Uncle Sam, Felon?

Recent years have brought us a steady stream of financial cheats, frauds, and scams. Bernard Madoff, of course. Rotting in jail. The guys who brought us Enron. Rotting in jail. Bernard Ebbers, head of WorldCom. Rotting in jail. And . . . Uncle Sam? 

That's right, our own beloved Uncle Sam is arguably as guilty of "cooking the books" as any corporate scamster. In fact, if he were running a publicly-traded company the way he's running the government, he'd likely be serving time in one of his own prisons!

Here's the issue. Most of us use what's called the "cash" method of accounting. It's pretty simple, really. Cash comes in, cash goes out, and at the end of the year there's a difference we call "profit" or "loss." In Washington, they call those year-end results "surplus" or "deficit." For fiscal 2010, that deficit was $1.3 trillion, and our total national debt now stands at $13.9 trillion (give or take a few billion).

But publicly-traded companies and bigger privately-held businesses are required to use the "accrual" method of accounting. That method requires them to recognize income and expenses when incurred, rather than actually paid. It's kind of like recognizing you owe 30 years of mortgage payments the day you buy your house. And according to the 268-page Financial Report of the U.S. Government (the closest thing we have to a federal "balance sheet"), if Uncle Sam used the accrual method, the government's "net operating cost" for 2010 soars all the way to $2.1 trillion!

Social Security is the classic example of "off books" federal accounting. Actuaries estimate that over the next 75 years, the system will spend $8 trillion more in benefits than it takes in from payroll taxes and interest on the Social Security "trust fund." And Uncle Sam owes even more for unfunded promises like future Medicare benefits ($23 trillion), retirement benefits for federal employees and veterans ($5.7 trillion), environmental cleanup costs ($300 billion), and loan guarantees related to Fannie Mae and Freddie Mac ($600 billion). Those trillion-dollar promises are certainly part of the federal debt. But you won't find them listed in any official balance sheet!

What does this all have to do with taxes? Well, regardless of how we calculate the federal debt, there's only one way to eliminate it. At some point, the government is going to have spend less than it makes. And that's going to mean higher taxes. If you're dreading the tax hikes necessary to close a $1.3 trillion deficit, just imagine what you'll need to pay to eliminate $2.1 trillion!

That's why we're focusing more of our practice on tax planning. If we're going to deliver the most value possible, it's not enough just to look at your finances in relation to where taxes are now. We have to look at them in relation to where taxes are going to be. So look to us for more than "just" a tax return each year.

 And remember, we're here for your friends, family, and colleagues too!

July 1, 2012 Client Newsletter

And the beat goes on. For more than 30 years I have been searching for the answer.  What are some small businesses doing to make them successful that others aren’t doing?  

I think I found the answer.  Or should I say the answers.  For the next few months we will continue to share with you some of the things that our clients are doing today to be more successful.

Last month we talked about what the really good businesses were doing right. And it started with a simple one page business plan.  Your written plan describes your business, outlines your goals and serves as a roadmap for future activities— everything from handling unforeseen complications to repaying borrowed money. It's a document that should grow with your business, undergoing constant tweaks as your big idea evolves from a concept into a successful company.  

Did you take time to fill it out?  I did. And it helps.  

I have toyed with the idea of starting an additional consulting business with small business as an offshoot of our tax preparation business.  Originally I saw a need to help small business owners gain a better internet presence.  See below.  But after I met with our first prospect, a long time client who is a heating and air conditioning contractor, I learned that in fact he was looking for something more.  Frustrated with just doing it, doing it, everyday, he longed for something better.  “How can I build my business so I don’t have to be on the job every day?” he asked.  “What do I need to do to?  I am not getting any younger.  And it is getting tougher doing this stuff everyday. Can you help me?”  

The light bulb went on. Perhaps what we need to do is look at creating an affordable results centered consulting business aimed specifically at small business owners looking for answers for their problems and are willing to pay for the privilege of not having to devote the time, trouble, or stress to doing it.  

Taking a few minutes I jotted down my ideas about this new business on my handy one page business plan, spent some time with my colleague Jack Smith deciding what direction we should take, and right now we are working out the kinks with our “guinea pig” heating and air conditioning client.  If things go well, this new business is something that I believe that you could benefit from.  I will pass on the results in a month.  

