Newsletter from
Steve Richardson & Company, Certified Public Accountants

December 28, 2017

Tax Planning for Charitable Contributions!

Generous People!

Most people are, by nature, generous in their charitable giving; they will certainly take full advantage of any tax deductions available. But!

But a Tax Deduction will not motivate people to give!

Very few (if any) people make donations to get a tax deduction. Tax deductions do not motivate people to give.

Tax Law Defines a Charitable Organization

Most Charitable Organizations are non-profit entities that qualify under §501(c)(3) of the Internal Revenue Code. These organizations include churches, synagogues, mosques and a variety of other religious organizations. They also include a wide variety of non-religious organizations such as:

• educational,
• scientific,
• literary,
• testing for public safety,
• fostering national or international amateur sports competition,
• preventing cruelty to children or animals
• And other charitable organizations

And other charitable organizations

And other charitable organizations: if that sounds like a “catch-all” it is. Charitable organizations that qualify for §501(c)(3) status are so diverse and complex, that they cannot be listed in the law but must be defined by function.

For Example:

I spend a great deal of time and money investing in the West Alabama Food Bank. The mission of this entity is to feed people who are hungry in nine West Alabama Counties. Where a man puts his time and his money – there goes his heart. This mission is important to me. This organization is clearly one of those “other charitable organizations.”

Why did Congress create §501(c)(3) of the Code?

Congress was motivated to create §501(c)(3) of the Code to “Lessen the Burdens of Government”.  Governments, at every level, have legal and ethical obligations to see to the health, education and welfare of the people.  This obligation is too big and too diverse for the government to meet without significant assistance from the private sector.  Charitable organizations are necessary to help governments see to the needs of the people.

It is for this reason that tax deductions are granted for charitable contributions.

Charitable Organizations are concerned about the New Tax Law!

It is true, many churches and other charitable organization are concerned; personally, I think that many of these concerns are unfounded.

I do not believe that the nation’s churches and other charitable organizations will see any significant decline in donations.

To Charitable Individuals and Corporations

As a CPA, I would advise two things:

• Continue to give. In fact, reevaluate your giving and take a hard look at your motivations to contribute money to the charitable organizations that you support. If you honestly reassess the reasons that you give, it may be that your level of giving may actually increase.
• If you are entitled to a tax deduction for donations, take it, but do not let the deduction confuse why you are making the donation.
• Even with less tax motivation, there are still tax planning opportunities!

Tax Planning for Charitable Giving

Many of our clients are generous givers. Some of our clients give right around that $20,000 a year mark (some much more, even up to a $1,000,000 or more a year). Consider this: double up your giving in one year and skipping the following year. In this way you can have $40,000 in charitable tax deductions in one year followed by zero dollars the following year.

Caution: if you do choose to “stagger” your charitable giving, please talk to the charitable organizations that you support so that they are fully aware of your tax planning. Staggered giving represents budgeting problems for most churches and charitable organizations; they need to know your intent so that they can put into place certain budgetary controls.

To Charitable Organizations:
How do you deal with the new tax law?

Because of the new tax law, many organizations believe that charitable contributions will drop. I believe these concerns are unfounded. I think I am right; I hope I’m right! But, this is a new fund raising environment.

My advice is this:

• Restate your mission and purpose with clarity.
  1. Clear mission statements
  2. Publish your actions plans
• Communicate your mission and purpose with your donors better.
  1. Communication is the key to successful fund raising.
  2. Explore new methods of communication
  3. Do not abandon the old tried and true methods of communication: a personal visit, a warm hand shake, a face-to-face visit.
  4. Always make a clean and clear ask. Ask your donors for their support! Always Ask.
• Inform your donors of your successes and, believe it or not, your failures too. Such information makes your donors more a part of your process.
  1. Donors are more educated and sophisticated today; most can spot hype and hyperbole; when you communicate with your donors, tell them the truth.
  2. Discuss your failures and tragedies. Trust me on this one.
• Create more non-financial ways for your donors to participate in your mission and purpose with time, skills, planning and activities. A donor that has made these types of commitments to your organization will likely become lifetime committed financial supporters.

