Due to changes to the Coloradoan business section, this will be the final installment of Tax Talk. Thanks to our readers and those who submitted questions over the years.

First, it should be noted that the due date is Apr. 17, 2012 because Apr. 15 is a Sunday and Apr. 16 is the Emancipation Day holiday in the District of Columbia. The Apr. 17 due date applies even for taxpayers who do not live in the District of Columbia.

The significant non-business changes to the Form 1040 and related schedules are as follows:

• For 2011, the standard deduction is $5,800 for single filers and for married persons filing separately, $11,600 for joint filers and qualifying widow(er)s, and $8,500 for heads of household.
• The amount for each exemption for 2011 is $3,700.
• Taxpayers must complete new Form 8949 before completing Schedule D to report capital gains and losses.
• The 2011 standard mileage rate for moving expenses and for medically-related use of an auto is 19¢ per mile for miles driven before July 1 and 23.5¢ for miles driven after June 30.
• A taxpayer who converted or rolled over an amount to a Roth IRA in 2010 and chose to report the taxable amount on his 2011 and 2012 returns must report the amount that is taxable on his 2011 return on line 15b (for conversions from IRAs) or 16b (for rollovers from qualified retirement plans).
• A taxpayer may be able to take an IRA deduction if he was covered by a retirement plan and his 2011 modified AGI is less than $66,000 ($110,000 if married filing jointly or qualifying widow(er)). If the taxpayer’s spouse was covered by a retirement plan, but the taxpayer was not, he may be able to take an IRA deduction if his 2011 modified AGI is less than $179,000.
• The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses has increased to 20% for distributions after 2010.
• The AMT exemption amount for 2011 is $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).
• The making work pay credit has expired. A taxpayer cannot claim it on his 2011 return.
• A taxpayer who has to repay the First Time Homebuyer’s credit may be able to do so without attaching Form 5405.
• The nonbusiness energy property credit is available for property placed in service in 2011, but with new limitations. The credit now has a lifetime limit of $500, of which only $200 may be used for windows. Use Form 5695.

In regards to your business reporting on Schedule C and related forms of your 1040, you need to be aware of the following:

• The 2011 standard mileage rate for business travel is 51¢ per mile for miles driven before July 1 and 55.5¢ for miles driven after June 30. In addition, beginning in 2011, taxpayers may use the business standard mileage rate for a vehicle used for hire, such as a taxicab.
• The self-employment tax rate is reduced from 15.3% to 13.3%.
• Health insurance costs for a taxpayer and his family are no longer deductible in computing self-employment tax.
• For tax years beginning in 2011, the maximum amount that may be expensed under Code Sec. 179 is $500,000, with the investment-based phaseout beginning at $2,000,000. A taxpayer may elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as Code Sec. 179 property.
• Businesses that acquire and place qualified property into service during 2011 can claim a depreciation allowance in the placed-in-service year equal to 100% of the cost of the property.
• Beginning in 2011, payments taxpayers receive through merchant cards and third party networks are reported on Schedules E and C separately from other gross receipts. However, for 2011, IRS has deferred the requirement to report these amounts. Therefore, taxpayers are directed to enter zero on the “a” line and report all gross receipts on the “b” line, including any income reported to them on Form 1099-K, Merchant Card and Third Party Network Payments.
• Qualified joint ventures reporting rental real estate income not subject to self-employment tax must report that income on Schedule E instead of Schedule C.
• Form 5884-B, New Hire Retention Credit, is available to individuals who hired qualified employees in 2010. This credit may be claimed for a retained worker in the first tax year ending after Mar. 18, 2010, for which the retained worker satisfies a 52-consecutive-week requirement. Thus, for employers filing calendar year income tax returns, the retention credit is claimed on the employer’s 2011 income tax return. The new hire retention credit is part of the general business credit claimed on Form 3800, General Business Credit.

Get Going Now on Estate Planning

Estate planning can be a complex and emotional endeavor on several levels – personal, legal and financial. For this reason, some business owners avoid the estate planning process altogether. Doing so, however, can be a big mistake, especially now.

Here’s why: After a decade of tax cuts that resulted in the complete elimination of the federal estate tax in 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2011 restored the federal estate tax for tax years 2011 and 2012. The current exemption is a generous $5 million per person or $10 million per married couple.

Surprising to many, the lifetime gift tax and generation skipping transfer (GST) tax exemptions also jumped to $5 million for 2011 and 2012. (Note that this increased lifetime exemption is separate and in addition to the annual gift tax exclusion of $13,000.)

However, unless Congress takes further action, the estate and gift tax exemptions will drop to a more meager $1 million on January 1, 2013, where they stood back in 2001. In addition, the maximum estate and gift tax rate will rise from 35 percent to 55 percent on this date.

Time Is of the Essence

By acting before the end of 2012, you have a rare opportunity to make larger lifetime gifts – up to $5 million if you’re single or $10 million if you’re married – free of estate, gift and GST tax. This opportunity is also of particular interest to same-sex couples who are un-married and don’t qualify for federal gift or estate tax marital deductions.

Given this short window, it’s crucial to review your estate and gift plan to aggressively take advantage of these increased exemptions before the end of 2012.

It’s also important to review the language in your estate plan documents, which might result in unintended consequences in light of this legislation. For example, your current plan may state that an amount “up to the federal estate tax exemption” should be transferred to a trust for your children, with the balance passing to your spouse.

If your estate is valued under $5 million, this language might inadvertently pass the entirety of your estate’s value to your children and bypass your spouse altogether. Now is the time to adapt the language in your plan documents accordingly.

Consider Business Value

For closely held business owners, business valuation is another issue to consider in light of the increased estate and gift tax exemptions.

Generally, the IRS tends to frown upon valuation discounts for marketability or lack of control for family trans-actions. Basically, these discounts are perceived by the IRS as more of a wealth transfer and tax reduction strategy than as legitimate adjustments required to reflect the value of a closely held business.

