Making Work Pay Credit Woes

What has the making work pay credit done for you? Most of us received the equivalent of $800, through reduced withholding. The reduced withholding was just a vehicle to get the money back into the taxpayer's hands quicker. It was really a reduction in the FICA tax, but that was how they were going to pass it down to the masses, instead of issuing checks. This way they could assure that the credit only went to hard working Americans. Right.

How many of you married couples changed your W-4 withholding when this happened? So far this busy season, every married, no kids couple owes something close to $800. Dandy. We all know that most people think the competence of the accountant determines whether or not they get a refund. Now likely we will lose all of our married, no kid clients because they think it is our fault.

For a simple way to avoid this: When you get your next pay stub, bring it to me (both your's and your spouse's, if applicable). Ask me -- am I withholding enough tax? I can help.

Stimulate the Economy

I just read Mark Cuban's latest blog post (http://blogmaverick.com/2010/01/31/the-simplicity-test-a-simple-policy-guide-for-job-growth/) about stimulating small business. As a CPA, I have often joked that every stimulus plan presented seemed to be drafted by accountants or lawyers, as we can benefit by all the changes, and businesses have no idea what they are, or what the heck they need to do to comply, or take advantage of the new laws/proposals.

Honestly, I have several small business clients (I only do this part time), and none of the stimulus bills have done anything for any of them. One of them did better in 2009 than 2008, but that is really only because he willed himself to do better by working harder, longer, etc. What has any bill done for any of them?

Let's look at Taxes. The federal government can say what it wants, and while it hasn't directly meant to hurt businesses - what has it done?

1. Offered to pay part of Cobra. Bonus for the employee only if they use it (most don't). For the employer? We have to completely change our Cobra process. Twice as much paperwork. Thanks.

2. Making Work Pay Credit. Woohoo. We lowered everyone's withholding so they could get an extra ($40 or so) a month. Now everyone has to pay tax (or has a small refund) and is blaming us (because your tables didn't account for 2 income families properly - how many one income families, by choice, are there left out there -- really?). Thanks - we're the bad guy now, and we doubled our work on payroll processing this year.

3. Bank Bailouts. If you think any of this money went to small businesses, why don't you pose as a small business, decent cash flow, wanting to buy a new piece of equipment that will truly help your business. See if one of the banks that were "bailed out" will give you a dime. Normally all small businesses are asked to personally guarantee all loans by taking out home equity loans. Good luck finding any equity after the housing meltdown.

4. Credit Card Reform. In light of the pending reform, all major banks did a systematic reduction of available credit, and the remaining banks noticed that your percentage of credit was severely changed, and raised your rates. Kudos, now we have less credit at higher rates, that sure helped us. Also, new rules do not effect cards used for business.

5. Extended unemployment. Well this one might have helped a little. Not in an actual business way, but it gives us the ability to sleep at night, when we had to layoff good people.

One of the commenters on Mr. Cuban's blog mentioned a test drive instead of unemployment. This is very insightful. There are actual incentives to hire someone on public assistance (WOTC), but allowing a test market, or even a supplemental to unemployment (without effecting benefits) would be very useful.

The question on most perspective employer (small business) minds is whether they can afford a new employee. Will the time training the new employee be crippling, as usually this is the time when they cannot generate as much income as you are paying them. Other often thought questions - is this a guy that truly is a victim of layoff, downsizing, or "the guy" that employers used "downsizing" as an excuse to get rid of the bad seed. We've all been there.

Kudos for you Mr. Cuban for an insightful look at the problems of small business. Why don't you take on solving college football and the BCS now.

Charitable Donations - State of Idaho

(Updated to reflect new Idaho limits!)

Today I got an e-mail soliciting donations for the college I attended (Go Vandals!). It is asking for a pledge of $1,000 for the coaching excellence fund. Someone asked me how this effected their taxes, so I thought I would pass out the analysis for all you to ponder:

In the state of Idaho we have a credit for donations to educational entities in the amount of $250 for a $500 donation for a single person ($500 for a $1000 donation/married). The credit is not excluded from your itemized donations, so you get a double benefit from the donation (if you itemize your deductions). If your effective tax rate (married) is 25% (married AGI of greater than 67,900 less than $137,050, single $33,950-$82,250), you will have a reduction in taxes of $750 (married), or $500 (single). The number goes up slightly if you are above $137,050/$82,250. You can maximize the credit and tax savings as a married couple by giving $1000 a year (tax savings of $300 for 25% bracket). There would also be about a $70 state tax savings.

