One thing is certain, paying more tax than the law requires will not improve your chances of surviving. Re-arranging client affairs & re-organizing client businesses opens doors to extensive tax avoidance. Every dollar saved drops straight to the bottom line as another dollar of cash, profit, working capital & competitive advantage, and improves your chance of surviving the 21st century.
Few private businesses are structured effectively.
There are something like 33 different entities from which you can operate a business. The most commonly used are personal individual schedule C business, partnership, LLC or corporation. Each of these are taxed differently and can take deductions the others can’t. We use all of these except the schedule C business frequently. Plus we use the other 28 when circumstances dictate.
Private businesses are poorly structured. That makes them vulnerable to unnecessary tax, dangerous lawsuits & getting caught by competitive forces without the ability to maneuver. All of which can be disastrous. As businesses get larger, the more sophisticated they become and the more they will turn their attention to structures. At one time Caterpillar had 350 separate subsidiary companies in the Luxembourg alone. But private businesses generally go through their entire existence as a single structure.
We are expert at business structures. We will restructure your business to its best structure to achieve goals in tax, asset protection & maneuverability.
- A great structure achieves myriad valuable goals easily and effortlessly.
- A bad structure constantly interferes with business goals & exposes your vital assets to lawsuits & litigation.
- A bad structure is a trap because it’s inflexible, cumbersome & poorly conceived. Plus it adds to tour tax burden & puts all assets at risk needlessly.
- A bad structure is a lead weight around your shoulders.
- A bad structure makes it more difficult to survive & thrive in a competitive environment
It looks like everyone got what they voted for in tax reform.
It’s pretty clear who the big winners and losers are. Each individual will probably have to do some calculating to be absolutely certain, but the broad groups of winners & losers are pretty clear right now.
Tax Reform isn’t Valhalla. We did not just die and go to heaven. For every tax cut, there is a tax increase somewhere to make up for the lost revenue. That’s how the process works. If you are a large global corporation with more than 100 shareholders and no individual owner to answer to, you won the lottery. You are the big winner. That much is certain. That is where the bulk of the tax savings go. OK. That’s what they said they were trying to do, and they did it. For everyone else, broad groups will win and broad groups will lose. And those are pretty clear right now.
But here’s a pattern that has escaped notice.
High income earners with expensive homes and dependent children living in high tax states will be losers under tax reform. As will professionals such as equity bankers & physicians at all income levels wherever they live. Both groups will pay more tax under tax reform. But here’s where the pattern begins to show up. According to the demographics, those are the Hillary voters. When they voted for Hillary; they voted for tax increases; and they got tax increases.
The winners on tax reform will be low income families in low tax states. In fact, I believe, low income people even in high tax states will be winners. Hmmm. Does that describe Trump voters? I think it does. Those people voted for tax cuts when they voted for Trump. And they got tax cuts. That formula works even for people who live right next door to each other; one voted for tax hikes and one voted for tax cuts; they both got what they voted for.
The big losers on tax reform are Hillary voters who are really winners because they voted for tax increases and got what they voted for. Everyone got what they voted for. Probably coincidence.
But balancing the budget in the same week?
Now here’s the real kicker. In the same week tax reform was passed, Trump manipulated our friends in the UN into voting in favor of ending their own US foreign aid, which will go a long way toward balancing the Federal budget. Thank you UN.
Trump gave people what they voted for and balanced the budget in a single week. Is that even possible? No other President from Washington to Lincoln to FDR ever had a week like that.
There is one hurdle left.
Who has the gonads to cut off 90% of foreign aid? Probably not Trump. The press would rake him over the coals. But Nikki Haley definitely does. Did you see her glaring at UN voters as they voted on the Jerusalem issue? In addition, she followed up the vote by inviting all the nay voters to a party. She is looking for a fight and she is getting in their faces. Nikki Haley will cut them off in a minute, and she won’t give a diddle what the press thinks.
These people are serious. I’m going to keep my head down and stay the hell out of both their ways. But I am enjoying the show. As the Chinese proverb says, ‘May you live in interesting times.’
