The Swiss banking giant UBS has agreed to turn over the names of 4,450 American clients suspected of tax evasion in the US. Switzerland has always had strong bank secrecy laws and has therefore been an attractive option for individuals seeking to hide income. According to the IRS the 4,450 accounts held over $18 billion at one point. The New York Times reports:

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A simple quiz for smart marketers:

Let’s say your goal is to reduce gasoline consumption.

And let’s say there are only two kinds of cars in the world. Half of them are Suburbans that get 10 miles to the gallon and half are Priuses that get 50.

If we assume that all the cars drive the same number of miles, which would be a better investment:

* Get new tires for all the Suburbans and increase their mileage a bit to 13 miles per gallon.
* Replace all the Priuses and rewire them to get 100 miles per gallon (doubling their average!)

Trick question aside, the answer is the first one. (In fact, it’s more than twice as good a move).

We’re not wired for arithmetic. It confuses us, stresses us out and more often than not, is used to deceive. [PS here are some reader-contributed explanations for those still lost: Charlie, and Nariman.]

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Rep. Thaddeus McCotter (R-MI) has introduced H.R. 3501, the “Humanity and Pets Partnered Through the Years” (HAPPY) Act, which would allow taxpayers to deduct up to $3,500 per year in pet expenses from their federal taxes.

Ruh ro! As an organization that put a sad-looking puppy on its newsletter recently, we can’t very well criticize policy efforts that take advantage of Americans’ love of man’s-best-friend. And yes, those expenses quickly add up: a friend of mine this past week shelled out $700 after Sweet Pea swallowed a pill that fell on the floor.

Pets are good and caring for pets is good, but doing it through the tax code is problematic. MSN catalogues some of the problems associated with this bill:

“Qualified pet expenses” appears to include a wide variety of undefined things involved in providing care, with the exception of acquisition costs. Thus, the adoption fee at the pound would not be included. But would you get a tax break for the grooming session that includes nail polish for FiFi, or every can of Fancy Feast or each new toy? Or how about the little castle you buy for the fish tank?

Kathy at Blogging For Michigan also notes that people can deduct expenses for their own medical care only if those costs exceed 7.5% of adjusted gross income, so the bill would give your pet’s medical bills better tax treatment than your own.

No doubt the IRS will spend an inordinate amount of time coming up with what a “qualified pet expense” is, and it will be either so broad to be ridiculous or so narrow as to be useless. Either way it’ll be a mess of government micromanagement.

If you want to cut taxes, cut taxes. But this type of targeted tax break is precisely the thing that mucks up the tax code and adds complexity and uncertainty. (Check out the mocked-up Individual Pet Tax Return (Form W-K9) for some insight as to why.) A federal government program for pet expenses would never fly, yet this bill would achieve the same thing via a less-scrutinized tax deduction. And the acronym is ridiculous. TTH: Trying Too Hard.

People shouldn’t get pets just because the tax code encourages them to do so. In fact, such people would probably be the worst pet owners. I’d hate to see loving pet owners become dependent on the government for their pet care.

Politicians should use the tax code to raise revenue, not to shape people’s behavior in ways they think is nice.

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Here’s a great short power point forwarded to me from one of my Padgett Brothers…..see it through to the end, it’s worth it.

In my experience with Small Business Owners, I have seen some pretty messy finances. And many times a Small Business Owner will tell me “Oh, no…you haven’t seen anything this bad.”

It always reminds me of this scene from Blade Runner (sans the “time to die” part):

People have been asking me about the “Financial Crisis” recently. What I have found is that Good Business Ownership trumps tough economic conditions. Business Owners who were struggling before are struggling now. Business Owners that were making money before are making money now.

A Small Business Owners investments are largely on Main Street, not Wall Street.

Another dynamic to which Small Business Owners should be sensitive is that the bulk of their investments are in their business.

The good news with this is that uncertainty about a Small Business’ financial condition can be easily removed with a good monthly accounting service. A Small Business Owner may worry about their IRA’s or brokerage accounts, but the when it comes the business, we should all know exactly where we stand.

We can remove uncertainty about our main investment.

Some good great sources for a broader understanding of the “Financial Crisis”

Great, Great stuff on this over at This American Life here and here.

It would be impossible to overstate how great these reports are. You will be informed and satiated by listening to these.

These are long, but quite engaging and easy to follow. Once you listen to these you will have a better understanding of the situation beyond that of most financial services consultants.

For a shorter explanation, check this 8 minute video out.