Why do People Give?

People give for a variety of reasons, but the core reason is the mission and the effectiveness of the organizations that they support.

The tax deduction for charitable organization has not gone away! 

The itemized deduction for charitable contributions won’t be going away anytime soon. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

Thanks! I love my job and, without you, I would not be able to what I do. Thank You!

Steve Richardson, CPA

 

Newsletter from
Steve Richardson & Company, Certified Public Accountants

December 27, 2017

Unreimbursed Business Expenses

Dear Clients & Friends of the Firm:

Promised Tax Planning Memos

As promised, here is the first of a few tax planning memos that relate to the new tax law. This memo deals with unreimbursed employee business expenses.

Unreimbursed employee business expenses

It is typical for people who work in several trades and businesses to incur substantial unreimbursed employee business expenses. Some of these trades and businesses are:

• Ministers & Clergy
• Outside Sales People
• Construction Workers

There are, of course, many other employees who also incur unreimbursed employee business expenses.

A Cry for Help!

Following is an email I got from a fellow accountant asking me for advice; it is reproduced below verbatim:

Steve,

I have a client who gets paid with a W-2 of $600,000, but has $150,000 in misc. itemized deductions. In light of the tax change below, any suggestions?

“Miscellaneous Itemized Deductions Suspended Under pre-Act law, taxpayers were allowed to deduct certain miscellaneous itemized deductions to the extent they exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income. New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. (Code Sec. 67(g), as added by Act Sec. 11045)”

My friend and fellow accountant has an excellent question. His client is an outside salesman; obviously well compensated. But, the unreimbursed expenses are high! $150,000!

Under this new law, these expenses are not tax deductible.

Tax Planning: an “Accountable Expense Plan.”

There is only one solution; the employer needs to create an “Accountable Expense Plan.”

An “Accountable Expense Plan” is a plan that allows an employee to account for his expenses (typically in an expense report), turn those expenses into his employer and be reimbursed. These reimbursements, if done correctly, are not taxable.

The “Accountable Expense Plans” are excellent; they have been around for many years and the work well. The problems, all of which can be overcome with good planning, are:

• How can the business afford to pay these expenses?
• How can the business and employees organize and account for these expenses correctly so that they qualify as a part of an accountable plan?

How can the business afford to pay these expenses?

Obviously, it will be difficult for a business to financially absorb the cost of substantial unreimbursed employee business expenses. The solution is simple: reconsider the entire compensation scheme for the business.

Guidelines for how to reconsider compensation:

• Be fair; try not to use this as an opportunity to cut compensation costs. In the long-run this could undermine your business.
• Calculate the average employee costs of unreimbursed employee business expenses. This can be done in two ways:
  • On an employee by employee basis
  • On an employee class basis
• Reduce compensation by employee or by employee class
• Create an accountable reimbursement plan (We can help!).
  • The plans must be in writing
  • The plans can be employee by employee or by employee classification
  • The plans can have dollar limits, once again, the dollar limits can be applied on an employee basis or on an employee class basis.
• Organize the paper work
  • Create an expense report (We can help!).
  • Create an internal accounting system to track the reimbursements.

This is a good law (at least I can make the best out of a not-so-good situation)

I (sort of) like this new law. We have many clients (literally hundreds) that have employees with substantial unreimbursed employee expenses. As you might expect, we have a significant number of these employee-clients (who incur substantial unreimbursed employee expenses).

There is often a “disconnect” between the employers (who feel that the compensation that they pay is excellent) and the employees (who feel that their compensation is being sapped by the unrelenting pressure of unreimbursed employee expenses). This is a cause for employee discontent and can lead to high employee turnover.

With this new law, the old problem of unreimbursed employee expenses will be brought into sharp focus.

The new business standard

This new law will, I believe, cause many more employers to adopt accountable reimbursement plans. If the employers do so correctly, it will not increase their financial costs. What it will do is this: the employee job satisfaction will improve and, with a bit of good planning, so will employee productivity.

