Archive for the ‘Anything Goes’ Category

Debt Deal but no new taxes… for now

Well, it finally happened.  Sort of.  A deal has been made on the debt ceiling issue and supposedly there will be no new taxes.  Congress agreed to make $917 billion in spending cuts (over 10 years) and the President is able to raise the debt ceiling by $400 billion.  Future debt ceiling increases of $500 billion have also been authorized.  No one actually likes the deal, but apparently it is as good as it’s going to get according to Congressional leaders.

Where are the $900 billion in spending cuts going to hit?  Well, that is up to a joint committee to determine.  This “committee”, which has not yet been established, has until November to make its recommendations for a vote by Congress.  If unsuccessful, automatic spending cuts would occur which have already been established.

They say that there will be no tax increases.  The problem is, those Bush-era tax cuts that were extended last minute… (remember that chaos?) are set to expire December 31, 2012.  Do you think they forgot about that?  I highly doubt it.  In addition, there are tax increases which will mostly affect the high income earners that are set to begin in 2013.  I’m sure Congress is counting on those tax increases. 

I personally struggle with the continued last minute deals that really don’t make a difference except to calm down the immediate crisis.  Politicians are letting their political aspirations limit their actual potential impact for good in our government.  Everything they do and pass is for a temporary fix.  They extended the Bush tax cuts for only two years… they extended the estate tax and AMT issues out for two years… they refuse to actually take on the tax system and give it a much needed tax reform.  I can’t be too harsh.  The “Gang of Six”, made up of six Senate members, has been working on a comprehensive tax reform plan.  However, it’s far from being ready for proposal to Congress.  At this point, it’s hard to say where those efforts will lead us. I understand that with the two main parties having such differing opinions on tax issues, this task is not an easy one.  But no one can deny that something has to be done.  

For more information see the ‘Debt Ceiling breakdown of deal’ on CNN’s website

Made in America

The continuing unemployment news makes it obvious to me that we must find a way to compete again in the manufacturing sector.  There are long lists of reasons why we don’t make things in America anymore, but the fact is, we must if we want a vibrant economy. 

Not all of us are capable of being “knowledge workers” or similar highly educated people employed in high tech or service industries.  There will always be a portion of any population that thrives by making things – performing physical labor.  We cannot continue to “legislate” or “collective bargain” the value of that labor; the world economy has set the value.  The market always sets the value of goods and services. 

During the great depression, the organized labor movement got a huge boost as the government came to the aid of the then under-represented American laborer.  Over the years the protections and bargaining rights have developed to the point where in many industries our labor has simply priced itself out of the market.  Labor unions have in many cases, caused manufacturers to move manufacturing off-shore or to “right to work” states” in the U.S.  It appears to me that unions are now costing their members more jobs than they are saving. 

I have made it my business to look for US manufacturing companies that are flourishing.  It seems that those few (and the numbers are growing) have developed a niche, are fanatical about quality, and happy enough to make a profit.  Their goal is not necessarily to go public or make gazillions of dollars.  They are typically small, efficient businesses who have identified a need in the marketplace and filled it….with high quality, appropriately priced products.  They do not compete on price; they compete on quality and service. 

Typically the stakeholders of these small companies are the owners’ families, their customers and their employees; not investment banks and shareholders.  This is the way most businesses get started; identify a need and meet it, making a good living and return on investment in the process. 

I now find myself looking carefully at where the things I buy are made.  If I can find a product made in USA that meets my needs, I buy it over the foreign made competition.  Thus in my own small way I am supporting my fellow Americans.  There is a growing movement to increase support for U.S. manufacturers.  Check out Diane Sawyer’s  Made in America Challenge.   Also there is an interesting blog called   “China Ate My Jeans”  written by my cousin, Tina Parsons, who has made 2011 the year she will try to purchase nothing unless it is made in the USA.  She has identified many US companies who are slowly beginning to rebuild our manufacturing sector. 

It may never be possible for U.S. manufacturers to compete on price in the world marketplace.  However, on a local or “close to home” level, niche manufacturers are beginning to flourish.  In my experience, the quality of the U.S. made products reward my extra shopping effort required to find them.  You won’t find these products at the local big box retailer.  You will have to look online buying direct from the manufacturer or at specialized “niche” retailers.

Deductible Auto Mileage Expense Increase

The IRS has issued the new mileage rates.  Beginning July 1, 2011, the standard mileage rate for business purpose is 55.5 cents per mile (was 51 cents from January 1 through June 30).  The most common uses of the rate include:

  • Mileage reimbursement to employees using an accountable reimbursement plan (can be less than the federal rates, but never greater)
  • Mileage deducted on schedule C
  • Unreimbursed business miles deducted on Schedule A 

The IRS publishes these rates as a guideline, not a requirement.  Businesses are allowed to use a lower rate if they choose.  However, you cannot use a higher rate.  If a business reimburses its employees using a higher rate, the difference would be taxable to the employee. 