So what this is saying is that you can donate to most schools (the way the credit is worded, most schools or school organizations are covered), and effectively donate $1000 to the school and only be out of pocket around $180 (married) or donate $500 and only be out of pocket about $90 (single). Many employers have a policy (I know the two big accounting firms I worked for did) that they will match your donation, up to a certain amount. If this is the case, your $180 just donated $2000 to your school.

In Idaho we have another similar credit for donations to youth and rehabilitation facilities. The cool thing about this credit is that (with several of the entities) you can donate in-kind, or donate all the stuff that is sitting in your garage or storage area that you will never use. My wife and I have a policy, "get-one, donate-one." So whenever I get new clothes, I donate something. I keep a bag in my closet, and fill it as new clothes are purchased. Before the end of the year, I itemize the bag, give each item a value, and drop it off at the Idaho Youth Ranch (get a receipt). You want to donate (at least) $200 single /$400 (married) worth (thrift-store price) of stuff to maximize the credit. You get the exact same benefit (donate $200 single/$400 married get credit of $100/$200), and it is also included in your itemized deductions (if you itemize) as well. So that $162/$325 tax savings is actual money you will save, or get refunded. And you donated to a good cause.

These facilities are specifically named:

• Anchor House, Coeur d’Alene

• The Arc, Inc., Boise

• The Children's Home Society of Idaho, Inc., Boise

• Children's Village, Inc., Coeur d’Alene

• Dawn Enterprises, Inc., Blackfoot

• Development Workshop, Inc., Idaho Falls

• Gem Youth Services, Inc., Emmett

• High Reachers, Inc., Mountain Home

• Hope House, Inc., Nampa

• Idaho Drug Free Youth, Inc., Coeur d’Alene

• Idaho Elks Rehabilitation Hospital, Inc., Boise

• Idaho Youth Ranch

• Kinderhaven, Sandpoint

• Learning Lab, Inc., Boise

• Magic Valley Rehabilitation Services, Inc., Twin Falls

• New Day Products, Inc., Pocatello

• Northwest (North Idaho) Children’s Home, Inc.

• Opportunities Unlimited, Inc., Lewiston

• Panhandle Special Needs, Inc., Sandpoint

• Project P.A.T.C.H., Planned Assistance for Troubled Children

• Project Safe Place

• Shepherd's Home, Inc., McCall

• Transitional Employment Services for the Handicapped,

Coeur d’Alene

• Walker Center, Gooding

• Western Idaho Training Co., Inc., Caldwell

• Women's and Children's Alliance

• Winchester Occupational Workshop, Winchester

If you have any questions, about how this will specifically help you, I can quantify it for you pretty easily. Just let me know,

Go Vandals!

-Al

Fairness and the Tax Code

I'm sure you've all heard the story about the group of friends that paid their dinner bill like their taxes. 4 people ate free, and the rest split it up ($100 bill) - $1, $3, $7, $12, $18, $59. They get $20 off, and can't divide up the savings without making everyone angry. I guess it was meant to say "give the rich a break, of course their going to save more money with a tax break, they pay more."

I think it paints the wrong picture of our tax code. I've heard it referred to as, "it can either be fair or simple, not both." To most who label it as unfair, they don't take into account all taxes -- they pick and choose the taxes they think are unfair, and single out the biggest variances. Let's look at the 10 people eating dinner:

The 4 people eating for free (the poverty level) -- this implies that some pay no tax, when that is entirely false. The income tax threshold for a single person is roughly $9,350. This can vary, as they may qualify for credits, and receive public assistance to offset some of that. They have no investment income. Of course, they pay 7.65% tax for FICA and Medicare (their employer wouldn't pay their portion without them - we'll add that too) - $1,430.55. I would venture to guarantee that they spend half their take home on taxable (sales tax) items. Let's just say another 6% of half their income, or $280.50. You can probably assume that 2% of their rent goes toward property taxes (let's say rent is 30% of salary - $56.10. So each of those 4 people are paying roughly $1767.15 in tax, and making as much as $10,065.28 (grossed up for employer match) -- or approx 17.6% in taxes.