Note: These are all NPR sources, but are free from political commentary. These are fair, accurate and thorough reports.

Recently Beth posted the following question on the FAQ’s page:

Hi Jim,

I have belonged to a bartering organization for some time. The fees are being raised, and since my business is growing, I am rethinking my need for a bartering group. Jim, can you tell me the pros and cons on taxes for bartering? I always receive a 1099 from the bartering broker, usually between 1,000 and 6,0000 per year. Should I have this barter income come as my business, or my personal income (I have used bartering for personal use and business needs) and I am not sure how this affect my taxable income.

thanks

Beth Caldwell
Pittsburgh Professional Women

Great question Beth! As cash gets tighter, barter activity tends to increase.

The short Answer:

It’s not worth the trouble.

The Long Answer:

Let’s start off by reviewing barter exchanges by taking a look at a short note about this in the September “Small Biz Builder”:

Barter Exchange Defined

“Transactions involving the exchange of property or services instead of cash are called barter exchanges. The fair market value (FMV) of the property or services received in an exchange is taxable income to the recipient.

For example, an auto mechanic repairs a landlord’s car in return for 6 months rent-free use of an apartment. The landlord reports the FMV of the auto repair as rental income and the mechanic reports the fair market rental value of the apartment as self-employment income.

Caution: due to increased bartering activity via the Internet, the IRS has recently signaled its intent to pursue tracking barter exchanges.”

Now for my opinion:

I have never seen any increase in tax efficiency that results from Barter Exchanges. (But tax efficiency isn’t everything, as we will see in later paragraphs.) In fact, bartering may result in a greater likelihood that your accounting may be considered inaccurate by the taxing agencies!

(After all, the IRS has “recently signaled its intent to pursue tracking barter exchanges”. This is because taxing agencies don’t believe that barter income and expense are receiving the proper treatment)

In most cases, we have found that trading goods and services for other goods and services is less efficient than trading trading dollars for goods and services. And this is not only due to the complexity inherent in reporting bartering, but also due to the service fees charged by barter systems.

When Bartering might make sense:

There is, however, a case where barter might make sense: If a Business Owner has extra “stuff” that wouldn’t get used otherwise, offering this “stuff” as payment for a needed service would be a way to increase the business’ financial efficiency.

Here are (2) examples:

Example 1: A hotel that has capacity during a slow time. They have all cost for those rooms even if the room were never reserved. But they can offer the rooms, something they were paying for anyway, as an exchange for another good or service.

Example 2: A caterer has 10 gallons of milk that need to be used in the next (2) days. The caterer can offer to provide some food to a Chamber of Commerce in return for free admision to future events. The caterer saved the loss of their inventory, and also got something in return that the caterer was going to use anyway (Admission to the chamber events).

Your Tax Situation:

As far as what to do with your taxes, we would need to apply the appropriate proportion of income/expense to both business and personal tax returns. I know it’s kind of a pain, but the best thing to do would be to pull out your monthly barter statements for the year, and start adding up the business transactions and adding up the personal transactions. Oh, and by the way, this is an example of the increased complexity that results from bartering transactions.

The business income/expense gets reported on the business return and the personal income/expense would get reported on your personal return. If you want a more technical answer, email me directly and I will go into it with you.

(And if I could make an unrelated observation, your financial life, beyond dealing with barter exchanges, would be better if you didn’t intermingle business and personal transactions!)

For you Beth, largely because you offer a service, I would recommend trading those little green rectangles of paper that we call money for the goods and services that you need.

Making money is art and working is art and good business is the best art.

—-Andy Warhol

A trucking and earthwork business operator has been accused of allegedly threatening to shoot two Internal Revenue Service officers.

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Huh?

This paper reexamines the responsiveness of taxable income to changes in in marginal tax rates using detailed compensation data on several thousand corporate executives from 1991 to 1995. The data confirm that the higher marginal rates of 1993 led to a significant decline in taxable income. This small group of executives can account for as much as 20% of the aggregate change in wage and salary income for the 1 million richest taxpayers and one person alone can account for over 2%. But the decline is almost entirely a short-run shift in the timing of compensation rather than a permanent reduction in taxable income. The short-run elasticity of taxable income with respect to the net of tax share exceeds one but the elasticity after one year is at most 0.4 and probably close to 0. The response comes almost entirely from a large increase in the exercise of stock options in the year before the tax change, followed by a decline in the year of the tax change and the change is concentrated among executives at the top of the income distribution. Executives without stock options are 6 times less responsive to taxation. Other types of compensation such as salary and bonus or nontaxed income are either not responsive to tax rates or not large enough to make a difference. The estimated elasticities show that the dead weight loss of recent tax increases was around 15-25 percent of the revenue generated.