Because of this perception, there is talk that the Obama administration is considering legislating away these discounts, which would result in much higher business valuations for certain family transfers. By transferring business assets before 2013, you can take advantage of family valuation discounts while they are still firmly in place and recognized by the IRS.

What About Clawback?

Some people have expressed fear of a “clawback” by the IRS after 2012. They are worried that after the estate tax exemption drops to $1 million, a recalculation of transfers made in 2011 and 2012 might result in an additional tax.

Several legal and tax experts have examined the legislation and weighed in on this question, and the consensus seems to be that there will be no tax clawback. Of course, tax law is complex, and Congress can be very unpredictable.

The bottom line? All indicators point to this year being a once-in-a-lifetime opportunity for gift and estate tax savings. So prepare to meet with your tax and legal advisors soon.

Our tax team can help you create a plan to take advantage of the increased estate, gift and GST exemptions. Contact us to schedule an appointment.

Word to the Wise

Stay True to Your Investment Strategy

With wild stock market fluctuations now the “new norm,” many business owners are worried about their investments. You might be one of them, wondering what you should do – buy, sell, hold or bail out of the financial markets completely?

Without a doubt, you need guidance. But that guidance shouldn’t come from a news report, a hasty call to your broker or an e-mail from a golfing buddy.

Sound investment direction should come from a carefully crafted investment strategy that is part of a financial plan that doesn’t hinge on the daily ups and downs of the Dow Jones Industrial Average. Your investment strategy should be developed in the context of your financial goals, age, stage of life and tolerance for risk, among other important factors.

Crafting a Financial Plan

If you already have a financial plan, it’s a good idea to revisit it periodically. If you don’t have a plan, here are some things to consider when crafting one:

• Find a great partner. Choosing a financial planning partner is a critical decision. In the process of crafting a financial strategy, you’ll be sharing the intimate details of your life and finances – your hopes, dreams and thoughts about money.

As with many relationships of this nature, finding the right fit is key. You’ll want to work with someone who is credentialed in the financial planning arena, has a stellar reputation and strong people skills.

Ask your CPA, attorney or friends for recommendations. Call and chat with a few prospective advisors. When you’ve narrowed your choices by phone, arrange a face-to-face meeting with those you like so you can see how you might work together.

• Assess your goals. In The 7 Habits of Highly Effective People, Stephen Covey re-minds readers to “begin with the end in mind.” What are your financial goals? How much money do you need, or want, to be financially independent, to provide for your family or to leave a philanthropic legacy? The answers to these questions will ultimately drive your financial strategy.

• Look at the big picture. You own more than the cash you have available to invest in securities, so consider all of your assets as you plan. Your financial strategy must be created with your entire asset pool in mind, including your business.

For example, if your business value is somewhat volatile or inconsistent, you may want to invest your personal wealth more conservatively. If you already have a fair amount of risk in certain areas, you’ll want to balance that elsewhere.

• Be realistic about risk. Many business owners would say they are comfortable with investment risk. But beware: A tolerance for risk in business doesn’t necessarily translate to a tolerance for risk when it comes to personal finances. Also, it’s all right for your risk tolerance to change over time. If you have college tuition for your children or retirement looming, your appetite for investment risk may be diminished.

• Don’t listen to your pals. Your friends may have your best interests at heart, but listening to their investment tips, warnings or money-making schemes may not be a good idea. Despite what they may tell you, their circumstances, goals and risk tolerance are likely to be different from yours. Stick with your own strategy, created with your specific circumstances in mind.

Focus on the Long Term

Remember, when you’re armed with a financial plan, market volatility becomes much less of an issue. Your plan will accommodate short-term ups and downs in the market and, most importantly, help you reach your long-term financial goals.

Looking for a solid financial and investment strategy? We can recommend local professionals who can help.

Protecting Your Business

Top Tips for Online Security

According to the U.S. Department of Commerce, roughly $10 billion in online transactions are executed via the Internet each year, and the number of online financial transactions is growing daily. Unfortunately, as the number of these transactions increases, so does cybercrime.

Many business owners think their company is too small or obscure to attract the attention of cybercriminals, or that they don’t store any data of particular value.

That’s probably what one small furniture maker thought – until the company’s network was hacked, its proprietary designs were stolen and another company beat them to market with similar pieces. It’s likely that the thieves weren’t even associated with the competitor – they simply found valuable information and exploited it to their advantage.

What’s at Risk?

The most significant cyber threats to businesses include hacking and malware, lost or stolen hardware, rogue employees and natural disasters. While you may not be able to completely isolate your business from these threats, you can diminish the likelihood of a significant breach by increasing awareness of the problem and adopting more sophisticated security practices.

• Secure your network. To be effective, security practices must be updated frequently. Antivirus and anti-spyware software is essential, but it only works if you keep it current. Be sure to install software updates as soon as they are issued to take advantage of any security fixes included.

But sometimes it’s difficult to identify your own weak spots. Investing in an annual security review conducted by an outside expert may be helpful. This expert can also educate you and your colleagues about the latest threats and how to combat them, as well as best security practices.

• Limit access to data. All employees do not need access to all systems. For example, there’s no reason for anyone outside the finance or accounting depart-ments to have access to the company’s financial data, and only those in R&D should be able to access research-related information. Creating limited access via passwords and network segregation reduces the likelihood that an insider will inadvertently create a security problem.
• Address data storage issues. For online merchants, the security bar is extremely high, particularly when it comes to data storage. The Payment Card Industry (PCI) Security Standards Council provides resources for merchants to increase data security. Note that most states have enacted laws that require companies to notify customers of security breaches involving personal information.
• Educate your employees. Experts in the field of cybercrime refer to online security as a “team sport.” Training your team to use good security practices is a must. For example, employees are generally aware that they shouldn’t give out their personal information in response to an e-mail, but they may not be aware of the risks of sharing sensitive business information.

Keep cybercrime top of mind via regular training sessions reminding employees about simple steps they can take – changing their passwords regularly or being aware of business “phishing” scams, for example.

Perfect online security is impossible. But it’s important to take steps to protect your business – and your customers – as best you can.