Now look at Joe Schmoe middle class (the guy who paid $7). He makes 50k, owns a 150k home, all his investments are tax deferred (401k, IRA). He itemizes $12,500 in tax/interest, $1,500 in property tax (1%). His income tax would be approx $4,660. He spends 35% of his income on taxable items (6% sales tax) -- or spends $17,500 and pays $1,050 in tax. His FICA/medicare would be $7,650. His total taxes are $14,860 - with total income of $53,825 (grossed up for employer match) or 27.6%.

Now the high-roller -- let's just say he makes 400kin income, lives in a 750k home, and has investment income (1/2 dividend, 1/2 interest) of 100k. He itemizes ~ $65,000 in taxes/interest. He is going to pay approx $98,431 tax on his income, an additional FICA/medicare of $47,956.8. He will have tax on his investment income of $25,000. We'll assume that he pays 2% property tax on amounts greater than 150k, and 1% on first 150k -- or $13,500. Let's say that they spend 25% of their employment income on taxable items (sales tax) -- or $100,000, and the sales tax rate is 6% ($6,000 in tax). To sum it all up, $536,356.80 in income (grossed up by employer FICA + investment income), and a total of $190,887 in taxes (35.5%).

So to those who talk about the vast inequities I say, "Balderdash!" the poverty level is still paying about 18%, middle class 30%, and wealthy 35%. Sounds more fair than anyone wants to admit.

Walmart - What do they really do for the economy?

I just read Brian Cuban's blog post on Walmart (http://tinyurl.com/ya2odmk), and it brought me back to the same old discussion. Does Walmart add or take away from the economy?

I read (scratch that - "listened to...") Sam Walton's book, "Made in America" (http://bit.ly/6pDx4b) quite a few years ago, when travelling frequently. His ideas were not new, he was just a very astute business man. Instead of pricing for what people will pay, he always priced for the lowest price he could sell it for -- no "loss leaders" no gimmicks, just low prices. Several other "big box" stores offered discount items. Less quality in the name of low price - K-Mart, for example. For eons, grocery stores have offered "store brands" for a cheaper alternative. For those of us that have tried "store brand" soda, when we really wanted a "Coke" know that they are not the same, they are just cheaper. While K-Mart generally concentrated on big markets, Walmart moved into smaller towns. I was living in Moscow Idaho (population ~ 20k + 8k university students) when they opened, and I saw a few of the business that went under because of Walmart. There was the typical outrage-mostly from the same people that are outraged by all big business. I actually knew someone who worked at one of the stores, and later went to work for Walmart. Actually she still works for Walmart - some 15yrs later.

When she worked for the "mom & pop" store, she made minimum wage. Even less than that, actually, as she was subject to a state minimum wage that was less than the federal minimum wage because the business employed fewer than 10 people (or close - I can't remember). She didn't have health coverage, or retirement. The "mom & pop" had its good aspects -- poor pay or not, they were a close knit family -- they had Christmas parties at the owner's house, and knew the families of all employees. Straight out of "A Wonderful Life" less the afore mentioned really bad wages, and lack of health care or retirement packages. The sad part was that the "Mom & Pops" didn't pay better, offer healthcare or retirement not because they were hoarding money for themselves, but because they couldn't afford to. They had no secret formula to riches that Walmart took from them, they had a small store, made enough money to get by, and it required a few minimum wage employees so they didn't have to work every waking hour at the store - that's it.

Walmart had the advantage of economies of scale. Purchasing power, group rate healthcare plans allowed them to sell the same things much cheaper, and offer better benefits. They could stream line their delivery to minimize shipping charges, negotiate contracts that allowed them to return any unsold items (if they got bad products). They could also sell lesser quality items, similar to the items that the "mom & pop" were selling much cheaper (this is where the China items came to play). All in all, Walmart actually had a plan, and stuck to it. The only plan most "mom & pops" have is to open a store & sell things. Walmart not only wanted to sell things, their plan involved what to sell, how to sell, how to get what to sell, how to get what not in the who now -- understand?