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This article says it all. But, I think it is funny (and Embarrassing for Congress) that Congress is blaming the IRS. The IRS has no choice but to enforce the laws that Congress passes. I don’t think that there is a person in the IRS that actually thinks the antiquated regulations regarding the cell phone deductions are appropriate. But what are they going to do? Just ignore the law?

If Congress would change the law, then “IRS Weenies” (see the last paragraph of the quoted article) would be enforcing the appropriate laws instead of being saddled with an unwieldy tax code.

I just kills me how Congress likes to blame the IRS. If Congress passed and update laws as appropriate, then these issues wouldn’t occur. I think that such out-in-out pandering and posturing makes Texas Representative Sam Johnson the “Weenie”.

When I explain this Regulation (or any of the many other inappropriate regulations) to my clients, I place the blame where it belongs: on Congress, not the IRS

Bet you didn’t even know: If you use a cell phone for work (one provided by your company), you’re supposed to keep a detailed log of every call you make on that phone, recording whether each call is for work or for personal use. If you don’t, and even if 100 percent of the calls are for work purposes, your employer, by law, can’t consider your phone a business expense. Instead, it has to consider the phone a perk provided by the company, which means its value has to be treated as taxable income to you.

If this sounds crazy it’s because virtually no one follows the letter of the law on this issue. (If anyone out there has a work-provided cell phone and has the value of its service tacked on to their W-2 at the end of the year, let me know.) But it is the law, and it’s basically remained unchanged since cell phone service began as an outrageous luxury for the rich in 1989.

While most employers have simply been ignoring the law—the same way that no one itemizes and pays taxes on out-of-state purchases—the IRS has of late been cracking down on the issue. According to the L.A. Times, UCLA got slapped with a $239,000 bill for back taxes because employees hadn’t been keeping the aforementioned logs. UC San Diego received a similar, $186,000 bill. The University of California system provides some 13,000 workers with University-issued cell phones, so its potential liability is huge. Nationally, 5.5 million people have phones provided by their employers, which must have IRS agents’ eyes lighting up with giant dollar signs like Scrooge McDuck.

The good news? Our Congressmen are trying to ride to the rescue to change the law that requires the absurd recordkeeping. Both the House and Senate have pending legislation to take cell phones off the list of taxable fringe benefits, and even the IRS’ Advisory Committee now considers the rules to be overly “burdensome for any employer” and recommended relaxing the requirements.

See more details from the Times at the link below, including this gem of a quote from Texas Representative Sam Johnson: “In 1989 when cellphones were huge and when it cost a lot of money to make a phone call. Nowadays they’re a dime a dozen and the cost is way down. If you don’t log all your telephone calls, you’re going to have some IRS weenie after you. That’s why we’re trying to get the law changed—because it just doesn’t make any sense anymore.”

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In March, agents served the orig­inal summons, calling Wesson to testify and produce certain books, records, papers and data account­ing for his taxes dating back to 2003. Instead, Wesson demanded a cer­tified copy of an IRS agent’s oath and a copy of the agent’s photo ID, according to court documents.

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This from the Tax Policy Blog over at the Tax Foundation website:

Once again, the United States Congress is making the tax code worse. Not that it should surprise any of the readers of this blog. Members of Congress, however stupid their policies may be, just want to appear as if they are doing something right now as it relates to housing. And if that means making the tax code more complicated and more distortionary and more discriminatory, then so be it.

The housing bill that Congress is set to pass and the President is now willing to sign is set to add a number of lines to the standard 1040, including a deduction for property taxes paid that will likely be in the adjustments section (above-the-line deduction). And then there is the new credit for homeowners that must be repaid in future years. It’s essentially an interest-free loan administered through the tax code, as if the federal government doesn’t have any entities that subsidize and administer borrowing for housing already.

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Congress is on the verge of requiring payment card processors to tell the Internal Revenue Service how much money merchants receive through credit card and debit card transactions.

…

“This proposal does not raise taxes on anyone,” said Baucus, who chairs the Senate Finance Committee. “These information reports would just cause people to file more accurate returns.”

…

The legislation, however, would require credit card processors to withhold taxes on payments to a merchant whose taxpayer identification number (TIN) couldn’t be verified. But there are bound to be errors in the TIN verification process, Darien said, meaning some small businesses could have 28 percent of their credit card reimbursements withheld until the errors are corrected.