PS. I will be a loser. But after applying my own off-the-shelf tax strategy, I will be a winner. There is a solution to every problem. Want to solve your tax problems? Give us a call.
Big Deal Inversion
This could blow the lid off.
What more iconic American company is there? Coca Cola? Too late. They probably already inverted.
Burger King bought a Canadian company and plans to do some things to cut their American income tax. Burger King is owned by 3G Capital and the Brazilian trio. Very, very smart people who turn around every company they buy. I’m a big fan of these people. And what they’re doing is completely ethical, (Judge Learned Hand said so. Google it up) legal and dictated by economics.
They’d be idiots if they didn’t invert. Their investors would run them down and string them up. (Although I think they’re probably too smart to deal with actual stockholders. I doubt if they have any of those.)
Inversion is the practice of buying a foreign subsidiary and moving their tax base to the foreign company, thereby skirting some income tax.
But from my understanding, Burger King intends to do something that may eliminate all U.S. income tax. This is how it’s probably going to work. The following may not be in accordance with the article or the video or public pronouncements. But it’s what I hear is going on.
From what I understand, they are going to refinance all their corporate debt by borrowing from Warren Buffet’s company, Berkshire Hathaway. (They have a lot of debt from the original acquisition.) The loan will be made to the Canadian company who will loan it to the American company, charging enough interest to wipe out all American income, there by diverting all American income to Canada. This isn’t even a sophisticated technique. This is a bottom shelf, plebian, ordinary tax strategy that any yo-yo could have dreamed up. But it’s simple, and the Brazilian Trio believes simple is better. And I would tend to agree. After all, MPAI.
The deal is what it is. It could have long term ramifications on the government. Those people with their noses stuck in the air can’t continue to ignore everything they don’t like, as though this were a fairy tale. This stuff could tear our country apart.
But that being what it is, that’s not the reason I wrote this. I wrote this to take a dig at Warren Buffet. Bill Gates’ pal. (Gates’ claim to fame is he knew Steve Jobs.) Some background. Warren shot to fame as the guy standing behind the President nodding like a puppet when the President told us why we needed to pay more income tax. He’s the same guy who famously said, “The rich should pay more tax.” He’s the guy the President hung a medal on (see link below). Buffet’s in bed with the Brazilian trio on other investments (Heinz Ketchup). Which is damned smart and damned lucky of him. Can’t fault him or them on this. This is the guy (I assume.) who is going to loan the money to the Canadian company to loan it to the American company to gouge it on interest to transfer all American profits to Canada. (It’s really not an investment (wink, wink) but I’ll bet it’s a convertible note, or I’ll bet it gets converted at some time.)
All of this would be perfectly OK if he didn’t shill for tax increases. But he did and it’s not OK to switch horses in the middle of the stream. I’m sure you all know that.
This is the same Warren Buffet that doesn’t pay his own taxes.
So the guy who said we should pay more tax does avoid taxes himself and is going to avoid them even more in the future. That’s all well and good, but he doesn’t think we should. And he loves it when he’s on TV and the President is blowing sweet nothings in his ear.
Veracity apparently means nothing to this guy.
The attack of the nerds
I’ve been reading the Lords of Strategy by Walter Kiechel III which is about strategy consulting – McKinsey, Boston Consulting, Bain and others. The book was wildly interesting through the first half and disintegrated towards the end. Halfway through the book, he made a statement that made it sound like the book should end here. It wouldn’t have been complete, but from an interest standpoint, this was the end. The first section was about the wingnuts and those who invented consulting. The last section was more about academics and other less interesting stuff. Regardless, the obvious conclusion was never reached. If you have any idea what you’re doing, consulting is a waste of time & money. If you don’t, it’s probably a still a waste of time & money.
The book was terribly informative about the history of strategy consulting. It covers the entire gamut of American strategy consulting going back to the 1920s and 1930s when Alfred Sloan transformed General Motors into the first modern corporation and McKinsey began consulting the things GM did that made GM successful. I was impressed by the breadth and depth of the book, but less impressed by consulting which is obviously not what it’s cooked up to be. I was looking for a bit more substance from the profession itself.
