Ahhhh the dog days of summer are upon us. It is Sunday evening when I am writing this and apparently there is some sort of deal on the expansion of the federal debt ceiling. Although I understand it is only a short term bill it will change the way the debt is managed and is aimed at avoiding problems this December. Remember the Bush tax cut debate last year?
According to Political, the proposal goes back to the Gramm-Rudman sequester model of the 1980s, which calls for severe across-the-board cuts as an action-forcing device. The cuts would affect Democratic domestic priorities, including Medicare, but also about 50 percent would come from defense spending, which is a major priority for many Republicans.
The goal is to give both parties an incentive to avoid a deadlock in the committee, and the administration will also have a major stake since success will make it easier to manage its borrowing. But the severity of the threatened defense cuts is such that it risks a backlash from House Republicans, accounting for some of the continued uncertainty Sunday.
What I found absolutely farcical about this whole mess has been the reaction of the various credit reporting agencies like Standard and Poors and Moodys threatening to down grade the federal debt. These agencies facilitated the real estate boom and bust by giving their seal of approval to debt instruments pieced together from no-doc and sub prime mortgage loans. They now characterize these instruments as “toxic.”
Ironically the U.S. Government always pays its creditors and it does so by borrowing heavily. Actions that they, the credit reporting agencies, have known for years. Despite this, dare we say, Ponzi type cycle, these credit reporting agencies have always awarded U.S. Government debt their highest ratings.
So maybe it is done and maybe it isn’t. Maybe the markets will crash this week. And maybe not. Armageddon around the corner? Maybe not. Interest rates going up? Maybe not. Better still lets focus on something that we can actually control and get on with our business.
Another comment about the economy. The recent GDP report of a very sluggish 1.3 % growth for the second quarter 2011 reinforces what we have been saying for months. Our purely anecdotal survey of small business clients leads to only one conclusion. Making a living right now really is tough.
The IRS continues to feast on S Corporations that pay very low salaries to owners. Typically, S Corporation owners take very low salaries, so they can receive the bulk of the corporation profits as distributions, which are not subject to payroll taxes. IRS and the courts balk at this practice. In a recent case, Watson, D.C., Iowa, a CPA.....who should know better...took a $24,000 in a year in which the S Corporation’s profits were around $200,000. A district court agreed that his pay was unreasonably low and ruled that the distributions are properly reclassified as salary and are subject to payroll taxes.
This constant struggle between S Corporation owners and reasonable salaries is something that we have had extensive experience in. The IRS reasonable salary classification and definition are a moving target. Something that we love to talk to you directly about.
IRS has joined with states in its fight over mis-classified workers. It is part of the Obama budget proposal directing the IRS and the Federal Labor Department to work together to increase enforcement. Illinois has recently passed a law that provides penalties for mis-classifying employees. Pennsylvania recent enacted legislation aimed at curing mis-classification of construction workers that include criminal penalties.
Remember that IRS relies upon leads from states to audit firms on this issue. Typically this referral comes from an Illinois Department of Employment Security (IDES) audit of a business generated by an independent contractor filing a claim for unemployment benefits. Our experience is that you are almost guaranteed to be audited by IDES if your independent contractor files a claim for unemployment. Especially if you are not currently an active employer in the system. If you have any type of direction and control of an independent contractor, i.e., you tell them what they are going to do, when they are going to do it and set the price, they are employees.
Another year another IRS Nationwide Tax Forum. I will be out of the office August 13-19 attending the forum learning what issues’ IRS will be focusing on this year. Please help me help you by getting us your sales tax information to us before I leave. Thanks in advance.
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