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The short answer is NO. No amount of accounting is going to make the prices lower at the pump. (Surprised you, huh? I bet you thought I was going to wax poetic about some underused tax deduction.) But Good Accounting can help you save money on expenses (and taxes) including your fuel expenses.

I always ask Small Business Owners if they know how much money they made last month. Usually, 90% will raise their hands. Then I ask if they know how much they spent last month. Only 10% will leave their hands raised. Lastly I will ask if they know how much they spent on Utilities, Payroll, Supplies, etc…..and I am usually left with no hands.

I have yet to meet a successful Business Owner who doesn’t count his/her money every month.

(An elemental part of accounting is actually assigning expenses to …well….accounts. The rest of the world would consider these categories, but accounting is based on the allocating of monies to specific categories: Expense accounts, Sales accounts, Equity accounts, etc….)

So when a Business Owner looks over their accounts, they can see exactly what they are spending on each category. And if it turns out that 40% of expenses are going to Supplies, perhaps some changes can be made. The same is true of other expense categories like Rents, Licenses, Dues and Subscriptions, Repairs, Advertising, and yes, Fuel.

If a Small Business Owner feels the need to tighten up their spending, it would be difficult to make any strategic decisions without a good accounting. (That’s one reason why I like my job — it’s recession proof!)

So if rising fuel costs are hurting your bottom line, do some accounting and see if any funds can be reallocated from other expenses. A process like this is the epitome of Small Business Ownership. Isn’t it great?

This post from Business Opportunities and Ideas opines that there are some good things about high gas prices. I must admit the same idea has crossed my mind…

However, I don’t think the high price of oil is a bad thing. For years we’ve been warned that oil is running out and that burning it is a major contributor to greenhouse gasses – but despite acknowledging the facts we’ve not really changed our habits. Experience tells us that when prices increase the incentives to find alternates also increases and that’s got to be good news for the environment. Even if it’s a pain in the butt for most of us now.

It also makes me think that alternatives to oil are going to be the next big boom – if you missed the Internet boom then here’s your advanced warning alternatives to oil is the biggest business opportunity of the next 10-20 years – I predict that there will be many billionaires made in businesses that provide alternative technology to oil.

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He means bugs. To be more precise: the genetic alteration of bugs – very, very small ones – so that when they feed on agricultural waste such as woodchips or wheat straw, they do something extraordinary. They excrete crude oil.

Unbelievably, this is not science fiction. Mr Pal holds up a small beaker of bug excretion that could, theoretically, be poured into the tank of the giant Lexus SUV next to us. Not that Mr Pal is willing to risk it just yet. He gives it a month before the first vehicle is filled up on what he calls “renewable petroleum”. After that, he grins, “it’s a brave new world”.

Scientists find bugs that eat waste and excrete petrol – Times Online
 

I don’t know that all this is actually good for humanity — Wouldn’t this lead to somehow betraying the inherent Dignity of Man?  (e.g. how long before we genetically modify humans to be perfect slaves?  Or Modify some humans to to be inferior/superior to others, etc….)

(I know this is just an accounting blog, but everything we do in our life expresses our values and accounting is no different.  Any accountant can easily look at any balance sheet or income statement and know what the client’s values are.  So perhaps revealing some of my own values can help other gain insight on how this profession truly works.)

Just goes to show you what a little empirical analysis will do:

A study published on Thursday by the Dutch Centre for Insurance Statistics (CVS) showed that fewer accidents and reports of fire and theft occur when the 13th of the month falls on a Friday than on other Fridays.

Friday 13th not more unlucky, study shows | Oddly Enough | Reuters

I can’t help but remark about how this reflects on Small Business Accounting.  How many times have you thought that you’ve had a great month, only to look in your bank account and see a smaller balance than expected?  Or found that you spend more money on labor than you thought? 

A little accounting can go a long way….

I use my cell all day, everyday.  Maybe I should stop?

“We cannot say with any certainty that cellphones are either safe or not safe,” Dr. Black said on CNN. “My concern is that with the widespread use of cellphones, the worst scenario would be that we get the definitive study 10 years from now, and we find out there is a correlation.”

Well – Debate Over Link Between Cellphones and Cancer Is Revived – NYTimes.com

The IRS is giving a hard time to Milwaukee County Executive Scott Walker:

Milwaukee County Executive Scott Walker had to fight the IRS to allow him to claim the portion of his salary he gives back to the county as a charitable donation, Walker says.