I was also disappointed my alma mater didn’t even warrant a mention. Andersen Consulting/Accenture. But, although they’re promoting strategy today, that has probably never been their strength.
Let’s face it, we’re talking about the people who grew up playing video games. Originally, most consultants were engineers, and they still are. But PhD’s and MBAs are also well represented. If there’s a difference between these people and everyone else, it’s their focus on formulas, and they’ve built up a long list of them. The problem is, they’re interesting & famous & well known, but none of them work.
I’ve waded through all the big business formulas brought to us by strategy consulting, from decentralization (GM’s move to break up the company into independent units or subsidiaries), Growth Share Matrix (cash cows, stars, question marks, dogs), experience curve (costs fall 25% as volume doubles), SWOT analysis (strength, weakness, opportunities, threats), three C’s, five factor framework, seven S framework, value chain, etc., etc., etc.
What I have come to realize as I read this book is that business consulting was the original ‘attack of the nerds’. It’s all an attempt to reduce success in business to a formula. A + B = C. Doesn’t work. Hasn’t ever worked, They’re all looking for the next big thing that will explain everything. But they never find it. They do however, keep changing their minds about what the big secret to is. Which of course keeps the cash register ringing and keeps a big hazy shroud around what they do and how effective their advice is.
Next to war, running a business is the most complicated & complex endeavor on the planet. Far more complex than physics or calculus or engineering, because these are all formulaic. They respond to a set of rules and axioms. But in business (and war) nothing is that way, everything is fluid and ever changing: the landscape, the players, the tools, the medium, etc.
But then, perhaps no one really expects consulting to work. Perhaps it’s just a smoke screen. The big clients of consulting firms are insecure CEO’s who pay big dollars to be reassured, albeit with a long term consulting contract. Or executives looking for expert opinions to back them up. Which makes you wonder whether the results are dialed up in advance? In many cases, very likely. The book made the point, that consultants are leery of surprising C suite executives whose patronage they rely on.
In the final analysis, most consulting stuff doesn’t work; not in the way consultants wished it did. All of the breakthroughs I mentioned in the fifth paragraph were reverse engineered. They were the result of an observation and they’ve yet to be proven capable of directing the future, which is the ultimate goal of consulting. This realization drives consulting to find another rainbow with another pot of gold which this time possibly will work.
But business success can never be reduced to a formula.
Here is the secret sauce of business success, the one thing that will work every time, the one thing nobody will pay good money for, but the one way every company can add significant competitive edge – –
Be easy to do business with and do everything right the first time.
It isn’t like this is a new idea. This has been around since time immemorial. Both Steve Jobs and the Brazilian trio used this to make record making accomplishments. This is nothing but business processes, systems and customer service. Or if you wish, continuous improvement & constant cost cutting in a full blown meritocracy.
Nothing else works. If you want to succeed, this is how to do it. Otherwise you’re just babysitting your customers until the day Amazon, or Apple, of Google, or Caterpillar or someone down the block (who came to see us) takes them away from you. They will, you know. They’re spoiling them right now.
“Good artists copy, great artists steal.” (Pablo Picasso and Steve Jobs). What the heck. This stuff works and consulting doesn’t.
Apple has been proving this for years as they watched your customers sleep in the streets to get first crack at paying three times as much for their products. Everybody thinks it’s the innovation, but innovation is a flash in the pan. Today Apple’s innovation is old & stale and there are tons of imitators trying to beat them to death with price, without success. Apple is making it on its business processes, it’s reputation and its fabulous customer service.
Think Apple Stores and iTunes. Think Amazon. If there’s a formula, this is it. And it’s not something some nerds discovered in their garage.
Another example: The fact that GM outperformed Ford (first mentioned above) is a solid example that business processes & systems outperform innovation. Ford was first to the table and invented the assembly line, which you would think would make Ford unassailable, but GM brought processes & systems to the table and dominated Ford far a century.
Or so to speak … One thing more that’s a little off track, but is oddly related to the foregoing conversation. “Game” is an attempt by the same nerds to reduce love to a formulaic approach. These people obviously love formulas. Push-pull, cocky funny, so on and so forth. Both strategy consulting and game have their strong points; they will improve an otherwise dismal record. Something is always better than nothing, but all in all, the approach is insufficient.