The mileage rates for medical or moving expenses also increased 4.5 cents from 19 cents to 23.5 cents per mile.  The charitable mileage rate remains at 14 cents per mile.

Sales Tax Break for Californians

You may remember a few years ago when the sales tax in California increased by 1%.  That increase expired June 30, 2011 and as of July 1, 2011, we are back to a 7.25% state sales tax.   We’ve been waiting to see if the California legislature was going to extend it, since they can’t balance the budget. 

In San Diego, we have an additional 0.50% local tax which brings our sales tax to 7.75% in most areas.  Vista has an additional 0.50% city sales tax on top of that, bringing the new rate to 8.25%.  Click here to view the Board of Equalization’s chart of all cities in California and the sales tax rates effective July 1st.  

Make sure your accounting software, POS systems, accountants, etc. are updated on the change. 

Be sure to see your tax advisor if you are uncertain of your responsibilities.  Any excess sales tax collected must be remitted to the state.

Happy Tax Day! (office closes at noon)

In case you didn’t know, the tax filing deadline is April 18th this year rather than the 15th.  Why you ask?  Because the District of Columbia has this holiday called “Emancipation Day” which was celebrated on the 15th this year.   So, taxpayers got another day to procrastinate and we got another three days to work long hours.

Thank you to all our clients!  As you can imagine, we are very happy another busy season has come to a close.  To celebrate, our office will be closed from 12 noon Monday, April 18th through Wednesday, April 20th

On a side note, our blog has officially been up and at your service for one year now.  We are quite proud of it.  We hope you’ve found it valuable and would love your input.  Have a subject or a question you’d like addressed?  E-mail it to us or post a comment and we’d be happy to respond.

Deducting Charitable Contributions

In order to deduct charitable contributions, the charitable organization must be created or organized in the US (including the states, District of Columbia and possessions of the US) or must be provided by a treaty (side note – have you ever tried to read a treaty?  Not fun!).  Many generous people want to give for causes around the world and there is absolutely nothing wrong with it.  It is commendable!  However, in order for charitable contributions to be tax deductible, you need to give it to a bona fide US charitable organization which can direct the funds to those in need around the world.  Some think that Catholic churches located in other countries would qualify because they are arms of the Roman Catholic Church, a universal organization.  Tax courts have repeatedly rejected this argument. 

 Also beware of giving money to an individual or earmarking a donation for a specific individual.  You cannot give money to your church or other charity to give to a specific family in need. While it is a charitable act, it is not tax deductible.

Investment Strategy

Jeff Vistica, one of our business associates from Gradney & Vistica Financial Management offers this post with a comparison of my golf game to some other people’s investment behavior.   Enjoy!

By the way, if you are interested in contributing to our blog, email Mary for more information.

What’s your take on golf?

Jeff Vistica,

You may be for or against the sport or maybe you’re not going to adopt a stance either way. Regardless, I hope you’ll chuckle at a comment by Santa Clara University Professor of Finance Meir Statman, in which he opined, “Golf seems stupid to me — a cognitive error that misleads avid players into spoiling a good walk.”

Is the man crazy; clearly doesn’t get it? Or are you nodding your head in sympathy? Don’t worry, I’m not suggesting there’s a right or wrong answer. In fact, his challenge to golf enthusiasts along with his editorial title — “What Investors Really Want” — got me thinking about the value of differing perspectives.

When you take your leisure time, what is it that you enjoy the most? The competitive nature of sport…achievement…or perhaps a restorative pastime? What you choose doesn’t matter much to me. What does matter is whether you know deep down which is the right answer — for you. Wherever you find your reward should be the driving force for how you choose to play.

Translate that into the world of investing: like most years, 2010 offered up the usual frenzy of financial distractions that threatened to ‘hook and slice’ us into unforeseen sand traps. For example, consider this sampling of 2010 headlines:

  • May 29: “May 6 brought the ‘Flash Crash,’ a bewildering nearly 1,000-point slide that still defies explanation.” — The Wall Street Journal
  • July 23: “The equity markets are not working on a scale that is truly shocking.” — Financial Times
  • September 27: “Some 279 banks have collapsed since September 25, 2008.” — The Wall Street Journal
  • December 3: “The unemployment rate unexpectedly rose to 9.8 percent last month.” — The Wall Street Journal
  • December 29: “Housing market is still facing a blizzard.” — The Wall Street Journal

How did we respond to these and other reports? All too many investors reacted by swinging wildly at the risks and rewards from the previous hole, so to speak. Investors pulling their money in and out of the stock market documented this behavior. According to Morningstar, average stock mutual fund flows over the 36 months through November 2010 saw outflows of $414 billion, with $132 billion of these outflows occurring between November 2009 to November 2010.