There is no denying the purchasing power that was given to the nation's "poor" by Walmart. The question is "Does it really hurt the local economy to buy from China (as opposed to American vendors)?"

How could it hurt the local economy? Those mom & pop shops were not buying anything from the local economies - they were buying from distributors who were buying from wherever the products were produced. Look on the back of the tongue of your Nikes, or the tags on your shirts/pants and see if they say "Made in America." More likely "Hencho in Mexico," China, Tawain, or Vietnam The employees now have health care, and retirement (available - most minimum wage employees do not take advantage of what is offered). The huge monstrosities are now a great source of property tax revenue for the local economies without the local face (that local assessors felt guilty about sticking it to). The increased sales offer more sales tax revenue. Not to mention the local services that they require (landscaping, snow removal, utilities, etc).

Fundamentally, if you want to support "Buy American", you can find them at Walmart. You just won't buy them if you buy the cheapest things on the shelf. I'm just waiting for Walmart to start offering health care (insert Dr. Nick reference from the Simpsons)...I'm sure I want the best doctor, when I have a major illness, but when I need my prescription renewed for allergies, or an anti inflammatory for an injured knee (other than ibuprofen) -- I'm sick of paying for a $180 office visit, when Dr. Nick would suffice.

Executive Compensation - or Comp In General

Here’s an interesting essay about executive pay at Bear Stearns and Lehman, written by several Harvard Law Professors (Lucian A. Bebchuk, Alma Cohen, and Holger Spamann) -- The Wages of Failure

I wonder about all pay – not just executive pay. I work for a fairly large company as a tax manager (and have my own small practice on the side-hence this blog). It is an agricultural manufacturing facility, structured as a cooperative, to allow ownership by the growers. In lemans terms, we have a couple thousand owners, and their individual activity determines their share of the profits/losses.

These “owners” do not manage the manufacturing facilities. We have a CEO, and 4 senior VPs. Each individual location (three active factories, two inactive/processing factories and several warehousing facilities scattered in several states) has a management structure. We are big enough to be publicly traded, and in fact were, until an investor bought us off the marked and delisted us (quite a while ago). Our growers, then bought the company from that investor (sort of – they are still owners, technically, until the long-term sale is complete). Our corporate HQ has a management structure. All in all, I would estimate at least 100 manager and above level employees.

Their pay is (for the most part) fully deductible. With exception of two employees (CEO & a SR VP), all are under the lowest of our nexus state deductibility thresholds (300k) – and they aren’t over by much, and I would say a vast majority of managers are in the 60-80k range.

Some would attribute this to being cheap, or not making money. While both of these aspects have their merit, I believe the culprit belongs to the transparency to our owners (the growers), and our Board of Directors (who are active and paid minimally ~ the Chairman made 12k last year, most directors made 5-6k). This is something that (in my opinion) that needs to be a major issue of reform for publicly traded companies, investment houses, banks, etc.

Why stop at executives? Why are ANY compensation figures off limits? As the owner of a stock certificate, you (and several million of your closest friends) are the owner of a company. All compensation information should be available for you to review. Can I be the first to say that I want to know financials and compensation information for everyone that handles my money and investments.

A wise corporate buyer once told me that “buyers” should be the highest paid individuals in the company (retail), as if they can’t negotiate their own salary effectively, how do you expect them to negotiate the best deals with vendors? While humorous (and self-serving), the element of truth is that everyone contributes a good to the company, and determining their worth is very difficult.

