Frequently Asked Questions

Q. What services does Lear & Pannepacker offer?

A. Ours is a full-service accounting firm that can assist individuals, businesses and not-for-profit institutions with a variety of tax, financial planning, administrative and other services.

Q. Does that include the preparation of individual tax returns?

A. Yes. L&P prepares tax returns and other filings for individuals as well as business clients.

Q. Should my business be a "C" corporation, an "S" corporation or a limited liability company?

A. The correct decision will depend upon your specific needs and circumstances. In general, most small businesses elect to be either an "S" corporation or LLC in order to take advantage of the pass-through of income and losses to the owners. The LLC has become popular as it has most of the advantages of the "S" corporation with added flexibility in ownership, distributions and structure. We recommend you summarize your business needs and objectives, and we can assist you in evaluating the cost/benefit associated with each choice of entity to ensure the best long-term decision for your business.

Q. What are the differences between an employee and an independent contractor?

A. The federal and state tax authorities determine whether an individual is subject to employment taxes on a case by case basis, using facts and circumstances and comparing them to tax regulations and definitions. In general, an independent contractor is someone hired by you who is not engaged in the same business as you, does not work exclusively for you, and is not under your control or supervision. They should bill you regularly in a professional manner, have business cards, maintain a business address, telephone number or web address, be registered and pay taxes with the state they operate in, and otherwise conduct their business in a manner consistent with a legitimate self-employed individual. If there is any doubt as to these facts, the tax authorities are likely to reclassify these persons as employees and assess tax for unreported payroll.

Q. What constitutes "doing business in" another state for purposes of business reporting purposes, and do I have to file an additional state return?

A. Each state defines "nexus" differently based upon its state laws. However, the states have a goal to collect as much revenue as possible, and they often interpret the interstate commerce laws liberally to capture business activity. If you send sales persons into a state for purposes of soliciting business, you may have to file franchise or similar taxes. If you or your employees have a physical presence within a state, however briefly, you may become subject to income taxes. Taxpayers should consider filing these returns for general compliance, but also to trigger the statute of limitations and permit offsetting credits on their primary state tax returns.

Q. How long am I required to keep records to support my tax deductions?

A. The Internal Revenue Service generally requires that you maintain records to support your tax returns for three years from date of filing. Additionally, payroll and related tax filings have a four-year requirement, and certain other deductions can be as long as seven years from date of filing. We recommend you maintain complete records, including all pertinent supporting documents, for a minimum of five prior years (plus the current year) as the IRS may extend the statute of limitations due to late payment or disputed non-receipt of filed returns. Furthermore, we recommend you maintain certain primary tax records, including copies of all tax returns and a computerized accounting general ledger for a minimum of an additional five years. You should also note that certain assets that are carried forward to future years, such as fixed assets and marketable securities, should be kept until five years after the date sold or disposed.

Q. Should I buy or lease my business automobile or other equipment?

A. Generally, it does not make a difference for tax or financial reporting purposes. There are rules regarding the capitalization of leases that requires businesses to report the lease as if it were a purchase, with depreciation and interest. We recommend you evaluate the terms of each alternative and make a decision based upon the best financial option.

Q. Does it make good financial planning sense to pay off my mortgage early?

A. Many people are surprised that the answer if often no. Mortgage debt is "good" debt in that it matches a long-term appreciating asset with a long-term debt. Furthermore, it is tax deductible and usually at a lower interest rate than other types of debt. It often makes more sense to maximize 401(k) and pension alternatives and pay your mortgage on time.

Q. When does it make sense to withdraw my retirement funds early to a) pay down credit card and other debt; b) start a new business; c) use the funds for any other non-retirement reason?

A. Excepting extraordinary circumstances, never. The combination of federal and state income taxes, plus the 10% early withdrawal penalty, usually cost significantly more in the long run than most people anticipate. Whenever possible, alternative sources of funds (budgeting, credit card management programs, loans, pension loans, etc.) should be used first to preserve the pension asset. The IRS does provide relief from penalties for specific needs, including first time homebuyer and medical reasons.

Q. How do you charge for your services?

A. For most assignments, Lear & Pannepacker's fees are based on hourly rates that vary depending on the experience and capacity of the professional performing the service. We will provide an initial hour of consulting at no charge, during which we will come to understand the nature of the work you need performed. We outline the anticipated costs in an engagement letter to clients.

Q. What are your normal payment terms?

A. Lear & Pannepacker invoices on a monthly basis and are due upon receipt. Balances over 30 days past due are subject to interest charges of one and one half percent per month.

791 Alexander Road, Princeton, NJ 08540
Ph: 609-452-2200, Fx: 609-452-1065
email: info@lp-cpa.com