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Online Issues > February 2000 > letters
Letters Disagrees With Tax Planning Tip I do not agree with the recommendation to pay IRA fees out of separate funds stated in “Tax Planning Tips for 2000 and Beyond,” (JofA, Nov.99, page 10). What percentage of taxpayers gets any tax benefit from miscellaneous deductions subject to the 2% rule? If the fee is paid out of IRA funds, you do lose the tax deferred earnings on the fee, but you get a tax deduction (in effect) since the taxable income will be less upon withdrawal. William A. Cook, Jr. More About IRA Fees “Tax Planning Tips for 2000 and Beyond” (JofA, Nov.99, page 10) recommends paying IRA fees from separate funds, rather than from the IRA. This is desirable only if the fee is deductible from taxable income and reduces the taxpayer’s tax liability. But, in many instances, because of the 2.5% reduction in miscellaneous itemized deductions or if deductions are not itemized or no tax is due, paying the IRA fee does not reduce taxes for the year and is wasted. Charging IRA fees to the IRA generally reduces taxes, as the fees reduce taxable distributions later. Paying the IRA fee from separate funds is but 3% better than having the IRA pay the fee. The future value of nondeductible fees paid with non-IRA funds is 34% greater than if the IRA paid the fees. It is doubtful the taxpayer or the CPA will be able to notify the IRA custodian each year—just before the fee is charged—who is to pay the fee to save only 3% of a small fee. It’s better just to charge it all to the fund, except in the few cases where the taxpayer’s miscellaneous itemized deductions are almost always sufficient to reduce taxes. Victor Trivett, CPA Cash Gap: Interest Clarification I believe the interest saved per day in the first example of “Managing the Cash Gap” (JofA, Oct.99, page 27) has been miscalculated. Assuming the interest is charged at an annual rate of 8%, the amount of interest saved per day on borrowing $108 million would be $23,671, not $96,000. The total interest of $8.64 million, which represents a year’s interest, should be divided by 365 days, not 90 days, to get the correct daily rate of interest. Ann Metcalfe, CPA Author’s reply: Since I have received several e-mails about this same issue, perhaps I did not explain this as clearly as I could have in the article. The cash gap represents the number of days on average between when cash goes out to purchase goods and when cash comes in. If a company has a 30-day cash gap, it must finance 30 days worth of goods all the time. This means it must pay interest for the whole year for 30 days worth of goods. Consequently, the interest cost is for the whole year for the dollar investment in goods caused by the 30-day cash gap. In the example in the article, the company borrowed enough to cover 90 days worth of goods (90 x $1.2 million = $108 million), financed at 8%, for an annual cost of $8.64 million. The number of days in the cash gap tells how many days worth of goods must be financed, but the amount must be financed for the whole year. Shortening the cash gap by one day reduces the amount that must be financed, but it does not reduce the number of days that must be financed. Germain Boer, CPA Newly Formed Law Firm Raises Questions The Highlights item, “E&Y First in U.S. to Ally Itself With Law Firm,” (JofA, Dec.99, page 4) reports that the new law firm of McKee Nelson Ernst & Young will be “fully independent,” and exempt from current fee-sharing restrictions because Ernst & Young has made a loan rather than an equity contribution. Both conclusions are questionable. If E&Y is not a partner in the law firm, the inclusion of its name in the new firm’s name raises questions under the rules prohibiting misleading and deceptive firm names. If, however, E&Y is a partner, questions arise under the rules on who may be a partner in a law firm. In any event, your conclusion that the law firm will be “fully independent” is, to say the least, nave, as well as premature. L. Harold Levinson JofA Looking Good The online JofA looks great! I’ve appreciated all the changes to the JofA over the last few years, and this is a further improvement. Great job! I do, however, have a suggestion. Some articles with charts or tables have them within the text, while others require a link to another Web page. I recommend that you make them consistent and include them in the body of the article. It is just as inconvenient to click a link to view a chart under discussion as it would be for the print version to list all charts in the back of the issue. Patrick T. Brooke, CPA More About JofA Online The JofA Online is great! If you ever have daily or weekly e-mail updates, as most other publications do, I would like to subscribe. Larry G. Stolte, CPA
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