Cybercrime can destroy your business value. We can help you identify ways to protect your investment.

Pay Your Taxes — All of Them!

Of course, you’d expect your CPA to tell you to pay your taxes. But with the turbulent economy, business owners are sometimes tempted to take some shortcuts with the IRS.

One very dangerous example of this is not paying employees’ federal income tax withholding. The scenario typically unfolds like this: The business has hit a rough patch, revenues are a bit iffy and cash flow particularly tight. So the owner chooses to pay employees and vendors, but delays remitting the federal payroll tax withheld from the employees’ wages.

Bad idea! The owner is essentially borrowing money from the IRS without permission. Needless to say, Uncle Sam doesn’t look kindly on this practice. In fact, the IRS is becoming extremely aggressive in looking out for this offense.

Hello, IRS Agent

If the government notices that you have missed or are short on your weekly pay-roll withholding deposits, an IRS agent is likely to appear at your door. If the agent is not convinced that you are willing and able to pay, he or she can literally padlock your doors and prevent you from doing any further business.

The penalty for not remitting your withholding payments is 100 percent of the amount due, and the government can assess that penalty personally against individuals responsible for making withholding payments for the business. This includes the owner, corporate officers, controllers and bookkeepers – whomever the IRS believes had a part in making the decision not to pay the withholding tax.

What to Do?

If you have already missed a payroll withholding deposit or are about to miss one, contact your CPA for advice on how to proceed. This is not the time to ignore the problem and hope it will go away – because the IRS is not a friendly lender.

It’s crucial to meet all tax obligations. Let us help you work out a plan.

In the digital world of the 21st century, cybercrime has become as big a threat (if not bigger) for many businesses as any other type of criminal activity – including embezzlement, white-collar crime and even old-fashioned breaking and entering.

In the 2010-2011 Computer Security Institute (CSI) Computer Crime and Security Survey, malware infection was identified as the most common type of cybercrime, with 67 percent of respondents saying they had experienced such an attack. Other types of cyber threats ranking high in the survey were the loss or theft of laptop computers or other mobile devices (34 percent), phishing scams (39 percent), insider abuse of corporate Internet access or e-mail (25 percent) and denial of service attacks (17 percent).

Identify Your Risks

The first step to increasing cyber-security at your business is to develop a cybercrime governance and risk management policy statement. This statement should identify the cybercrime risks that your business is most susceptible to and detail the procedures you will follow to limit these risks.

Completely eliminating all cybercrime risks may not be feasible, but you must determine to what lengths (from both a financial and manpower standpoint) your company will go to reduce these risks to an acceptable level. This will be different for every company: A company that does business with the U.S. government or military, for example, or one that stores vast amounts of sensitive customer information will need to guard against cybercrime more diligently than most other businesses.

As you create your cybercrime governance and risk management policy statement, focus carefully on your company’s vulnerability to the following threats in particular:

Online banking and financial transactions: Over the past few decades, Electronic Funds Transfer (EFT), which includes both Automated Clearing House (ACH) transfers and wire transfers, has revolutionized the way businesses send and receive payments. Along with greater speed and convenience, however, also comes a far greater risk of cybercrime.

The best protection against the theft of funds when transferring money electronically is ACH Positive Pay, a security service offered by most banks. This service uses filters that allow permitted ACH items to post and blocks that prevent questionable ACH activity from posting.

Phishing and spear phishing: By now, most people are familiar with so-called phishing schemes in which cyber criminals send mass fake e-mails supposedly from financial institutions asking for sensitive data like account numbers and passwords. That’s why many thieves have now shifted their focus to a new scheme called “spear fishing.”

This is similar to phishing, but rather than sending mass e-mails to hundreds of thousands of people, thieves send targeted e-mails to a few people within an organization, seeking user names and passwords so they can hack into the company’s networks. Many spear phishing e-mails are very sophisticated and authentic-looking, and employees are often unsuspecting of them, since they usually aren’t coming from a supposed bank or financial institution.

Man in The Browser (MiTB) attacks: These cyber-attacks use phishing techniques to infect users’ computers with “Trojans” that carry out the attack. The Trojan is triggered into action while an employee is performing online banking transactions, transmitting login credentials (including tokens and challenge questions) to the cyber-thief, who is able to access the bank accounts and transfer funds to him or herself.

Companies tend to be especially vulnerable to MiTB attacks when allowing employees to perform EFT transactions from unsecure home computers. At one Midwest manufacturing company, the controller was working from home on a snow day and decided to initiate some ACH transfers via his home PC. This PC, however, did not have the firewalls and virus protection that were set up at the office. The employee’s bank login ID and passwords were hacked via a MiTB attack, and the thieves quickly logged into the account and transferred corporate money to themselves.

Fortunately, the company had instituted a two-step process for initiating ACH transfers, and the CFO caught the fraudulent activity before the funds were actually transferred. But this demonstrates just how easily hackers can obtain sensitive data to steal your business’ money electronically.

Mobile data security: Employees today are performing more of their work on laptop computers and hand-held mobile devices. While increasing employee convenience and flexibility, these practices also expose sensitive company data to new levels of risk.

One of the biggest risks is theft or loss of laptops and mobile devices. All employee laptops should be loaded with open-source encryption programs (like http://truecrypt.org). Meanwhile, free smart phone apps are available that enable users to wipe all the data remotely, and even take photos remotely to help reveal the phone’s location.

When connecting wirelessly outside of your office, employees can bypass wireless networks (and the malware and viruses they may invite) by connecting to the Internet via aircards instead. And don’t forget to treat flash drives with the same level of security precaution you do laptops and hand-held devices, including encrypting any data stored on them.

Focus on Policies and Procedures

According to the FBI Cybercrime Unit, protection starts with implementation and enforcement of policies and procedures company-wide. This includes everything from regular updating of security patches, firewalls and antivirus software to ensuring the use of strong passwords (see box at bottom of page).

Please contact us to discuss the specific steps you can take to help guard against cybercrime at you business.

