Preparing for a Disaster

Planning ahead to prevent the loss of important financial information is critical to reducing the cost and time needed to recover from a disaster.  A disaster can be large or small and can be natural or man-made.  Examples include an earthquake, fire, flood, computer hacking, accidental deletion, and identity theft.  In addition to planning for your business, be sure to also include your personal finances and digital libraries.  Good practices and safeguards I recommend include:

• Offsite computer file back-up.  For home computer backup, consider an online service such as Mozy.com that automatically backs up your data several times a day.
• Computer firewall, anti-virus, and anti-spyware programs that are kept current with at least weekly scans.
• Email spam and phishing filters.  Also, be sure never to click on suspicious file attachments, even if the email is sent by someone you know.  I will occasionally receive dangerous email attachments from friends who have had their email address book hacked.
• Use a login password to access your computer with a screen-saver that will re-lock your computer after a period of inaction, such as 10 minutes.
• Do not let the internet browser save your usernames and passwords associated with your financial accounts.  Keep your usernames and passwords private.  Use the "InPrivate Browsing" feature when using public-access computers, and then be sure to completely logout of the site and clear the browsing history.
• Use paperless statements and automatic bill paying services.  This eliminates private information from sitting in your mail box and paper statements from being accessible at home.  Shred old records and scan those that you wish to keep.
• Don't give out personal or financial information over the phone or email unless you initiated the contact or know who you dealing with.  Remember the IRS and your financial institutions won't contact you for such information.  They already have it!
• Make a video recording of your home, your valuables and business equipment for insurance purposes.
• Plan for how you will contact your customers, employees and family members, and where you will meet.
• Have available 72-hour emergency kits with some food, water, lighting, shelter, and medical supplies.
• Learn how to perform CPR and to handle minor medical emergencies.

Several good resources are available with information to help you take action to prepare for disasters.

• Federal Trade Commission Identity Theft Site:  http://www.ftc.gov/bcp/edu/microsites/idtheft//
• Utah Government Identity Theft Reporting Information System (IRIS):  http://www.idtheft.utah.gov/
• Internal Revenue Service:  http://www.irs.gov/businesses/small/article/0,,id=180547,00.html
• Be Ready Utah:  http://bereadyutah.gov/
• U.S. Homeland Security:  http://www.dhs.gov/index.shtm
• American Red Cross:  http://www.redcross.org/
• Small Business Administration:  http://www.sba.gov/services/disasterassistance/disasterpreparedness/index.html

Consider Paying Corporate Dividends Before 2011

Dividends paid by C corporations are taxable to shareholders and are not deductible to corporations.  This is the classic "double tax" treatment of C corporation profits.  For this reason most privately-owned C corporations do not pay dividends.  Dividends are ordinary taxable income, but since the Bush tax cuts of 2003, the maximum qualified dividend tax rate has been 15%, equal to that of long-term capital gains.  The Bush tax cuts expire at the end of 2010.  If Congressional action is not taken, the maximum dividend tax rate would increase to 39.6% for dividends received after 2010.  Pres. Obama has proposed that the maximum dividend tax rate not exceed 20%.  The post-2010 tax rate is hard to predict given the dysfunction of our national leaders.  Furthermore, the so-called health care reform law will add an additional 3.8% Medicare tax to dividend income beginning in 2013, for individuals having modified adjusted gross income of $200,000 or more ($250,000 for joint filers).  Given the higher, possibly dramatically higher, dividend tax rates in the near future, should your corporation pay dividends before 2011?

There are several specific circumstances where paying a dividend could make sense.  Additional financial and tax analysis is necessary to determine whether the ideas below are proper for your circumstances.

1. The C corporation has accumulated excess funds that are not needed for business purposes.  An accumulated earnings penalty tax of could be imposed by the IRS on the corporation.  The penalty tax rate is equal to the maximum dividend tax rate.  Paying a dividend of the excess accumulation avoids the risk of the penalty tax.
2. The C corporation has sold assets and has retained the after-tax sale proceeds to invest.  If the investments produce interest, dividends, royalties, rents, and annuity income, and such income equals 60% or more of the adjusted ordinary gross income of the corporation, then the corporation must pay the personal holding company penalty tax.  The penalty tax rate is equal to the maximum dividend tax rate.  Distributing the investments in liquidation of the corporation eliminates the annual problem of the personal holding company tax.  Note, however, that the corporation could recognize a taxable gain on the dividend distribution if the investments have appreciated in value.
3. The S corporation was previously a C corporation having accumulated earnings and profits.  If the S corporation earns passive investment income in excess of 25% of gross receipts, then a penalty tax applies.  Furthermore, the S election is lost after three consecutive years of excess passive income.  Passive investment income includes interest, dividends, royalties, rents, and annuity income.  The penalty tax is equal to the maximum C corporation tax rate, currently 35%.  A special election is available to distribute the accumulated C corporation earnings as profits as a taxable dividend.  The election and distribution will purge the S corporation of the problem of accumulated C corporation earnings and profits and enable the S corporation to avoid the penalty tax and potential loss of the S election.
4. The C corporation has strong cash flow, low debt, and currently pays dividends.  A special dividend that is financed with debt could be paid in 2010 in order to capture the lower tax rates.  The special dividend is in essence a prepayment of future dividends.