Also, the new law will force all parties to take a fresh look at the true economic costs of doing business.

The Business and the Non-Profit Worlds

The problem of unreimbursed employee business expenses in the business world is obvious. The problem in the non-profit and church world is much-much worse for a variety of reasons.

Often non-profit organizations are strapped for cash, lacking in quality internal bookkeeping, and stuck in an early 20^th century mindset that their employees are somehow obligated to be poor.

We can help employees and employers in the church and non-profit world overcome these barriers and establish functional accountable reimbursement plans.

Lemons for lemonade

There is a saying in tax practice: if the tax law gives you lemons, make lemonade.  (Ok; I just made that up, but it’s a good principle.)  The new tax law takes something away from employees engaged in outside business activities. Outside salespeople and people employed by nonprofit agencies may be seriously disadvantaged by this new law.

I will say it again: I think this could be a good law!

If so, how?

From a pure accounting point of view, this will allow businesses to more closely follow the basic economic principal of matching economic income with true economic costs. Unreimbursed employee business expenses are actually expenses incurred in creating income for the business.  This is an important concept that has good real world business application.  Done well, I think this concept will help businesses compete successfully with Amazon and other online retailers.

Economic trends in the USA

We are facing serious economic dislocations in the USA and in the world. The retail sector is dying fast; Amazon and other online retailers are killing local retail. Retail is not the only business sector being hard-hit.

I have a client that sells high quality baseball equipment; their major supplier is Mizuno (an important name in baseball). After 30-plus years in business, Mizuno has decided to complete with their own retailer by selling the same products online.  Worse, the online price is actually higher than the wholesale price that the local retailer can purchase the same products.  Unfair competition! Unfair; yes; but an all too common situation in modern retail.

It’s not just retail that faces this distorted economic playing field.

Industrial products and supplies are increasingly available from high quality online suppliers.  Building supplies too!

There are success stories!

There is, in my opinion, only one way to beat the online retailers: added value through increased customer services.

My clients have many success stories dealing with on-line competition.  One client added an outside sales force that focuses on providing a level of service impossible for online vendors.  A personal visit with a hand shake and a sit-down discussion of the customers’ needs translated into significant growth in retail sales often at a price premium compared to online competition.

If you are selling athletic equipment, industrial supplies, building supplies or in any other line of business facing the onslaught of online competition, you can win! Look at your sales model and consider the value of an outside sales force.  Any outside sales force, in my opinion, needs an accountable reimbursement plan.

Accountable reimbursement plans

Our CPA firm has helped hundreds of small businesses successfully install accountable reimbursement plans over the years.  If you need help, call me.

Thanks! I love my job and, without you, I would not be able to do what I do. Thank You!

Steve Richardson, CPA

 

Overview of the new tax law

I plan to follow-up this overview with more pertinent and practical tax planning newsletters.  Some tax planning needs to happen in 2017 – obviously I need to start writing a few of these memos today!

Complicated

I’ve read the new law; and read it again (505 Page! My brain hurts!).  Contrary to the press, this is in no way a tax simplification.  The new tax law is complicated – very!

The tax law, as it came out of the Conference Committee, is much better than the initial house version of the bill.  Frankly, this initial tax bill from the House had me spooked!  A lot of good things happened in the Conference Committee.

This bill is effective: January 1, 2018

The new tax law takes effect on January 1, 2018, except for a few provisions such as the individual ACA mandate, which are deferred until January 1, 2019.

MUCH better

A short civics lesson: Tax Laws is born in the House Ways and Means Committee and then, if approved by the full House of Representatives, it goes to the Joint Committee on Taxation; a “nonpartisan” committee composed of both members of the House and Senate.  The Joint Committee on Taxation, typically, will offer substantial changes to the House’s version of the Tax Bill.  This is a MUCH better law than we started with! It’s not perfect by a Long-Shot; but it is not the messy monster that we saw a few months ago.

