Buy the Bacon. Not the Sizzle

www.strategyfactory.us

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Don’t waste money on generic tax preparers.  Generic tax preparers are relationship marketers selling the sizzle, which is just background noise. They pull this off by distracting your attention away from the lack of results with a great relationship experience.  In the thirties, these people were called ‘grifters’.  Modern day grifters come in all shapes and sizes, from one man operations working out of their garage to big, established & highly reputable firms. But they all have one thing in common. They talk in grandiose terms about what they’ve accomplished for you, but they never reduce it to easily measured concrete savings that result in a real number you can take to tne bank. 

ELLIS is a results based marketer. We tell prospective clients we will save them more than we cost. We then explain where the savings will come from in easily understandable terms. We measure actual results after the fact and report the savings to you. If we fail to accomplish the savings we intended, although we never have except in the case of a collapsing company, we sit down or get on the phone and explain why that happened and we lay out the prospects for future savings.  In the old days they called people like us straight shooters. 

We can do this easily because 99% of the owners of closely held businesses pay more tax than the law requires. We know this because we’ve been monitoring it for 35 years. We won’t even tell you why. We’ll let you guess. But the obvious answer is probably the right one. 

ELLIS is selling the bacon; others are selling the sizzle.

www.elliscpa.us

One Life. One Chance. No Regrets.

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Photo Source: Beautifulquote.tumblr

One life. 
One chance. 
No regrets.

You own a business, a business with potential and opportunity. People tell you that and you feel it in your bones.

Of course, there are the naysayers. (First lesson: don’t surround yourself with naysayers.). Normally you wouldn’t pay any attention to this group. But the fact of the matter is, you haven’t been able to gain the traction to separate yourself from the competition. The economy has been a constant hinderence, but you know your competition is dealing with the same economy, and you realize some of you aren’t likely to survive, perhaps even you. Come to think of it, your competition does seem to be doing better in the marketplace than you are. You know there is something you could probably do to separate yourself from the competition and pull away from the pack. But you can’t quite put your finger on it.

If that describes you, ELLIS can help.

First of all, the economy is unlikely to improve for decades. ELLIS’ forecast predicts continued withering of the American economy stretching over decades. But it also predicts, specifically, how you can assure your success while those around you face ruin and despair. In fact, ELLIS goes so far as to predict that every company that survives to thrive in the 21st century will adopt the following business model, or one very like it. The companies that are most successful have already adopted it. Some of them were instrumental in devising it.

Amazon is the future of business. 
Google & Wikipedia are the future of knowledge. 
Apple is the future of innovation & customer loyalty.

These are the companies you must emulate to have any hope of surviving and thriving in the tumultuous and chaotic 21st century.

The business model I am going to describe was created by Steve Jobs as he pulled Apple from the brink of bankruptcy and propelled it to the most valuable company in the world. Your business model must put you into position where you can compete on level playing ground with Amazon. Right now, these three companies, especially Amazon, are busy spoiling your customers. And it isn’t price that will be the determining issue. People stand in line overnight for the opportunity to purchase the most expensive smart phones in the world. It’s efficiency. You’d damned well better be as efficient as Amazon, or you may as well start planning your business’ funeral right now 
 
Amazon is the most efficient business in the world right now because they have the best infrastructure. Everything from marketing to receiving the order, to pulling and packaging the product to delivering it to your home is done accurately, effectively and efficiently. In some localities you can get your order delivered the same day you place it.

Be honest. How does your business stack up?

I could regale you for hours with stories about everything from these companies’ tax strategies to their regulatory management to workforce management. In all of these areas and others they excel. Years ago they determined to make the willful effort to be constantly improving in every they had complete control over, and to do everything they could to gain control over everything else.

Ellis offers the business model and infrastructure to emulate these companies, regardless of your size or resources. It is completely feasible that your company is in the exact same situation Apple was in, in1998. This business model and infrastructure may be all that stands between you and putting your mark on the universe.

We’ll describe the business model and infrastructure in subsequent posts. In the meantime you can find out more by visiting our web site.

http://www.elliscpa.us

http://www.strategyfactory.us

Reinventing The Accounting Profession

Noble beginning

Double entry accounting was first documented in book form in 1494 by Luca Pacioli, a Franciscan monk, contemporary & actual buddy of Leonardo Da Vinci. Giovanni di Bicci de Medici introduced double entry accounting to the Medici family in the 14th century. The use of double entry accounting in the records of the office of the Treasurer of the Medici family has been confirmed as early as 1440.  But Antonio Manucci’s use of double entry records predates the most recent of those by 150 years,

Government treasurer’s offices are rarelly considered creative or innovative, as you’ve all learned by now if you are old enough to read this blog. If your mother is reading this to you, just trust me on this. Governments originate nothing. They copy of things they’ve seen elsewhere. Which is a lead pipe cinch double entry accounting was in widespread use by the time the treasurer’s office heard about it.