“Yellow Page usage amongst people in their, say below 50, will drop to near zero over the next five years.” — Bill Gates

The Internet has changed the business marketplace.  Both for large and small businesses. If you haven’t yet discovered the power of the Google, Yahoo local, Yelp, manta....all free local Internet listings.....you need to.  Your future customers have.    

Successful businesses are taking advantage of a great opportunity.  On May 30, 2012 Google made this very major announcement:

Today, we’re rolling out Google+ Local, a simple way to discover and share local information featuring Zagat scores and recommendations from people you trust in Google+. Google+ Local helps people like my husband turn a craving—“Wow, I need brunch”—into an afternoon outing: “Perfect, there’s a dim sum place with great reviews just two blocks from here. Let’s go.” It’s integrated into Search, Maps and mobile and available as a new tab in Google+—creating one simple experience across Google.

Local information integrated across Google

From the new “Local” tab on the left-hand side of Google+, you can search for specific places or browse for ones that fit your mood. If you click on a restaurant, or a museum (or whatever), you’ll be taken to a local Google+ page that includes photos, Zagat scores and summaries, reviews from people you know, and other useful information like address and opening hours....

Google+ Local is also integrated across other products you already use every day. If you’re looking for a place on Search or Maps, you get the same great local information there too. You can also take it on the go with Google Maps for mobile on your Android device, and soon on iOS devices....

Today is just the first step, and you’ll see more updates in the coming months. If you’re a business owner, you can continue to manage your local listing information via Google Places for Business. Soon we’ll make it even easier for business owners to manage their listings on Google and to take full advantage of the social features provided by local Google+ pages. Get more information on our Google and Your Business Blog.

What this means is that the greatest marketing channel for local businesses to reach existing and new customers just got a lot better.  From what I have read most small businesses have not taken advantage of it.   The Internet is the great leveler. It allows you to compete on an equal footing with your very large competitors. You absolutely need an Internet web presence.  No exceptions. Your customers are searching for you on the Internet.  BE THERE for them to find you. Your business needs to be listed in the new and improved yellow pages....Google+ and the best part it is free.   Well almost.  This change by Google is in an incredible opportunity for your to promote your business.  

Here is our suggestion.  We know you are busy.  Maybe your computer skills are a little lacking.  If you haven’t claimed your listing with Google we can help.  We will help you update your listing with Google and create a new dynamic page for your business.  We will help you get listed on the other major local search engines like Bing and Yahoo.  Our fee is just $49.00  To get started please call our office.   

Things you should be doing right now. Corporate entity disregarded . . . If you want to claim the benefits of a corporation, you've got to actually use the corporation for business, not just pass funds through the corporate bank account. In one case the Tax Court disregarded the taxpayer's corporation, finding it to be a sham. The corporation observed none of the formalities of a corporate entity such as shareholder meetings, issuing stock certificates, invoices were not made out in the corporate name, etc. The Tax Court attributed all the income to the taxpayer. There can be non tax consequences too. To be sure you don't make the same mistake, we suggest you should talk to us your trusted tax adviser.  We have available at no charge to active clients, all the boilerplate templates you need to keep your corporation in compliance. All you have to do is ask.

Following up on last months suggestion that you should be taking a look at your  recordkeeping,  I found the case John H. Schoppe (T.C. Memo. 2012-153) in which the Tax Court found the taxpayer's records were inadequate to substantiate claimed deductions. The taxpayer kept track of his daily expenses on a calendar, but with only vague notations of the amounts and payees. Auto mileage records did not include the business purpose. At trial, the calendars were not offered into evidence and witnesses the taxpayer claimed could substantiate commissions paid, were not called. The Court also noted it had no reasonable basis for applying the Cohan rule. The Court sided with the IRS in disallowing the deductions.   What is the best way to beat the IRS?  Keep good ironclad records.  

Laurie Elzerman will be out of the office July 27th to August 6.  

As a reminder we are open weekdays with a much earlier closing time that is based more on work flow than the clock.  We are still available to meet with you evenings and weekends.  The only thing we ask is that you call us for an appointment.