It’s not Obama you need to worry about.

Those of us who are business owners are often suspicious of tax policy put forward by democrats. Lately I've been getting a lot of email from Obama supporters asking how I could be against a tax policy that promises to lower taxes for anyone making less than $250,000. My first response is that any "promise" made by a politician, democrat or republican, especially with regard to taxes, is immediately suspect.

But I digress. Our good buddy and possibly the most hated legislator of all time, Newt Gingrich, hits the nail on the head. If you think a House majority led by Pelosi and a Senate majority led by Reid will consider $250,000 the threshold below which taxes will not be raised you've ignored Bill Clinton's example and inhaled one extraordinary puff off the democrat peace pipe. Further, if you think Obama will adhere to his campaign promises and veto legislated tax increases passed by a congressional majority of his fellow democrats I've got an autographed hymnal from Jeremiah Wright I'll sell you for my next mortgage payment.





My point is this: tax planning has become increasingly difficult in the past decade. New tax laws are passed with the prolific flourish usually reserved for tabloids. You SHOULD expect new tax legislation if Obama is elected. You SHOULD expect that legislation to result in tax increases needed to fund social programs. You SHOULD NOT delude yourself in the belief that those increases will be limited to the richest of the rich. In the United States the median household income is $44,389. This means that half of all households make more than this, and half make less. The democrats and the Obama campaign cannot seem to make up their mind whether the increases will stop at $250,000 or $220,000 or $150,000 or 120,000. The aim of Obama's spread the wealth tax policy is income equality. By definition that means those with more are levied to provide for those with less. If you're in the top 50% your taxes will go up.

Suppose you think I'm an idiot. Today, on a Monday, I might grant you that point. Suppose I'm wrong and the dems don't want half the people to pay higher taxes so the other half can have more. That, after all, is a little too Marxist. Suppose the dems only want the top 25% to pay more. This sounds fair (to a socialist leaning, out of work democrat). If one person makes more than three of his peers he needs to pay more taxes...right? For all of you middle class, college educated, hard working folks out there with Obama signs in your front yard get out your checkbook. In the U.S. 75.84% of households make less than $80,000. The next time you're standing in line at the post office with three other people chances are you're the rich one.

If you vote for Obama, just do me a favor: don't drink the cool-aid. Social spending will go up, foreign aid will go up, the size of government will increase and YES, the $65k you brought home last year from your $80k salary will go DOWN (if you own a business it's going WAY down). This isn't the price tag for electing Obama, it's the price tag for a democratic controlled Congress with no impending Presidential veto. Now you know.

My Opinion on Trickle Down Economics

This election season one of the arguments back and forth is between Obama's desire to cut taxes on the lowest wage earners and McCain's desire to cut taxes for businesses. I realize that I'm over simplifying but work with me a little.

The thinking behind trickle-down economics is that if businesses pay less tax they will invest those dollars back into the business, create jobs, higher profits and ultimately higher taxes for the Treasury.

The opposite approach says cut taxes for those purchasing goods so that they'll buy more, thereby generating more profits for businesses, create jobs, higher profits and ultimately higher taxes for the Treasury. We'll call this trickle up.

Trickle down makes sense because it generates additional revenue for businesses through reduced taxes FIRST. Businesses now have a choice of what to do with that money. Political arguments over whether trickle-down makes sense revolve around whether or not businesses actually DO make the choice to reinvest that extra cash or whether the owners pocket it. I believe they do invest it simply because businesses are in business to generate profits. Capital can only generate a profit if it is put to use.

For me, a business owner, this is just common sense and I have a hard time understanding why people don't "get it." Suppose my business generates a 25% return on investment and I find myself with $10,000 extra dollars through tax savings. If I invest that money back into the business it will grow to over $24,000 in just four years.

Trickle up is a harder sell. First, it requires that people spend the extra money rather than save it or payoff debt. In other words trickle up depends upon people acting irresponsibly while trickle down depends on businesses acting in their own best interest. Second, trickle up presupposes that businesses will take the leap of faith to invest in extra capacity needed to handle the new influx of revenues BEFORE those revenues show up. This kind of speculative behavior is uncharacteristic of smart business owners so what generally happens is revenues pour into businesses ill equipped to efficiently turn those revenues into profits. Finally, businesses have little incentive to either invest in excess capacity or generate excess profits in light of an unfavorable tax climate that effectively limits reinvestment of after-tax profits.

When you think about it our entire economy works on a trickle down basis. Businesses don't give money away and hope customers use that money to buy their products. Businesses invest money in resources such as labor and materials to add value that customers want to purchase. Business presume that their customers have likewise traded resources for cash so that they have money to spend.

In my opinion trickle down policies work economically while trickle up policies work politically. Each has it's place and we would do well not to confuse the aim of Obama's "spread the wealth" policies. It's about votes, not the economy.