In the public accounting world, we live to a higher standard. While safeguarding independence, (auditors) have to not only have independence, they have to look like they are independent. This is to prevent auditors from altering their opinion, because of their own financial stake. While there is much debate on the merits of it, what it amounts to is accountants (Managers and above) can’t own stock in companies that are audited by their firm. If they work on an audit, and they quit and are hired by the company they audited – they cannot work on anything related to the financial statements for a year. So if you’re a tax manager at KPMG, and your wife buys Albertson’s (Supervalue) stock, you’re likely in violation of independence guidelines – even if you do not work on any Albertson’s jobs. Yet CEOs and senior executives of the same companies (who are direct participants in management decisions of the company) can buy and sell their own stock freely? While stock options, and sales by corporate officers are disclosed in notes – they aren’t really regulated. Bear Stearns and Lehman, for the benefit of 10 people, reduced the equity of the companies by 2.5 billion through equity sales and bonuses from 2000-2008. The company I work for has total compensation of around 65 million. This is for ~ 1200 employees. This would fund the entire compensation of 5 companies this size for 8 years. To pull a childish reference, I call bull$hit. How can anyone with a logical mind think that pay of that magnitude could be good for a company?

Having Your Children Work For Your Business

Small Businesses:
Having Your Children Work for Your Business:
Before you start paying your children to work at your business there are some questions that need answered.
Do you pay your children allowances (or some equivalent)? If so, how much? Are you saving for their college (or requiring them to save)? What's your highest marginal tax rate? i.e. if you are a C-Corp, what is the corp's tax rate, if S-Corp, or LLC-- what is your personal marginal rate(highest rate)?

Your children do not have to file a dependent tax return unless they have earned income more than $5,700, or unearned income greater $950. They are exempt from withholding (for federal income taxes) if they earn more than $950.

One easy way to plan for your children's education is to employ them, and force them to save the money for college. This is fully deductible as wages for the company, and unless your child makes more than $5,700 in earned income for 2009 (unearned income, such as investment income, is much less, so you have to be careful there), they do not have to file an income tax return. You are exempt from FICA withholding, if they are under 18 yrs old and you're a sole proprietor. You are not exempt if you are a Corp or S-Corp, and a Partnership or LLC is only exempt if you and your spouse are the only owners (ouch!). There is a way you can do it if you have a C-Corp or S-Corp and you are actually a sole proprietor, you just have to create a smllc, and pay them through it -- not too tough.

I'm interested, you say, but how do I work this voodoo? I know if I pay my kids, they'll blow it all on pizza, music & video games.

You pay your kids as you would any other employee, but you have a payroll deduction to the savings account (say a Coverdell ESA). These are after tax deductions (up to $2000/yr), but there is no tax paid on appreciation (much like a Roth). So out of the $5700 have 2,000 directed to their Coverdell. You can increase their effective income by another $5000 as well, if you want to start planning their retirement (401k). As long as their W-2 doesn't say more than $5,700, they do not have to file (unless they have unearned income).

We all give our kids allowances, or some equivalent. This is just a way to make it work for them. Instead of giving them $50/week and asking them to save $25 for college -- why not pay them $60, deduct $20 for their Coverdell, and $20 for a Roth. Your out of pocket would be $60, but your child would be saving for college, retirement and you would increase your payroll deduction by $3120 (saved yourself ~ $7-800 in income tax) for money that you were already handing out or saving.

To maximize, let's say you pay them 2k for their Coverdell, and the remainder for their Roth (less what you were going to give them for an allowance). If they are 10, and they save 2k a year for college, and put 3700 a year for a roth -- every year until college -- retire at 66, you just gave them $2 million to retire with (8% annual yield) tax free, assuming they don't put in another dime, and about 5k/year for four years of college. If they are 5 now, it's ~ 3.6 million for retirement, and 10k a year for school (all tax free).

There are limitations to this. You want to pay your children for work they actually perform. It has to be something they can easily do. The IRS or Department of Labor can (and will) look into this if you are paying them, and you should be able to verify their work with timecards, or some other form of verification. You also have to be aware of labor laws. If they are a toddler, there is not much they can do, legally, is there? There is one easy way around both issues -- pay them for "modeling"

Models/actors are exempt from certain child labor laws (hence some TV families have infants and toddlers). If you put your children on your business card, all business advertisements, tv ads, etc -- you can hire them to be models for your advertisements, and on a regular basis, take more pictures, video, etc.

send me an e-mail, or give me a call and I can help you structure your labor so it works for you.

-Al W. Middleton, CPA

(208)724-3762

ctdmonet@gmail.com