Make Passwords Strong

The importance of creating strong passwords cannot be overstated. Factors such as increased computing power, faster Internet connection speeds and the widespread availability of broken encryption algorithms have rendered passwords of less than seven characters practically useless.

Consider this: A four-character password using only lower-case characters can be broken in less than one second; a six-character password can be hacked in about five minutes. However, a 10-character password using only lower-case characters will require about four-and-one-half years to break, and an 11-character password longer than a century!

Strengthening Customer Loyalty and Retention

Finding new customers is hard enough during good economic times, but it’s exceedingly difficult in today’s challenging economic environment.

Research conducted by Bain and Company bears out the widely accepted idea that holding on to the customers you already have is cheaper and more profitable than acquiring new customers. The research determined that acquiring a new customer is between six and seven times more expensive than keeping an existing one. What’s more, boosting customer retention rates by just 5 percent can result in profit boosts as high as 95 percent, the research noted.

New customer acquisition costs include advertising, promotion and personal selling time; time spent setting up new accounts and helping them get acclimated to your business; and lost profits due to new customers’ price sensitivity and the potential need to discount.

Satisfied existing customers, however, usually don’t have to be promoted to or sold on your business, don’t have to be “broken in,” and they don’t haggle on price. But they do tend to buy more products and services from your business and tell others about their positive experiences with your company.

What Customer Loyalty Means

Given all this, it’s imperative for businesses today to devise concrete plans and strategies that are geared toward building customer loyalty and increasing customer retention. But what exactly does “customer loyalty” mean?

For starters, it means attracting the right customers in the first place. These are usually customers who place a high value on quality and service, and aren’t just shopping for the lowest price. Once you have these customers, you want to get them to buy from you as frequently as possible and in the highest quantities possible, and also to help bring you more customers like them.

Think of this as the three Rs of customer loyalty: Relationships, Retention and Referrals. By building strong relationships with the right customers, you’ll retain their business over the long term, and they’ll refer other similar customers to your company. Here are five strategies to help you accomplish this:

1. Deliver outrageous service. In the book 55 Steps to Outrageous Service, the owner of a health insurance agency describes how he grew his firm from scratch into the largest agency in his state in just three years. This was accomplished primarily by delivering a level of service that far exceeded his customers’ expectations. Would your customers say that the service your business delivers is “outrageous”?
2. Respond to customer complaints quickly and thoroughly. View customer complaints not as problems but as opportunities to make things right and increase customer loyalty. Research shows that customers who feel their complaints were addressed quickly and fairly become even more loyal to those businesses.
3. Create customer loyalty programs. Frequent visitor/buyer punch cards used by restaurants and retailers are one of the most common examples of customer loyalty programs. Brainstorm with your managers and employees to come up with a creative loyalty program that will appeal to your specific customer base.
4. Stay in touch. The old saying “out of sight, out of mind” holds true when it comes to building customer loyalty. Stay top of mind with your customers by making strategic “touches” on a consistent basis. One of the best ways to do this is with an e-newsletter – an easy and inexpensive form of customer communication. Balance your e-newsletter content carefully between sales pitches and value-added information that positions your company as a leading expert in your field or industry.
5. Set clear and realistic customer expectations. Another saying applies here; that is, it’s always better to under-promise and over-deliver. For example, if you know that the fastest turnaround time you can achieve on custom orders is two weeks, don’t promise customers a 10-day turnaround just because they ask for it.

It’s far better to explain your production limitations and commit to a doable delivery date. Then, if you’re somehow able to beat that date, you come off as the hero, rather than the goat if you don’t meet the client’s raised expectations.

Don’t delay: Put these five strategies into practice today – and start reaping the benefits of increased customer loyalty and retention.

Boosting customer retention by just 5% can result in profit boosts as high as 95%.

Social Media and Your Business

In just a few short years, social media has grown from a casual, informal way for friends to connect online to a major societal movement that’s comparable with the explosion of the Internet itself about 15 years ago.

And in the same way that forward-thinking entrepreneurs were quick to seize the business and profit potential offered by the World Wide Web, savvy owners today are making social media tools a part of their business and marketing plans.

Developing a social media marketing strategy starts with evaluating the main platforms to determine which one(s) offer the most marketing potential for your business. The three main social media channels today are:

• LinkedIn: This is usually considered to be the more “business-oriented” of the social media sites. More than 100 million executives in virtually every industry on earth currently have posted their profile on LinkedIn.

LinkedIn is most beneficial for managing public information about your business and yourself; making vital connections with customers, prospects and centers of influence; and conducting competitive intelligence. After you’ve created your LinkedIn profile, join LinkedIn groups that are relevant to your industry and participate in the group forums and Q&As.

• Facebook: This platform has literally become the face of social media, with more than 800 million active users – that’s almost 1 billion – worldwide. You can create a Facebook page for your business and invite your clients to “like” your business. Plan on spending a half-hour or so two or three days a week updating your page and interacting with visitors.

• Twitter: “Tweeting” has become part of the American vernacular. It allows instant contact with your “followers” via short instant messages (or tweets) of 140 characters or less. Use Twitter to stay in regular contact with your customers and prospects and drive traffic to your website, blog, e-newsletter, etc.

Transparency is the name of the game in today’s nonprofit world. The trick is to know what records must be made available – and when.

Public Inspection Requirements

In general, a tax-exempt organization must make its annual IRS returns (Form 990, 990-EZ, 990T or 990-PF) and its application for exemption (Form 1023 or 1024) available for public inspection at its principal place of business.

Form 990 – You must make all parts of your organization’s three most recent Form 990s available -except for Schedule B (Schedule of Contributors), which is provided to the board and is not required to be made available for public inspection. In fact, with the exception of private foundations, organizations are not required to provide the names and addresses of contributors. Otherwise, be sure to include the appropriate schedules, attachments and supporting documents filed with these forms.