So it is safe to assume, if double entry accounting was in widespread use in Italy in the middle of the 15th century, the 13th century date documented by the Manucci family is a reasonably safe bet. It was probably in use well before that.

800 years

The point of all that laboring is to make the further point that the accounting profession is in dire need of updating. We have been using the same basic structure and financial reports for 8 centuries … That’s 800 years … almost a millennium. Actual financial reports have been found in these ancient records. That is a very long time, especially when you consider everything else in the world from iphones to Chevrolets are updated annually, or even semi-annually. Magazines are updated monthly, and blogs, but not this one, are updated daily. In a mere decade the products barely resemble each other. But accounting is still plodding along using the same old stuff.

Applause please

It was a remarkable invention, allowing us to measure a business’ progress or regression over time or at a moment in time.The former came to be known as the income statement and the latter came to be known as the balance sheet. Some have said the industrial revolution rested on the back of double entry accounting. It was at least one of the legs on the stool because it made it possible to manage a shop’s progress and health even if you couldn’t see it. But, silly us, here we are talking about this as though it were historical.

One more thing

At one time accounting was an art. But the technocrats who failed quantum physics have taken it over and given everyone the impression it involves higher mathematics. But in actual fact, all you ever needed to know then, which is less the case now, was how to add and subtract, which you could do on your fingers. And many did. Then came calculators which were as large as harvestors and hopped around on tables and made as much mechanical crunching, crashing noises as any actual harvestor. (I have witnessed them and they are truly terrifying.) At that point you didn’t even need a passing acquaintance with your fingers. Today you don’t even need to know how to hold a pencil or recognize paper. Lacking creative or innovative abilities, these lower technocrats have been happily copying (much like the treasurer’s office) what came before them. Before long, 800 years have passed and this is where we are today.  It is as though we’ve digitized the Roman Legions without accounting for modern military appurtenances.

Negative Progress?

Accounting has progressed backwards since it was originally invented prior to the 13th century from a respected art (remember Pacioli was buddies with Leonardo Da Vinci) to a little considered backwash of lower technocrats. Most people consider the accounting department analogous to the swamp.  If you want to drive people away in a bar, tell them you’re an accountant. Serial killers attract more and friendlier people. A further indication of the profession’s standing in the world is this, most accounting graduates want to be a tax person instead of an accountant. (Holy cow. How is that possible?) Tax is related to accounting like a carrot is related to a national forest. But to them, it’s the epitome.

Accounting, all by itself, should be a respected and valued profession. Accountants should be as popular as guys doing magic tricks. Like them, accountants should hear exclamations like, “I can’t believe you did that.” You certainly have the tools to do wonderful and magical things for businesses.

To be continued.  We’ll come back to this subject from time to time.

Best Advice

The lack of progression in the the accounting profession is of course an unsettling circumstance for some of us accountants, who have, at least myself, become determined to reinvent the accounting profession to better serve the needs of a battered clientele during the troubled and turbulent 21st century.

Here is my best advice … avoid accountants and accounting firms that develop relationships as a marketing tool. These are the guys who work the room like a politician at every event, who want to play golf with you. They’ll buy you drinks, wash your dog and mow your lawn. The problem is, while they’re patting you on the back, they may be picking your pocket.

Try to go with one who is a value or results based marketer.

It’s a sad fact of life, but we all market our services. Most of us, it’s sad to say, by developing relationships.

Tax Shelter

The number one tax shelter known to man is a wholly owned business. Always has been. Always will be until they change the constitution, either by legislative action or neglect.

55 Tax Breaks Have Expired

The trend for taxation is up.
This is no time for a sloppy approach to taxation.

As far as I know, no expiring tax break has been extended.  But the AMT fix was made permanent last year.