This is Classic Trickle-Down Economics

Overall, the Tax Cuts and Jobs Act represents the largest one-time reduction in the corporate tax rate in U.S. history, from 35 percent down to 21 percent. The bill also lowers taxes for the vast majority of Americans, as well as for many small-business owners — at least until the cuts expire after eight years.

Thank You Senator Rubio

Last-minute changes to the GOP’s big plan give a larger tax break to the wealthy and preserves certain tax savings for the middle class, including the student-loan interest deduction, the deduction for excessive medical expenses and the tax break for graduate students. A change made Friday morning to win over Rubio expands the child tax credit even further to give more money to working-class families.

Here’s a rundown of what’s in the final bill. (The final bill is 505 pages!)

What is changing?

A new tax cut for the rich: The final plan lowers the top tax rate for top earners. Under current law, the highest rate is 39.6 percent for married couples earning over $470,700. The GOP bill would drop that to 37 percent and raise the threshold at which that top rate kicks in, to $500,000 for individuals and $600,000 for married couples. This amounts to a significant tax break for the very wealthy.

The Conference Committee made a bunch of changes to the law

The new tax break for millionaires goes beyond what was in the original House and Senate bills, with Republicans seeking to ensure wealthy earners in states such as New York, Connecticut and California don’t end up paying substantially higher taxes as a result of the bill.

Changes for Sub-Section “C”, (generally large corporations)

A massive tax cut for corporations: Starting on Jan. 1, 2018, big businesses’ tax rate would fall from 35 percent to just 21 percent, the largest one-time rate cut in U.S. history for the nation’s largest companies. The House and Senate bills originally had the big-business tax rate falling to 20 percent, but Republicans were not able to make the math work to keep the rate that low and start it right away in the new year, so they compromised by moving the rate to 21 percent. It still amounts to roughly a $1 trillion tax cut for businesses over the next decade.

Economic Impact

Republicans argue this will make the economy surge in the coming years; I very much hope that they are correct.

The Individual Tax Deduction for state and local taxes is scaled back

You can deduct just $10,000 in state, local and property taxes: One of the most controversial parts of the GOP tax plan is the push to greatly scale back how much state and local taxes Americans can deduct on their federal income taxes. Under current law, the state and local deduction (SALT) is unlimited. In the final GOP plan, people can deduct up to $10,000 (married couples are also limited to just $10,000). The House initially restricted the $10,000 deduction to just property taxes, but the final bill allows any state and local taxes to be deducted, whether for property, income or sales taxes.

This is a real tax reduction! (Yea!) The bill out of the House was not.

Most Americans will pay less in taxes until 2026. The final plan lowers the tax rates for each income level and nearly doubles the standard deduction (while also scrapping the personal exemption). The result is that the vast majority of Americans will see their tax bills drop next year. Trump is fond of saying the “typical” family will save $2,000, but the reality is the amount will vary greatly depending up the size, location and circumstances of each family. The bill will also increase the number of Americans who owe nothing in taxes from 44 percent today to 47.5 percent after the plan takes effect on January 1, 2018. But all of the individual tax cuts are scheduled to go away after 2025. Republicans opted to make tax cuts for families temporary and reductions for businesses permanent.

Working-class families get a bigger child tax credit: Thanks to a late push by Senator Rubio (R-Florida) and Senator Mike Lee (R-Utah), the child tax credit would be more generous for low-income families and the working class. The current child tax credit is $1,000 per child.

The House and Senate bills expanded the child tax credit, with the Senate going up to a maximum of $2,000 per child. The final bill keeps the $2,000-per-child credit (families making up to about $400,000 get to take the credit), but it also makes more of the tax credit refundable, meaning families that work but don’t earn enough to actually owe any federal income taxes will get a large check back from the government. Benefits for those families were initially limited to about $1,100, but through changes Rubio and Lee pushed for, it’s now up to $1,400.

January 1, 2019

The individual health insurance mandate goes away in 2019: Beginning in 2019, Americans would no longer be required by law to buy health insurance (or pay a penalty if they don’t). The individual mandate is part of the Affordable Care Act, and removing it was a top priority for Trump and congressional Republicans. The final bill does not start the repeal until 2019, though.