Here’s the biggest revelation about innovation that’s ever come along.
Innovation does not build competitive advantage or long term success. The advantage of innovation is fleeting. Before long your competitors have copies and are beating you to death on price. Business processes & customer service build competitive advantage and long term success. They make you invulnerable to competition.
Take a good long look at Amazon.
Thanks to Apple
I have to admit, I give people way more credit than they deserve. Especially big wig type people. At least until they show me otherwise. Then I’m death on them.
I’m constantly disappointed by the best attorneys in town, or the only CPA practice I had any respect for, or on and on and on. Competence is apparently relatively rare. Now comes a revelation from Deloitte, one of the big 4 auditing firms and one of the largest consulting firms in the world.
From the Deloitte Dbriefs comes this tidbit … “Tax executives face growing demands to transform their tax department’s capabilities, shift their focus, and add value.”
Let’s take them in reverse order.
“Add value” means saving taxes.
“Shift focus” to saving taxes.
“Transform the tax department” means quit just slapping numbers on paper and start saving taxes.
I thought the attitude that tax preparers did their job by slapping numbers on forms was limited to my competitors. I thought they were the only idiots in the world. But today it turns out that attitude infected the entire tax industry including the tax departments of the very largest companies in the world. You know … the household names. I used to work there; these people used to report to me; and that is something new.
This doesn’t speak well of our country. First of all, this isn’t brain surgery. (I’m assuming brain surgery is difficult, but who really knows?) And it’s not flying a jet plane (same deal). All it takes to save on taxes is take advantage of all the tax preferences and tax savings devices embedded in our complex tax code by the United States Congress. They’re not hidden. They’re right there in plain sight. Everyone knows they’re there, you know it and I know it, but the crazy thing is, everyone in the tax industry is too busy slapping numbers on tax returns to take the time to learn them and use them, Except us and Apple’s tax strategist and a few others.
To be fair, the tax strategists at Apple, Google, Amazon, GE & Caterpillar have all come to the public’s attention one way or the other for legally saving massive amounts on taxes. The only reason this has suddenly become a big deal is because every CEO in the country found out by watching TV that Apple cut $400 billion dollars out of their tax bill legally … completely legally. And they used that savings to fund their rocket to most valuable company in the world. That was the wake-up call. Must have been a big shock because they’re calling their tax people on the carpet.
If you have a few extra minutes, read the post about Apple’s tax strategy.
Quiz for the day … what fruit goes best with a ‘double Irish with a Dutch sandwich’?
I intend to put this term on the tongues of every businessman in the country. Spread it around.
Another attempt to be the most disrespected person on the internet.
I read this on line today
” … wait, you went to a second-rate university… ”
People who throw their education in your face have little other ammunition to throw … from my personal experience the last bastion of the people who graduated from the ‘best’ schools is their education, and little else. I recognize the value of intelligence and I recognize the value of a network, but an education is just the first step on a lifetime journey of continual learning and experimenting … your education and $10 will buy you a cup of coffee. Your experience and capabilities may get you somewhere.
I was at the gym a couple of days ago bantering with a gal in one of the classes I take and she asked me what I did. I told her I had an accounting practice and she asked me the name but she’d never heard of us. I told her that’s because we try to keep our profile down locally. I got all the high profile I ever want during an unsuccessful campaign for U.S. Congress. I told her we don’t have a sign on our building or on the door to our offices, but my practice is one of the largest individually owned CPA firms in the United States. We have clients in 46 states. After oooing and ahhhing for a moment, she said something very interesting. She said, you seem very … “lively” for an accountant. And of course, you all know what she meant.
Besides the issues this attitude creates for ‘unlively’ accountants, it raises a larger point more pertinent to the typical businessman about the innovations people expect from their accountants and tax advisors. They expect absolutely none. Because they’ve never gotten anything other than ‘timing differences’ whenever they asked for tax advice. Year end tax advice is always swimming with timing differences. Unfortunately, with unlively goes dull and slow, at least in the minds of most business owners. Their tax accountants have trained them to think that way. Creativity and innovations are certainly unexpected.