Form 1023 or 1024 – This rule applies unless the exemption application was submitted prior to July 15, 1987, and your organization did not have a copy of its original application on this date. Also, an organization that has not yet been recognized as tax-exempt is not required to provide a copy of its pending Form 1023. Note that you can request a copy of your organization’s original application from the IRS using Form 4506-A.

In addition to these general standards, consider the following more specific rules:

Availability – Applicable forms must be made available during regular business hours. You may have a staff member present in the room during the public inspection. However, you must allow the visitor to take notes freely during the inspection.

Requests for copies – Copies must generally be provided on the same day of a request made in person, and within 30 days of receiving a request made by mail (or 30 days after receipt of payment, if advance payment is required for copies). Note that “by mail” includes requests made by fax and e-mail. If the visitor brings his or her own copying equipment (even a cell phone or compact camera) to the place of inspection, you must allow the visitor to make copies on-site free of charge.

Reasonable fees – You may charge “reasonable fees” for copying plus actual postage costs. Currently, the IRS defines reasonable fees as $1 for the first page and $0.15 for each additional page. You may also require that the fees be prepaid before copies are provided.

“Widely Available” Exception

In this age of the Internet, it is important to note that a nonprofit is not required to provide hard copies of its Form 990 or Form 1023 if it has made those documents “widely available,” such as by posting the document(s) on the Internet (either on the organization’s own website or as part of an online database such as GuideStar).

Further, the website must clearly inform readers that the document is available and provide instructions for downloading it. Here, posting documents in a format such as an Adobe Acrobat PDF, which does not require special hardware or software, meets the “widely available” requirement. In addition, no fee can be charged for downloading the information.

Five Steps to Take

Along these lines, GuideStar (http://www.guidestar.org) suggests five simple steps for increasing transparency utilizing your organization’s website:

1. Post your annual report.
2. Post your IRS letter of determination.
3. Post any audited financial statements.
4. Regularly update your site with current, detailed program and evaluation information, including evidence-based evaluation metrics.
5. Post board and key staff members’ names, titles and bios highlighting each person’s skills and contributions.

The Upside of Transparency

Ultimately, transparency can be a real tool for nonprofits, providing an opportunity to share with an increasingly curious public exactly how your organization operates — from finances to policies, practices and governance.

Questions about this important topic? Contact our office today for help in understanding and complying with IRS public inspection rules.

Meeting the Challenges of Transparency

Ultimately, there are circumstances that require transparency – and others that require confidentiality.

If your board hasn’t already, have them write an organizational confidentiality policy. Then hold people accountable to that policy, and make sure that contemplated disclosures are consistent with your policy.

• Educate your board on what matters are considered “confidential” and how these matters should be handled (typically in an executive session).
• Be aware of confidentiality “gotchas,” such as fine print in contracts or grant awards, which may contain clauses requiring confidentiality.
• Determine if the type of client you serve dictates additional confidentiality – e.g., you run programs working with drug and abuse treatment, children, victims of violence or healthcare patients.
• Know what’s open and what isn’t. If you receive public funds, staff personnel records may be required to be open for inspection. This includes performance reviews and salaries of certain staff members. However, it’s critical to know that certain personnel records may not be released (such as health records), so make sure you understand any disclosure rules regarding information about employees.
• Consult with an experienced attorney when legal matters are involved to determine what should be kept confidential (e.g., certain information regarding pending litigation).

Exceptions for Harassment Campaigns

The IRS provides an important exception for organizations that feel they are the subject of a harassment campaign. In the words of the IRS, this occurs when the requests for documents “are part of a single coordinated effort to disrupt the operations of a tax-exempt organization rather than to collect information about the organization.”

An organization that believes it is being targeted by such a campaign may suspend compliance with document requests while it applies for a determination by the IRS. Note that under normal circumstances, requests from members of the news media are not considered harassment, nor is an increase in requests resulting solely from an article or story appearing in the news media.

A special exception allows organizations to ignore multiple requests from a single individual or address without seeking a determination of harassment from the IRS. An organization may disregard requests beyond the first two that come from the same person or same address within any 30-day period, or beyond the first four requests within any one-year period.

Beware the Independent Contractor Trap

Nonprofit organizations, just like for-profit businesses, tend to use independent contractors for a very simple reason: It saves on employment taxes.

But costly problems can occur when you misclassify workers as “independent contractors” when they are actually employees in the eyes of the law. Simply put, the person your nonprofit is paying is not an independent contractor simply because you say so.

Proper worker classification depends upon a set of well-defined rules. This includes both a 20-factor test used by the IRS and a more general seven-factor test used by the U.S. Department of Labor. The penalties for worker misclassification can be crippling, including the imposition of substantial fines, penalties and back-taxes.

Employee or Independent Contractor?

As a general rule, courts look at the following four factors when deciding whether a true independent contractor relationship exists:

1. Who supplies the tools and materials? An independent contractor will supply his or her own tools and materials.
2. Is work done for other contractors? Independent contractors work for more than just one client.
3. Is there an opportunity for profit or loss? A true independent contractor faces the possibility that the job will be performed at a loss, as compared to an employee who is simply paid wages.
4. Who determines how the work is done? A true independent contractor will be able to determine the order, sequence and time he or she decides to work. An employee, by comparison, is bound by the employer’s demands (i.e., work days and schedule).

Two Examples

Example #1 – Suppose you operate a homeless feeding program and your kitchen drain backs up. You call a plumber, an experienced professional who knows his business. While you may have some input or preferences about how he performs the repair, it is highly unlikely that you will stand over the plumber and instruct him on how to fix your drain. For the most part, the plumber is in control of what he does and how he does it.

Verdict: Independent Contractor

Example #2 – Now suppose you hire a designer to revamp your website. You provide the desk, computer, printer and all other materials and information she needs to do the job. You also set the work schedule (afternoons from 1 to 5, five days a week) and you require that your designer do the work using a specific programming language or coding standard. Finally, you require the de-signer to send regular progress reports and attend project meetings.

Verdict: Employee

Guidelines to Consider

To avoid worker misclassification issues, keep these guidelines in mind:

Watch rehires. Be careful about bringing former employees back as consultants or independent contractors. Such individuals are best treated as employees unless the situation clearly and defensibly warrants treating them as an independent contractor.