There is a “plan”

There is a “plan” to hold down the expected increase in insurance premiums.

The Congressional Budget Office projects the change will increase insurance premiums and lead to 13 million fewer Americans with insurance in a decade, while also cutting government spending by more than $300 billion over that period. Some Republicans hope to make other changes to health care to prevent insurance costs from rising dramatically by the time the repeal kicks in.

Estate Tax Significantly Liberalized (Yea Again!)

You can pass your heirs up to $22 million tax-free: In the end, the estate tax (often called the “death tax” by opponents) would remain part of the U.S. tax code, but far fewer families will pay it. Under current law, Americans can pass on up to $5.5 million tax-free (that threshold is $11 million for married couples). The House wanted to do away with the estate tax entirely, but some senators felt that was too much of a giveaway to the mega-rich. The final compromise was to double the threshold, so now the first $11 million that people pass on to their heirs in property, stocks and other assets won’t be taxed (and yes, that means $22 million for married couples).

Sub-Chapter S Corporation, LLCs, Sole Proprietorship, and more

Most small businesses are organized in “pass-through” entities such as those listed at the top of this paragraph.  That means that they do not pay income taxes on their own but that there taxes are paid by the individuals who own an interest in the “pass-through” companies.

Small businesses are the most important cog in the economy of the United States! By Far!  A small business tax break is long overdue.

Most people simply don’t know or understand the magnitude of the small business sector in the United States. Utilizing the data and definitions from the SBA, small businesses make up the following; 99.7% of United States employer firms, 63% of net new private-sector jobs, 48.5% of private-sector employment, 42% of private-sector payroll, 46% of private-sector output, 37% of high-tech employment, 98% of firms exporting goods and 33 % of exporting value.

(See: https://www.sba.gov/content/small-business-gdp-update-2002-2010)

“Pass through” companies get a 20 percent reduction in taxable income: Most American small businesses are organized as “pass through” companies in which the income from the business is “passed through” to the business owner’s individual tax return. S corporations, LLCs, partnerships and sole proprietorships are all examples of pass-through businesses. In the final GOP bill, the majority of these companies get to deduct 20 percent of their income tax-free, a large reduction that mirrors what was in the Senate bill. The changes, however, expire after 2025. The National Federation of Independent Business initially opposed the House version, arguing that it didn’t do enough for small businesses. But the NFIB later endorsed the House and Senate plans.

But! But; I often hate that word.

Service businesses such as CPA firms (Bummer!), law firms, doctor’s offices and investment offices can take only the 20 percent deduction on their personal tax returns if they make up to $315,000 (for married couples).

AMT Tax Reform!!!

Many of you have heard me refer to the AMT Tax as “Tax Hell”; it is a brutal and unfair tax that was allowed to evolve from its original intent into a tax monster!

No corporate “AMT” tax: The final GOP bill gets rid of the corporate alternative minimum tax, a big relief to the business community. The Senate included the corporate AMT in its version of the bill, but the House did not. The corporate AMT makes it difficult for businesses to reduce their tax bill much lower than 21 percent. CEOs complained that this was a backdoor tax that would make them less likely to build new plants, buy more equipment and invest in more research, since the corporate AMT made the tax credits for those investments essentially null and void.

Individual AMT tax is redirected to accomplish its original purpose: Fewer families will have to pay the individual AMT: The AMT for individuals started in 1969 as a way to prevent rich families from using so many credits and loopholes to lower their tax bill to almost nothing.

The AMT Evolution: but what started out as a way to prevent the wealthiest Americans from tax dodging started to hit more and more families over time. Currently, the AMT kicks in fully for individuals earning over $120,700 and married couples earning over $160,900. Under the final Senate bill, that threshold is lifted to $500,000 for individuals and $1 million for married couples. (Some families in the $200,000 to $500,000 range will still have to pay AMT, but they will pay far less than they were before).