Among the tax breaks not extended …

Section 179 and bonus first year depreciation

This means you will have to depreciate your computers and other equipment over five to seven years instead of taking it all into expense when you buy it.  If you are used to taking substantial chunks of section 179 or bonus depreciation … you will feel the bite. BECAUSE, not only will you not write off your new acquisition in the initial year, you will only get HALF the first year’s depreciation. BECAUSE that’s the way MACRS depreciation works. HOWEVER, this is just a timing difference, you do not lose the deduction for all time. You just can’t take the deduction as fast as you used to. Which means more tax now; less tax in the future.

That will be a big speed bump for many businesses. One of the problems with timing differences is this … they’re addicting.

Corporate Research & Development Credits

This will have no immediate effect on any clients, but it is notable because this is the primary reason no big corporation in the country pays tax at the highest rates despite the fact they earn millions or even billions of dollars.

Tax Relief for Underwater Homeowners

Income forgiveness becomes taxable for people who short-sell their homes for less than the mortgage amount. However, there are still ways to get out of taxation here, so there’s still hope for you.

Other stuff includes many of the green credits, windpower, teaching supplies, commuting expense, and several  industry specific tax breaks.

In one way or another this will hit most business taxpayers, some of them it will hit in a big way

Article here … if you’re bored … not a good article, but the best I could find …

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/02/from-nascar-to-wind-power-congress-just-let-55-tax-breaks-expire/

But remember these truisms

The number one tax shelter known to man is a wholly owned business. Always has been. Always will be until they change the constitution, either by legislative action or neglect.

Never do anything just because of taxes. At the best it will cost you 100% to save 45%.

Revenue solves all problems. Profits are king. Cash flow is king. Working for a small, steady business is Crown Prince.

The point of tax strategy is to increase the equilibrium point between revenue, costs and income tax to where the maximum amount of money sticks to the wall. Sometimes this is achieved by paying more taxes.

The way to pay the most taxes possible is with a partnership, an LLC, a  C corp or as a schedule C business or any of the other of the multitude of business entities available, except S corps. The way to pay the least tax is to mix and match all entities to take advantage of every tax preference in sight.

Always hold real estate in an LLC. Always do business as an S corp. Never hold real estate in a  corporation. Never do business in an LLC.

If you have big hands, tattoo these truisms on the back of your hands.

Robert Ellis
www.elliscpafirm.com
The edge to survive in a perilous world

Year End Stuff

There are always a few year-end things to do to make sure you’ve positioned yourself adequately to keep your taxes at the legal minimum over time.  Our intention is to decrease taxes in a way that does not become taxable in a subsequent year. It is not a good thing to lower taxes this year only to increase them more next year. Thus we don’t normally include timing differences in our recommendations. Timing differences are the bread and butter of tax firms trying to give you the last minute impression they are looking out for your best interests.

Also of salesmen trying to make year-end quotas.  Never do anything just for taxes. Always call us first.

IRA & 401(k)

It doesn’t make any difference if you want to put a couple thousand dollars into an IRA or 401(k). But there are people out there who have millions in 401(k)s, and those people are playing a fool’s game adding to their 401(k).  It’s far better to pay your taxes and put what’s left in an investment. At least if you make a profit, your taxes will be half of what they otherwise would be. This is by far the best approach and the one I make to all my clients. If you need help with an investment adviser, let me know and I can recommend some.

However, if you’re employed and your employer is matching your contribution, the previous paragraph goes out the window. In that case, go high enough to maximize your employer’s match and then stop. Your goal here is to get as much as possible from your employer because that should pay the taxes when you want out. Don’t forget the entire amount is taxable plus an 10% penalty if you are younger than 50.

Taxes Trending Up

You are all aware that basic tax rates are up. Noticeably up. To the extent that you will feel the pain. We are seeing that in more ways than not. We are also seeing more of our clients post record years, so their tax bite is taking a double whammy. More than any year since 2008.  As I have said before, if you have your business in order to operate smoothly and efficiently you will experience year over year gains.  Competitors down the street who are not operating smoothly and efficiently will eventually hit the wall.

In the 21st century, infrastructure is everything.

Medical Insurance Deduction

The primary reason I am writing this post is because of health insurance on S corp owners.  If you are an owner of an S corp and your insurance is not provided by a C corp, the cost needs to be reflected on your W-2 in order to be fully deductible. If it’s not, the only option is to include it on your personal return as an itemized deduction where it will be phased out up to 10% of your total income. If you’re audited, the IRS will expect a legitimate reason why your health insurance plan is not under your S Corp name. For example – Some States don’t allow it, or the insurance provider doesn’t allow the particular group plan……..