Debt and financial statements

We're being asked by a lot of clients if they should take on debt to weather the economic storm. Usually the answer is no. Debt is not a substitute for profits. And when you don't know what the score is debt can be deadly. This is an email response to a client who has been holding off on hiring us to prepare financial statements because money is tight. I think it holds lessons for everyone (myself included) on the importance of good financial reporting and the harm debt can do if not properly managed. This client really has a great business, but any business can be crippled by debt too easily.

Dear Client.
Patty forwarded your email to me. As a business owner let me assure you there are plenty of “screw the whole thing” days ahead of you. The good news is that they should decrease in frequency. For what it’s worth I’ll give you my two cents on two topics you are dealing with at the moment.

First, I understand the cost/benefit thinking so don’t worry if you decide Axiom isn’t the best fit for producing financials. I think it is, but I’m biased. The bottom line is you MUST HAVE monthly financial reporting whether produced by Axiom or someone else. Without it you will be making decisions that aren’t based on anything but your emotions. In the absence of information our recollection of facts, figures and logic is based on how we feel. You need good feedback on where the business has been and is so you can know where it is going. Financial reporting does just that.

Second, don’t take on anymore debt. We don’t have a plan for the debt, it’s not in any budget that we’ve produced, and we don’t know how we are going to repay it. During our last meeting you laid out the basic economics for your business model and they pointed to high margins and relatively low overhead. If the business needs more cash it’s because the basics of that model are wrong or because something is broken. Accurate financial statements will help diagnose the problem so you need those quickly. In the mean time debt is not going to fix anything. In fact it will just make cash flow worse and narrow the long term options for the business. I think I’m preaching to the choir on this one, but I’m doing so because I want to reinforce a belief in you that I think is a healthy one. Debt is no substitute for profits so unless we can figure out a way to feed profits into the bank account we should stop borrowing money. It will make your life so much easier down the road, and it will GUARANTEE that there are fewer “screw the whole thing” days ahead of you.

The truth about LLC’s and taxes

THEY HAVE NOTHING TO DO WITH EACH OTHER! That's everything you need to know about LLC's and taxes. I can't tell you how many times CPA's ask new clients "So what business tax return do you file?", and then the client says "Were an LLC." That's like the guy at Home Depot asking "What kind of hammer do you need?" to which you answer "I live in an apartment." So here I'm going to quickly break down the truth about LLC's.

An LLC is created at the STATE level. It has nothing to do with IRS upon creation. However, all corporations and associations are required to file a tax return so IRS has setup some rules that determine how LLC's can be treated for tax purposes.

First, you need to understand there are two different kinds of LLC's: those with one member/owner and those with more than one member/owner.

SINGLE MEMBER LLC RULES
A single member LLC is disregarded by IRS UNLESS the owner elects otherwise. What this means is that an LLC with one owner that DOES NOTHING will take on the tax treatment of its owner. If the owner is an individual the LLC will be treated as a sole proprietorship. If the owner is a corporation it will be treated as a division of the corporation. Simple.

MULTI MEMBER LLC RULES
Multi member LLC's are taxed as partnerships UNLESS the owners elect otherwise.

LLC's that ELECT
If the owner(s) elect NOT to be treated as disregarded the LLC can be taxed as a corporation. From here the owner(s) can elect to be treated as an S corporation.

So here are the three questions you need to answer if you have an LLC

1. Are you the only owner?


2. Did you make any elections NOT to be a disregarded entity?


3. If you elected to be taxed as a corporation did you ALSO elect to be treated as an S corporation

If you have any questions please call, but don't expect your CPA to know all the answers just because you say "I'm an LLC." The hammers are on isle 10.

Freedom from email

When Axiom started I knew I wanted to go paperless. It always struck me as counterproductive when people would print emails out and staple them in the client file. It's the technological equivalent of driving your Hummer to the Greenpeace rally.

Three years later nobody even talks about "going" paperless anymore. People just assume you have. If you still have client perm files laying around the office there's probably a rotary phone in use somewhere. But technology doesn't always equate to productivity and I've gained a healthy respect for a former senior partner's staunch reliance on that pink stack of phone messages.

My problem has been that I relied on my email inbox TOO much. In the span of a week it would quickly fill up with three of four hundred messages and I would be stuck spending a huge block of time forwarding, creating followup tasks and the like, but MOSTLY I was filing. The thing is I wasn't usually filing a lot of important stuff. It was mainly something I might need in the next client appointment or something that could be useful later. Sometimes I wouldn't get rid of the message itself because I might need it before the next meeting and I didn't want to PDF it to the client's folder on the server.

This post from Gary Boomer changed everything. A big part of Boomer's setup relies on Microsoft OneNote. First, you should know that I'm not a Microsoft fan. Truth be told I despise Bill sometimes but CPA's can't live without Excel and Outlook is....well it's Outlook and A LOT of people know how to use it, including my employees. So I go along. But this OneNote thing is slick. I had used it before with a tablet PC, but had never used the Outlook integration. It took me about two hours to go through 400 messages with Boomer's system, but now everything is where I need it including all of the attachments and I'm eerily peaceful staring at that empty Outlook inbox.