Get it in writing. Have independent contractors agree in writing that they are not employees and that they expressly waive any right to benefits.

Get an invoice. Ask for a formal invoice with the contractor’s business name, address and other details.

Know the law. Obtain IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Responding to the questions will help you make a clear determination.

Fill out the forms. Ensure that all Forms 1099 are properly filed for workers who are paid $600 or more during the year.

A Final Thought

While many nonprofit organizations are exempt from federal income tax, they must still withhold federal income tax from the pay of their employees, subject to special rules for Social Security, Medicare and federal unemployment (FUTA) taxes. For further guidance, be sure to consult IRS Publication 15-A, Employer’s Supplemental Tax Guide.

Proper classification of workers is critical. Our professionals are experienced in helping nonprofit organizations such as yours remain in compliance.

Red Flag Rules: Lessons to Be Learned

After several years of debate, Congress has finally determined which businesses and organizations will fall under the identity theft prevention law commonly known as the Red Flag Rules. While certain entities are required to develop a written program to spot the warning signs – or “red flags” – of identity theft, nonprofit organizations will not be required to do so.

Still, the lessons to be learned concerning identity theft are real. Whether it’s theft of your organization’s credit profile in order to fraudulently obtain credit or a breach of confidential donor information, identity theft is a real-world concern with dire consequences. Consider these steps for protecting your organization and your donors:

• Hire smart. Identity theft is often an “inside job.” To head off trouble, run criminal background checks on all potential new employees.
• Train your staff. Provide training for your board and staff on records management and security.
• Limit access. Limit access to sensitive information (such as EINs, bank accounts and credit cards) and always encrypt sensitive data on your computer network.
• Review credit reports and statements. Regularly review your organization’s credit reports and carefully scrutinize employee charge card billing statements before they are paid, particularly those accounts for which multiple cards are issued.
• Guard check stock. Avoid using preprinted check stock. If you must use preprinted stock, guard it like cash.
• Compare notes. Talk to peers in your industry. Chances are, many of your risks are similar and you can learn from each other.

A strong system of checks and balances can help prevent identity theft. Ask us about establishing proper internal controls for your organization.

The time has come to put up or shut up when it comes to showing so-called “meaningful use” of Electronic Health Records (EHR). Simply put, you’ll need to prove that you are using certified EHR technology in measurable ways if you want to receive federal incentive dollars.

Make no mistake, the stakes are high. Doctors in a three-physician practice, for example, could earn a total of $132,000 ($44,000 each) through the Medicare program over the next five years. What’s more, physicians with a minimum of 30 percent Medicaid patient volume (20 percent for pediatricians) could earn $63,750 in Medicaid incentives if they meet the requirements.

By contrast, physicians who do not demonstrate meaningful use of an EHR system will see Medicare reimbursements cut by 1 percent a year starting in 2015 until a maximum 5 percent penalty is assessed.

For most practitioners, establishing “meaningful use” means going through the formal attestation process via the Centers for Medicare and Medicaid Services’ web-based Registration and Attestation System (http://cms.gov/EHRIncentivePrograms).

Understanding the Criteria

The criteria for meaningful use will be introduced in a series of three steps over the next five years. Stage 1 (2011 and 2012) establishes the baseline criteria for electronic data capture and information sharing. Stage 2 (expected to be implemented in 2013) and Stage 3 (expected to be implemented in 2015) will expand on this baseline.

To successfully attest, you’ll need to meet 20 out of a total of 25 meaningful use objectives, which are broken out as follows:

• Core Set (15 total objectives) – All 15 of these core objectives must be met. These are fairly straightforward objectives covering everything from using computerized provider order entry (CPOE) for medication orders to recording smoking status and maintaining an active medication allergy list for patients.
• Menu Set (five of 10 total objectives) – You’ll need to choose five from a list of 10 menu set objectives. These cover everything from generating patient lists by specific conditions to incorporating clinical lab test results and using certified EHR technology to provide patient-specific education resources to the patient.
• Clinical Quality Measures (six of 44 total measures) – From a list of 44 possible measures, you are required to report on six total clinical quality measures, three of them core measures. Note that these measures are in addition to the 20 of 25 meaningful use objectives previously noted.

Taking the Plunge

Medicare-eligible professionals will need to have met meaningful use for a consecutive 90-day reporting period before using the Attestation System (the 90-day period must fall within the calendar year). You will fill in the numerators and denominators for the meaningful use objectives and clinical quality measures you have selected and, immediately after submitting your results, you will see a summary of your attestation and whether or not it was successful.

Note that if your initial attestation fails, you do not need to wait 90 days to re-attest. You can select a different 90-day reporting period — even if it varies by only a day or so from the previous period. For instance, barely missing a required numerator for a specific measure may be fixed by changing the reporting period by a few days, a week or a month.

Medicaid-eligible professionals will need to follow a slightly different attestation process. While you will register for the Medicaid programs on the same CMS website, you must attest to Medicaid meaningful use on a different state-specific website. You can check your state’s scheduled launch dates for Medicaid EHR Incentive Programs at http://cms.gov/apps/files/statecontacts.pdf.

An Attestation Check-up

Plan ahead and be ready by giving your practice a dry run before you take the reporting plunge:

Register: Register long before you’re actually ready to attest in order to ensure that any problems are resolved and attestation doesn’t get delayed. Registration in the program doesn’t commit you to anything. Note that registration is for the life of the program, while attestation is every year.

Review: Review the Attestation User Guides on the CMS website. These provide step-by-step instructions for login and completing attestation.

Calculate: Finally, you can enter your core and menu measure information in CMS’ Meaningful Use Attestation Calculator (http://cms.gov/apps/ehr) prior to submitting your attestation to see if you meet all of the necessary measures. Note, the tool does not calculate Clinical Quality Measures, which are reported directly from a certified EHR.