Mortgage Interest Deductions will get smaller:

Under the current tax code, taxpayers can deduct any interest they pay on up to $1 million worth of mortgage loans. House Republicans tried to cap that at $500,000 for new loans (existing mortgages are unaffected by the plan) but in the final version of their, Republicans have settled on a $750,000 cap.

How much does this tax bill cost the USA?

The final bill will cost $1.46 trillion: Republicans decided it would be all right to go into debt up to $1.5 trillion to fund the tax cut. In the end, they nearly hit that mark. The official estimate — released Friday evening alongside the bill — came in at $1.46 trillion.

What is NOT changing?

The Conference Committee, thanks to a few hard-nosed Senators (Rubio), made this bill much better!  The bill keeps in place the student loan deduction, the medical expense deduction and the graduate student tuition waivers.

The House bill got rid of these popular deductions, but the Senate bill kept them, and the final bill even makes the medical deduction a bit more generous for a while (dropping the threshold to take the deduction from expenses over 10 percent of income to expenses over 7.5 percent of income for 2017 and 2018). After that, the medical deduction threshold reverts to 10 percent). In the end, Republicans decided it was better to allow millions of middle-class families to continue using these breaks if they qualify for them.

401(k)s, IRAs and Roth IRAs

Retirement accounts such as 401(k) plans stay the same. No changes to the tax-free amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.

Johnson Amendment stays in place:

Churches, synagogues, mosques and other nonprofits (the Johnson Amendment stays in place) can’t get political and endorse candidates in elections. Trump and conservative Republicans wanted to “totally destroy” (Trump’s words) the Johnson Amendment, which has been in place since 1954 and prevents religious institutions and nonprofits from getting involved in elections via fundraising or endorsements. The House bill included a repeal of the Johnson Amendment, but Democrats were able to get the Senate parliamentarian to determine that including the repeal in the bill didn’t comply with the rules of the Senate.

Real Property and Rental Income:

There will be a “Shortened Recovery Period for Real Property”; the depreciation rules for real estate will change effect on January 1, 2018.

For property placed in service after Dec. 31, 2017, the Act would shorten the recovery period for determining the depreciation deduction for nonresidential real and residential rental property to 25 years.

It would also eliminate the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property, and would provide a general 10-year recovery period and straight line depreciation for qualified improvement property (certain improvements to the interior of nonresidential realty) and a 20-year ADS recovery period for such property.

For tax years beginning after Dec. 31, 2017, a real property trade or business electing out of the limitation on the deduction for interest expense would have to use ADS to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property.

For property placed in service after Dec. 31, 2017, the Act also shortens the ADS recovery period for residential rental property from 40 years to 30 years.

Complicated

Did I mention that this new law is “complicated”?  This short memo hasn’t touched on a tenth part of the new law.

Thanks!  I love my job and, without you, I would not be able to do what I do.  Thank You!

Steve Richardson, CPA

 

A Federal Grand Jury

Called

In forty-plus years of practice as a CPA I have never been “called” to a Federal Grand Jury to testify.  A large portion of this past week was spent involved with just such an activity.  It was unpleasant.  A Federal Grand Jury is a serious meeting; the Grand Jury is discussing matters that could have an irreversible and catastrophic impact on people’s lives.  Serious is an understatement!

The families involved face the potential of irreversible damage that will include massive financial costs and may well include time in jail.

“Called” is the appropriate word.  I say “called” because attendance is not optional.  I received a summons and was “required” to appear and testify in a potential tax evasion case involving a former client.  Had I been legally and ethically allowed to avoid this “call” I certainly would have.

The Grand Jury’s job is to decide if the prosecution have enough evidence to issue an indictment. An indictment is a required precursor to prosecution.  Unlike state law, upon issuing an indictment, the case advances to court within 70-days.  Things move fast!

A Federal Grand Jury

As indicated, a Federal Grand Jury is a dark unpleasant place; as if to emphasize the unpleasantness of this situation, the Grand Jury is convened in a basement!

Unpleasant facts

First: there is no defense.  The defendant and the defendant’s attorneys are not allowed inside the Grand Jury.

Second: the prosecution presents their evidence indicating a federal crime.  The grand jury is being told the story entirely from the point of view of the prosecution.  As I said before, there is no defense presented.