Walker gave back $60,000 a year of his $129,000 salary for each of his first six years in office, to fulfill a 2002 campaign pledge. In 2005, the IRS questioned whether his county donations were actually political donations, Walker said in an interview. He took the charitable donation deduction as a way to offset the income taxes he would otherwise pay on the money he gives back, Walker said.

He filed an appeal with the U.S. Tax Court, providing a letter from county Treasurer Dan Diliberti stating that Walker’s $60k was going into the county’s coffers, not some campaign account. The IRS then backed off, Walker said.

He’s now cutting his give-back to $10,000 a year. His donations stopped in April, following his re-election but will resume soon with bi-weekly payments that add up to $10,000, Diliberti said.

Walker fought IRS over his givebacks – All Politics

Looks like mean ol’ New York is going to start taxing Amazon.

Savvy shoppers have long enjoyed a simple rule of thumb: buy from out-of-state e-tailers, save the tax. The Empire State is the first (and so far only) state to require online retailers to collect sales tax even when they have no “physical presence” in the state, such as a store, a warehouse, or even a sales rep. Amazon and rival Overstock.com (OSTK) say the law is unconstitutional, and each has filed suit against the state. “We’ve worked very hard not to become a tax collector,” says an Overstock spokesperson.

Attention, Online Shoppers: Taxes Ahead

Tags: Taxes

I recently came across the coolest website ever at the National Federation of Independent Business. The website is 411SmallBusinessFacts.com.

I have to be careful, I could read this all day.

This website has compiled the results of over 2000 small business surveys

For instance did you know that Sixty-one (61) percent of small-employer taxpayers typically consult a tax professional prior to making a major financial decision for the business? Or that Thirty-nine (39) percent say that they originally went into the business with one or more family members. Almost three-quarters of inherited businesses were transferred to more than a single family member?

Here there is verifiable information. I no longer have to say, “Well….you know…they say….” Instead I can say:

The data for this survey report were collected for the NFIB Research Foundation by the executive interviewing group of The Gallup Organization. The interviews for this edition of the Poll were conducted between June 8 and July 8, 2002 from a sample of small employers. “Small employer” was defined for purposes of this survey as a business owner employing no less than one individual in addition to the owner(s) and no more than 249.

The sampling frame used for the survey was drawn at the Foundation’s direction from the files of the Dun & Bradstreet Corporation, an imperfect file but the best currently available for public use. A random stratified sample design is typically employed to compensate for the highly skewed distribution of small-business owners by employee size of firm (Table A1). Almost 60 percent of employers in the United States employ just one to four people meaning that a random sample would yield comparatively few larger small employers to interview. Since size within the small-business population is often an important differentiating variable, it is important that an adequate number of interviews be conducted among those employing more than 10 people. The interview quotas established to achieve these added interviews from larger, small-business owners are arbitrary but adequate to allow independent examination of the 10-19 and 20-249 employee size classes as well as the 1-9 employee size group.

Actually….I think I might just say, “Well, you know they say….”

I don’t think anybody would ever dispute Disney’s Preeminence as brand but thre are some who question exactly how they got there.

Here is an article at Church of the Customer about Disney’s curious decision to close down a successful and profitable web site simply becuase it doesn’t fit “their model”.

Disney’s Virtual Magic Kingdom is a virtual representation of the real-life Disneyland theme park. It’s also an online community for evangelists of Disneyland.

More than a million avatars have been created at VMK. By almost any standard, it’s a popular site.

But Disney plans to shutter VMK tomorrow night, and that’s caused consternation in paradise. Petitions have been signed, protest sites have been created. VMK citizens wonder why Disney would want to close something that solidifies and extends their loyalty.

Here’s one reason: Disney envisioned VMK as an 18-month promotion, not a long-term loyalty effort.

What confidence they must have in their plan to take this action. Here is another article at Small Business Branding:

I took away a lesson in how to make customers love you. Give them a consistent message and over deliver on everything you do for them. I loved the experience so much, I was willing to pay $8 to $10 for a Manhattan (my favorite drink). Back home in a restaurant I would shell out half that amount. Everything cost more, but the brand delivers and so I was smitten. When you love something you are willing to pay more to prolong the experience. Are your customers willing to pay more for your experience? Maybe it’s time you have a hard look at how you deliver to your audience.

I just thought that it was interesting….two different perspectives on Disney’s branding effort.