Practitioners who’ve been through the attestation process say the greatest challenge was adopting an EHR system in the first place. Once they had the proper software in place, meaningful use came naturally.

As you face the challenges of a rapidly changing healthcare system, turn to our professionals for valuable guidance.

Physicians who do not demonstrate meaningful use of an EHR system will see Medicare reimbursements cut by 1 percent a year starting in 2015 until a maximum 5 percent penalty is assessed.

EHR and Malpractice

Used properly, an Electronic Health Records (EHR) system can help prevent malpractice incidents and medical errors. Yet, physicians who are not careful when using their EHR systems could actually increase their malpractice liability. Consider these steps to protect yourself:

Highlight critical data. Important information can easily be overlooked when it’s embedded in paragraphs of an EHR’s auto-generated boilerplate. Either highlight positive findings or place them in a separate section of the record to avoid skipping over critical data.

Document changes. When making a change in a record, clearly indicate that you are making the change and why.

Mind the metadata. If it were subpoenaed, would the data in your EHR help you or hurt you in court? When shopping for an EHR system, consider how well the system shows who entered what portion of the record as well as who made each change and when.

Don’t perpetuate mistakes. Be aware that copying and pasting previously entered information can perpetuate any mistakes that may have been made earlier.

Use the right template. Although it’s inviting to let templates do much of the heavy lifting, using the wrong template can seriously impact the chart. Always make sure you’re using the right templates for your specialty and the type of visit.

Don’t shortcut safeguards. Turn off built-in decision-support systems (like drug interaction alerts and exam reminders) at your peril. Ditto for shortcutting the system. A physician who doesn’t use the EHR’s e-prescribing system but instead writes it on a prescription pad, then enters it into the EHR at the end of the day, doesn’t receive any safety alerts until after the patient has the prescription.

Pay attention to the patient. Don’t allow your focus on your EHR to divert your attention from the patient. If you’re so busy concentrating on learning how to use your EHR, you may miss the subtle signs and symptoms that a patient presents with. Schedule longer appointment times while you’re learning.

Steps to Becoming a Medical Home

Accomplishing meaningful use of Electronic Health Records (EHR) can also serve as a launching pad for attaining recognition as a Patient-Centered Medical Home (PCMH) — a strategic move for many primary care practices.

Just as it does to spur EHR adoption, the federal government is providing incentive funds to offset the cost of implementing the technology necessary to become a PCMH. Several states are conducting medical home pilot projects, which include enhanced physician payment to account for increased service coordination and other activities.

Depending on your state’s particular program, reimbursement could include a care coordination payment plus opportunities for shared savings, in addition to existing fee-for-service or capitation models.

A Technology Overlap

The technology needed to accomplish meaningful use of EHR is, for the most part, the same technology needed to become a PCMH. Here, it is critical to understand that this is a practice-level designation. Individual physicians will not be approved for medical home designation — it is the practices that will be recognized.

Ultimately, a practice must demonstrate nine specific “functionalities” to become recognized as a PCMH by the National Committee for Quality Assurance (NCQA). The scoring is complicated, but basically offers certification in one of three levels.

To qualify for Level I designation, a practice doesn’t even need to have an EHR in place. Level II designation does require an EHR system or e-prescribing capabilities, while Level III requires inter-operable technology that allows a practice to both send and receive data.

PCMH certification addresses the following nine standards:

1. Access and communication
2. Patient tracking and registry functions
3. Care management
4. Patient self-management support
5. Electronic prescribing
6. Test tracking
7. Referral tracking
8. Performance reporting and improvement
9. Advanced electronic communications

Steps for Getting There

Aligning your practice with the parameters needed to become recognized as a medical home will not occur overnight. But again, if you’ve implemented the technology and the internal systems to accomplish meaningful use of EHR, you should be well on your way. Consider these key steps to help guide you:

Read up. Educate yourself on the PCMH initiative by reading Joint Principles of the Patient-Centered Medical Home, which outlines the basic tenets of becoming a PCMH and was drafted by the American Academy of Family Physicians, the American College of Physicians, the American Academy of Pediatrics and the American Osteopathic Association. Also attend a PCMH program webinar, join a Regional Provider Symposium or simply sign up on a PCMH provider listserv to keep up to date.

Find out what your state is doing. Find out if your state has a defined, state-developed or specific state-recognized process. The American Academy of Family Physicians’ AAFP Government Relations 2011 State Legislation: Medical Homes Report provides a snapshot of state-level developments.

Focus on the essentials first. Experts agree that having e-prescribing, patient registries, a patient portal and the ability to perform measurement and tracking are essential first steps.

Get creative. If your current EHR system lacks patient registry functionality, for example, you could certainly wait until your vendor creates a registry plug-in. Or, you could use off-the-shelf software that culls patient data to create a database.

Check yourself. Download the PCMH checklist (a PDF file) from the American Academy of Family Physicians (http://aafp.org/pcmh) to find out where you stand on the journey to becoming a medical home.

Test yourself. TransforMED offers a free medical home self-assessment (http://transformed.com/MHIQ). After answering 12 questions, you’ll have a better sense of where your practice stands and receive recommendations that directly relate to your score.

The Road Ahead

The medical home concept has certainly evolved since the American Academy of Pediatrics introduced the concept in the late 1960s. At present, some 44 states and the District of Columbia have passed laws in support of PCMHs. As you work toward meeting EHR meaningful use requirements, it may make sense to also pursue PCMH. Ultimately, both can result in higher quality health care and increased revenue for the practice.

Additional Resources:

• Patient-Centered Primary Care Collaborative – http://pcpcc.net
• National Committee for Quality Assurance – http://ncqa.org
• American Academy of Family Physicians – http://aafp.org/pcmh
• U.S. Department of Health and Human Services PCMH Resource Center –http://pcmh.ahrq.gov

Is It Time to Wage a Collections Campaign?