NOTE: This doesn’t apply to C corps with a medical reimbursement plan. IN that case, the C corp can either reimburse you or pay the premiums directly. This is for you getting your insurance personally or from your S corp.  We will be updating Medical Reimbursement Plans this year.

Two years ago, it didn’t make any difference because the result is the same regardless of how you calculate the deduction.  Then, surprise, surprise, the IRS began enforcing regulations they had never enforced, added new guidelines, disallowing the self employed health insurance deduction on page one … and suddenly, many, many S corp owners began losing their insurance deduction. Now the insurance premium must be paid by the S corp, included on your W-2, and your W-2 wages must be equal to or more than the insurance deduction.

We have been communicating with many of you on this issue.  If we have and you have already dealt with the information we need, that’s good. If you fit the requirements of this and you want to be included in this, please let us know today. We have only a limited amount of time to comply.

Tax Projection Efforts

This is also why we’ve stepped up our tax projection efforts. With taxes and income both on the rise, we are seeing a lot of clients surprised at their tax liability.  If we didn’t communicate with you on your tax projection, we probably looked at it and decided you were probably OK. If you are experiencing higher income and want to make sure, let us know.

The End

We want to make sure you all understand what’s going on, and why we have been pestering you for this information.  There have been other examples of this kind of tightening the requirements to increase tax revenues, but this one is most widely felt. You can expect this kind of development to be a normal undertaking of the IRS for years to come. They are in a revenue raising mood. And we are their target.

That’s why we’re in business … to offset all their moves to your best advantage.

Robert Ellis
www.elliscpafirm.com
The edge to survive in a perilous world
888-241-5040

What went wrong with the IRS?

The American system of taxation is a complex undertaking. It is so complex it relies on the willing cooperation of the population and the willing assistance of tax professionals. With an estimated 85 million taxpayers paying federal income taxes and an equal number filing only to receive welfare payments, without the willing participation of everyone, the system would soon crumble.

The managing partner of a fairly large regional firm once told me that the IRS relies on the accounting profession to keep people on the straight and narrow. That seemed a novel idea at the time, but it’s perfectly obvious. They can’t audit every return and they can’t put everyone in jail. They can’t even handle Obamacare.

It is the accounting profession that holds the system together.

But the system is showing signs of decay … of a government that no longer trusts its citizens and a citizenry increasingly concerned it won’t be treated fairly by the IRS and other federal agencies.

For this system to work, people must feel they have competent advocates in their corner protecting them from the unbridled aggression of the IRS. They’re willing to put up with aggression as long as they think there is someone in their corner protecting them. You can argue that the IRS aggression is not unbridled, but in my experience as a tax professional, it is. Anecdotally, I recently ran into an appeals agent who suspected I wasn’t myself because my signatures didn’t match. Whatever that means, but she effectively barred me from representing my clients in a tax audit. Because the contact information of supervisory levels at the IRS isn’t published, it took me several days to get the number of someone above her. Once I found that person, the issue was quickly resolved. Field agents and appeals agents sometimes run wild. I could entertain you all afternoon with stories along these lines.

This kind of aggression has been increasing for several years, not due to Congressional mandate mind you, but due entirely to internal actions of the IRS: either at the agent level or the service level in changing the regs, changing enforcement action, etc., etc.

As the IRS is ramping up their aggression on the one hand, they’re simultaneously threatening professional tax preparers by attempting to make tax professionals part of the enforcement arm of the IRS on the one hand, and attempting to police professionals for incompetence on the other hand. This makes professionals very concerned about the penalties and sanctions the IRS could levy against them for actions appropriately is the responsibility of the client. Penalties can be severe, including losing your right to practice before the IRS or going to jail. What this is effectively doing is making tax professionals afraid to undertake a vigorous defense of their clients in the event of tax controversy. Some professionals have completely bailed on this issue. This is an ugly spiral that is feeding on itself and is not likely to end well.

Now I am one who thinks that policing professionals was not a bad idea. I cheered the concept when it was first disclosed because there has always been a lot of incompetence and shoddiness in the profession. But it seems to be getting worse rather than improving. Policing actually made the profession less competent. Why? … because today tax professionals are less likely to understand the constitutional underpinnings of the tax system and are therefore are less likely to take substantive stands for their clients.