Third: federal prosecutors are busy people.  They will not waste their professional time unless they feel that they have a good case.  The prosecutors must believe that they have an “excellent” prospect of getting a guilty verdict when this case advances to court.

Fourth: it is very likely, given 1, 2 and 3 above that the Grand Jury will issue an indictment.  It’s not automatic. Grand Juries have been known to decline to indict but it is rare.

This is a client newsletter

I think this guy is innocent; stupid! Stupid, but innocent.  Frankly, my opinion doesn’t matter. The facts in this case, for purposes of this newsletter are irrelevant. The purpose of this newsletter is to teach about this unusual aspect of criminal tax law.

And, more important …

This experience with the Federal Grand Jury has reinforced for me two things:

1. It is very important to file fair and accurate tax returns. To state this as a negative: Do Not Cheat on your taxes.
2. It’s also important to be smart in filing your tax return. To state this as a negative: Do Not Be Stupid when filing your tax returns.  Stupid is the right word when stupid can land you in jail.

Do Not Cheat

Well – Duh!

Do Not Be Stupid

I think we all know what cheating is; we know it’s bad and to be avoided.  Stupid is different; maybe we do not all understand what stupid is in connection with tax law.  I use that word, “Stupid” when Stupid can land you in jail.

I hate negative words…

To restate this as a positive: how can you be smart in filing tax returns.

Good Records: Good record keeping is essential.  Do not assume that you know how to keep good records; ask!  Bring your records to us and have me or our staff take a look at your process.  Let us make suggestions.  It’s not difficult to keep good records and you do not necessarily need QuickBooks or other formal accounting systems to keep good records.  I have good clients that keep excellent records with a simple filing system, bank reconciliations and excel sheets.

In today’s plugged in and cyber-connected world, there are multiple options that will allow you to keep excellent records.

Recognize high risk transactions:  Auto reimbursements and other expense reimbursements need to have a bit of additional attention. There are other high risk transactions that you may not recognize; for example, putting your wife on the payroll for the sole purpose of maximizing the family’s retirement accounts. On the surface, that does not sound too risky; but it is.  It is impossible for me to list all the risky tax transactions; the list is simply too long.  But! (I love that word “But”.)  But there is a “Rule of Thumb” that will help you gauge the risk of a tax transaction.  The rule is this: Yes or no; does the tax transaction have economic substance relative to your trade or business.  To restate this rule in different terms: is the tax transaction “ordinary & necessary” for the conduct of your business.

Compensation planning:  Planning compensation allocations, retirement contributions, and tax withholdings and other payroll transactions needs to be done with a high degree of professional care.  Payroll and payroll reporting problems will generate IRS mail quicker than any other tax transaction.

Do the normal things well: The normal things are: bank reconciliations, expense categories and required supporting documentation such as receipts, and separating personal cash and business cash are all essential.  And ask us to take a look and advise.

And – Be honest!  Simple ethical principles apply to tax law: tell the truth.  To quote a wise man, “The truth is like a lion. You don’t have to defend it. Let it loose. It will defend itself”: Augustine of Hippo.

Maybe this case is important

Maybe the details of this particular care are important.

The errors that triggered this catastrophic tax disaster is the commingling of personal and business funds and very bad tax records.

I cannot state this more clearly: Do Not Commingle Business & Personal Funds!  Ever!  Commingling is more that bad business; it is dangerous.

Bad Tax Records!  This client had very bad tax records.  The problem is that the records seemed to be complete and accurate on the surface.  They looked good.  They were reasonable (meaning that they didn’t seem to be inaccurate).  The internal bookkeeper was, or appeared to be competent.  We offered on multiple occasions to review the books but the offer was declined due to the “costs”. For the client, this was a disastrous decision.

Consequences:  I am deeply concerned about this taxpayer and his family.  Other families depend upon him for their livelihood.  If he is indicted and convicted the repercussions are severe!

First Time

I have never been to a Federal Grand Jury before.  I hope I never go again.