With year-end fast approaching, practices behind the receivables 8-ball will need to wage an all-out collections campaign to successfully close out the books. Consider these strategies for managing overdue accounts:

Start at the start. Managing accounts receivable starts with accurate information. Create a detailed accounts receivable report: a simple aging report as well as aging by insurance company and, separately, for patient receivables. Also include a calculation of the “days charges in receivables.”

Dedicate the resources. Put a tenacious employee on the case pursuing un-paid claims. A few hours on the phone could yield some impressive results.

Get involved. The physician is the ultimate authority figure. If your front desk or billing person has gotten nowhere, consider confronting patients yourself about payment issues.

Send the “10-day” letter. Instead of sending multiple statements over time, consider sending one statement showing the patient balance — and then stop. The next communication should be in the form of a 10-day collection letter notifying the patient to call within 10 days to discuss the account. Experience has shown that a patient who does not call within the 10-day period is probably not going to settle up.

Turn it over … with care. Collection agencies certainly have their place. The trick is to not turn accounts over too soon, when the money may still be recoverable by you. If an agency is successfully collecting from your accounts at a rate more than the industry standard of 17 percent to 20 percent, you may be turning those accounts over too soon.

Control the terms on payment plans. If you send delinquent patients a blank payment agreement form (or one with a default minimum of, say, $25 a month), don’t be surprised if they choose the $25 option. Instead, structure payment plans around a monthly payment of 10 percent of the amount owed, with the goal of patients paying the total amount within one year.

Interest deferral on Series EE bonds. Series EE Bonds dated May 2005 and after earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE Bonds are sold at half their face value. For example, you pay $25 for a $50 bond. The bond isn’t worth its face value until it has matured. Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.

The interest on Series EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If the election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, the election won’t be made so that the benefits of tax deferral can be enjoyed, particularly since the income itself is only received on a deferred basis. On the other hand, if the bond is owned by a taxpayer with little or no other current income it may be beneficial to incur the income in low or no tax years to avoid its inclusion in the future. This may be the case with bonds owned by children, although the “kiddie tax” (for children under age 19, and children age 19-23 who are full-time students) may apply, causing higher parental tax rates to apply to their income.

If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there is a procedure under which the election can be canceled.

If the election is not made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond, as discussed below). The bond continues to accrue interest even after reaching its face value but at “final maturity” (after 30 years) interest stops accruing and must be reported (again, unless it was exchanged for a Series HH bond).

Series HH bonds. Before Sept. 1, 2004, owners of Series EE bonds could exchange them for Series HH bonds. Essentially, HH bonds offered the opportunity to defer EE bond interest for an additional 10 years.

Series HH bonds pay interest semiannually by check at a variable rate set similarly to the rate on EE bonds. This interest is reportable when received.

However, if the interest on the EE bond or bonds exchanged for the HH bond had been deferred, the deferral continues until the HH bond is redeemed, matures, or is otherwise disposed of. HH bonds mature after 10 years. HH bonds bear a legend showing how much of the issue price represents deferred interest.

Inflation-indexed Series I bonds. Series I savings bonds are designed to offer a rate of return over and above inflation. The earnings rate is a combination of a fixed rate, which will apply for the life of the bond, and the inflation rate. Rates are announced each May 1 and Nov. 1.

Series I bonds are issued at par (face amount).

An owner of Series I bonds may either: (1) defer reporting the increase in the redemption (interest) to the year of final maturity, redemption, or other disposition, whichever is earlier, or (2) elect to report the increase each year as it accrues. If (2) is elected, the election applies to all Series I bonds then owned by the taxpayer, those acquired later, and to any other obligations purchased on a discount basis, e.g., Series EE bonds . The taxpayer may not change to method (1) unless he follows a specific IRS procedure.

State income tax exemption. Although the interest on EE, HH, and I bonds is taxable as described above for federal income tax purposes, it is exempt from income state taxes.

You are probably referring to qualified tuition programs, also known as 529 plans (for the Internal Revenue Code section that provides for them), which allow prepayment of higher education costs on a tax-favored basis. There are two types of programs: prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won’t be starting college for some time; and savings plans, which depend on the investment performance of the fund(s) you place your contributions in.

You don’t get a federal income tax deduction for the contribution, but the earnings on the account aren’t taxed while the funds are in the program. You can change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without Federal income tax consequences. It should also be noted that the beneficiary of the 529 Plan may be someone other than your child or grandchild as the beneficiary does not have to be related to you.

Distributions from the program are tax-free if they don’t exceed the student’s qualified higher education expenses. These include tuition, fees, books, supplies, and required equipment. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.

Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax will also be imposed.

Eligible schools include colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. This includes nearly all accredited public, nonprofit, and proprietary (for-profit) postsecondary institutions. A school should be able to tell you whether it qualifies.

Although you will receive no Federal tax benefit now by contributing to a 529 Plan, funds contributed to Colorado’s Qualified State Tuition Program can be deducted on your Colorado tax return. However, the contributions are deductible on your Colorado income tax return only if the monies used for the contributions were included in Federal taxable income.

You may participate in a 529 plan sponsored by a state other than Colorado. However, contributions to those plans are not deductible on the Colorado tax return. Additionally, if you have a plan in Colorado which you roll over into the plan of another state, you will need to recapture that income on the Colorado tax return in the year in which the roll over occurs. A plan rolled over from another state into Colorado, however, does not qualify for the deduction as it was not included in Federal taxable income that year.

The value of the principal amount which you put into this fund will generally not by taxable when withdrawn or distributed. It will, however, be taxable on your Colorado return if you previously deducted the contributions and the withdrawal is not made either to pay for qualified higher education expenses or as a result of the beneficiary’s death or disability, or as a result of receiving a scholarship.

CollegeInvest is currently the only qualified tuition program in Colorado. Some of the qualified plans offered by CollegeInvest include the Direct Portfolio College Savings Plan, Scholars Choice College Savings Program, Stable Value Plus College Savings Plan, and Prepaid Tuition Fund. Rollovers between these qualified plans are not considered a taxable distribution, not are they considered tax deductible contributions. More information for CollegeInvest can be found at www.collegeinvest.org or you may call 800-448-2424.