The fundamental aspect of taxation is that you can only be taxed on profits. You are constitutionally protected from government attempts to tax you for receipts that are not profits. For instance if you buy something for $17 and sell it for $5, you can’t be taxed on the $5. This concept can be traced from the 16th amendment to the Supreme Court case Glenshaw Glass to section 162 of the internal revenue code. As long as a deduction is ordinary and necessary in the pursuit of profits and meets the requirements of economic substance and profit motive, it’s deductible. And whether it’s deductible or not is not decided by the tax code or the IRS, it’s decided by you. In fact the tax code doesn’t detail what is deductible and what isn’t. Depending on this formula, the exact same thing could be deductible for some taxpayers and not deductible for other taxpayers.

This seems to be getting lost in the process. I have had to push cases all the way to court to get fair treatment for some of my clients. I will say that, in a limited number of cases I got fair treatment for my clients at lower levels. But I used to say, to find a reasonable person at the IRS you had to push it up to appeals. Now I am saying more and more, that sanity now resides at the courts. For how long, who knows?

The result, and I can guess the intended result is, tax professionals are less likely to take legitimate deductions when they know they may have to explain them to the IRS. They toe the company line, as it is, as though they’re working alongside the IRS to increase revenue collections, never even mentioning their new attitude to their clients. Probably because they don’t realize it, but you can bet they’re thinking, “I don’t want to lose my ticket.”

And you can’t blame them.

Perhaps.

But this development has certainly made it easier to differentiate my practice from my competitors. If you’re a business owner, this is not a good time to rely on a professional that came to you via relationship marketing. This is a good time to rely on a results based or value based marketer.

We will come back to this subject often on this blog.

This will serve as an appetizer.

http://www.elliscpa.us

Are you Fonda Fonda?

This is great. Hanoi Jane gets 501(c)(3) tax exempt status, people who give her money (who can these idiots be?) get a tax deduction and she probably uses the money to do her nails. The starving children in Africa are still starving, and polar bears are still freezing in the cold temperatures caused by Global Warming. I didn’t mind her brother Peter and his iconic film Easy Rider. I liked her dad Henry. But Jane is just not one of the Fonda’s I’m Fond of.

link here

http://www.foxnews.com/entertainment/2013/12/12/records-jane-fonda-charity-foundation-hasnt-made-donation-in-5-years/

Unemployment tax … part of the dangerous mundane

Unemployment Tax – part of the dangerous mundane

Just so everyone knows.

Payments to subcontractors can be subject to unemployment tax. Just as if you paid them a W-2.

Businesses are several times more likely to be audited by the employment tax people than by the IRS, and the employment tax auditors are generally smarter because most of them are real people.  If you’re issuing 1099s to businesses, no big deal. If you are making a few pretty small payments and issuing 1099s to individuals, again, no big deal. You’re liable for the tax but they’re more likely to brush it off as incidental.  Besides it isn’t going to break the bank.

But if you are paying a large number of people for their services and issuing them 1099s instead of paychecks, the auditors will assert unemployment tax. They’re so hungry for money, they aren’t real particular about the law.

Just saying …

A client ran into this situation earlier this year and decided not to fight it. I personally think it could be defended relatively easily.  This is not difficult to mount a defense to. But, when things go to court, you never know …  But I don’t make those decisions. You do.

In fact I don’t make any of these decisions. I just think out loud.

Four things I’d like to think out loud about.

  1. If it’s industry practice, it helps a lot.  If your competitors are doing the same thing, it would put you at a competitive disadvantage to pay tax when your competitors aren’t. If you end up in a controversy you have to fight, this is a strong defense as an addendum to everything else you will be using to defend yourself.  This is a very strong issue. Many IRS regulations and court cases have hinged on this particular issue. In fact, when you scan the cases you will see this pop up time and time again. Industry Practice.
  2. If you make payments directly to corporations (i.e., Bill Jones Operating Company, Inc.) it helps because you don’t have to issue 1099s to corporations. One of the targets of one of these audits is 1099s.
  3. All these corporate or LLC businesses you’re paying have business tax deductions.  Mileage, supplies, whatever. This is another very strong defense because, the tax is supposed to be on payments for labor (personal services). If the company has any deductions at all, then the entire payment is obviously not for labor.  Part of it is for the business’ expenses.
  4. This is a practical consideration. The account to which you’re coding these payments can either attract or escape the attention of the auditors . You should all know that accounting is an art, not a science. There is no “right” account.  If you choose an account that’s realistic that won’t attract the attention of the unemployment auditors, you’ll be better off. You are under no obligation to stick your head in the noose.

Hope this helps.

Pardon any typos. I have a feeling there are some. I’m famous for my typos.