That puts many business owners in the unfortunate position of having to plod along year after year paying more tax than the law requires and missing profit opportunities because they think they’re getting all you can expect from an accounting firm. But that’s not true.
Take the case of Apple. In 1998 when Steve Jobs returned to Apple, the company was three months from running out of cash and going bankrupt. We all know the story about how Jobs pulled Apple from the brink of bankruptcy and propelled it into the most valuable company in the world. Everybody knows about the iMac and the iPod and iTunes and the iPhone and iPad and what a great successes they were. But very few people know about the role tax strategy played and the 400 billion dollars it added to Apple’s coffers and cash balances.
Tax Strategy is an essential element of each of these companies’ success. They built their cash positions and balance sheets with tax strategy. They are all wildly successful companies, and all of them have been heavily criticized for pursuing legal, effective tax strategies. GE’s still embroiled in controversy for paying no income tax in 2010. Google and Amazon have been heavily criticized throughout the E.U. In fact the U.K. Parliament went so far as to ‘condemn’ Google. But Apple’s story is the most interesting.
Apple’s story is below.
It may be a coincidence that this story spans Steve Jobs’ tenure at Apple, but I don’t think so. It begins in 1997 with Jobs’ return and Apple sitting at the brink of bankruptcy. It ends sixteen years later after the greatest turnaround in history and Jobs dead and in the grave. From a single billion in 1997, Apples cash position had risen to $57 billion by 2010; and, as Apple’s market value had risen from $839 million to $549 billion, the company had become the most valuable company in the world.
The NYT initially broke the story in 2010, alleging, apparently inaccurately, that Apple’s effective tax rate was only 9.8%. It culminated In 2013 with Congress grilling Apple for avoiding $400 billion in tax using a “web of tax shelters” with catchy names like the ”Double Irish and a Dutch Sandwich”. Note the use of the word “avoiding” which implies it was all done legally, instead of “evading” which would imply laws were broken.
Apple had broken no laws. They will never be prosecuted for tax avoidance, because tax avoidance is not against the law. It’s human nature to avoid income tax. None of these companies had broken any laws. None of them will ever be prosecuted.
This story is not about Apple outwitting the world’s governments. The point of this story is that the biggest companies in the world are quietly and effectively sheltering their income from taxation with legal tax savings devices and tax preferences that legislators embedded in tax codes for this particular purpose. The story is about Apple cutting it’s taxes all the way to zero in many cases by taking advantage of what the world’s governments willingly provided. Many tax savings devices and tax preferences have been embedded in the U.S. Tax code by the U.S. Congress. And most businesses are leaving them unused. But not voluntarily.
In Apple’s case, newspapers have reported the company saved $400 billion in taxes. But if the truth were known, it was probably more than that. Never the less, that $400 billion went into the cash balances on their Balance Sheet and into their market value, fueling their rise to ‘the world’s most valuable company. But their tax strategies added greatly to bottom line profits and company value. It’s a statistical fact, that $400 billion in tax savings fueled Apple’s rise to overtake Exxon Mobile as the most valuable company in the world.
Jobs obviously had no desire to contribute precious working capital to taxing authorities through faulty tax advisors.
Here’s the moral of this paper: If you want your company to break through the barrier that separates the ordinary companies from the remarkable companies that leave their mark on the universe, you need to pay a lot more attention to your income tax and your income tax advisors. If you intend to survive and thrive in the tumultuous 21st century, it’s essential to cut tax to the legal minimum. Paying more tax than the law requires is not the pathway to success. For multinationals sophisticated tax strategy is required to keep pace with competitors. But for closely held companies, those savings open doors otherwise closed and provide a needed burst of competitive advantage.
Tax strategy is the first prong in a four pronged approach to turning a company around. The others are ‘modern workforce management’, ‘regulatory management’ and a form of analytics we call ‘analytical accounting’ or ‘transactional analysis’. If you’re doing this, greatness is a viable option. And so is putting your mark on the universe … a’ la’ Apple.
You can bet Apple’s tax advisors are of the lively variety.
For more information, visit our web site: www.elliscpa.us , or call: 888-241-5040.