Is this a wise strategy? Stocks in the S&P 500 Index ended the year up just over 15 percent. The Russell 2000 (U.S. small-cap) Index returned nearly 27 percent. International stock returns varied widely by country, with Peru and Thailand in the lead, and Greece and Spain in the basement. As a whole however, international stocks as measured by the MSCI EAFE Index, provided positive returns of just under 8 percent.

Investors who knew their game were best positioned to capture these sorts of returns in accordance with their personal risk/reward goals.  Those with a clearly established diversification plan realize a sound portfolio is built to ignore these distractions. They recognized that predicting market movements based on current events is nearly impossible and that a properly diversified portfolio is the winning strategy.

Word of Honor

I was listening to talk radio yesterday morning and they were discussing the BYU suspension of Brandon Davies for having sex with his girlfriend.  The host ended the discussion by saying this quote from Maeser, the founder of BYU… it struck a chord and made me think.  I know this isn’t normal accounting talk, but I thought it was worth repeating Maeser’s quote: 

“I have been asked what I mean by ‘word of honor.’ I will tell you. Place me behind prison walls–walls of stone ever so high, ever so thick, reaching ever so far into the ground–there is a possibility that in some way or another I may escape; but stand me on the floor and draw a chalk line around me and have me give my word of honor never to cross it. Can I get out of the circle? No. Never! I’d die first!”

— Karl Maeser, Founder of BYU

Religious differences aside, think about this quote.  One’s word isn’t what it used to be. Society’s standards have been lowered and it’s a shame. (Geez, I sound like my mom!)

As auditors, we always consider the “tone at the top” set by management of the companies we audit.  If management holds itself to high ethical standards, they usually hold their employees to the same standards without hypocrisy.  Thus, if we determine that management does not put importance on high ethical standards, our audit risks increase… so we have to do more work… so the cost goes up.

Clearly BYU set the tone at the top and expects its students to adhere to those standards without exception.  Do we do the same in our companies?  How do you value your word?  What value do you place on honor?  Would you cross over “Maeser’s line” if you gave your word that you wouldn’t?  Would you die to keep your word?  Now it’s an extreme statement, because let’s be honest… why would you promise to never cross the line? Nonetheless, it’s something to think about!

1099 Repeal in the Works

We briefly discussed some of the new burdensome 1099 requirements that came out of the Small Business Jobs Act one of our December blogs; IRS requires 1099’s….  We haven’t yet discussed the extremely burdensome 1099 requirements that came out of “The Patient Protection and Affordable Care Act” (affectionately known as “Obamacare”).  Expanded 1099 reporting requirements include all payments for both goods and services aggregating $600 or more in a calendar year, including those made to corporations.  Effectively this means virtually all business transactions must be reported to the federal government.    Government analysts estimate that this reporting will flush out taxpayers who do not report, or under report their income.  To many of us who have studied this proposal, the compliance cost to businesses and the taxpayer cost to fund the bureaucracy that must process all this data seems more costly than the perceived unreported tax revenue. 

Relief may be coming.  Thanks to some heavy pressure by the AICPA and many state CPA societies, the House Ways and Means Committee approved a bill earlier this month to repeal these expanded 1099 requirements.  It has been sent to the house for a full vote.  The Senate has a similar bill, but it doesn’t appear to be as comprehensive.  Of course, it wouldn’t come without a cost.  The House bill includes measures to make up for the perceived revenue loss.   The Journal of Accountancy’s article has more information.

In the mean time, the 1099 requirements for rental property owners is still effect.  Read the article for full details and continue to prepare yourself until it is actually repealed.  Keep your fingers crossed for full repeal!

Happy Birthday Jessica!

Jessica Dorsett

Saturday is Jessica’s birthday and she is the thoughtful person who posts all the Happy Birthdays on our blog so here’s my feeble attempt to honor hers! 

Jessica has been with the firm over 5 years.  Paul recruited her on her wedding day!

Here’s the story…. 

Paul’s daughter Regina and Jessica are good friends.  A spot had opened up on our audit staff a week before Jessica’s wedding.  Paul knew that Jessica was a high achiever from years of connection when Regina and Jessica got together at the Polito house.  As often happens, Jessica had been recruited before graduation by a firm in San Diego and hadn’t even thought about our firm.  Literally on her way out the door to Jessica’s wedding, Paul asked Regina, “Do you know where she is going to work?”  “Some firm in Sand Diego, she’s not looking forward to the drive from Escondido”.   Paul told Regina to let Jessica know that “We would make her an offer she couldn’t refuse”, which Regina relayed to Jessica at her wedding.  After the honeymoon, Jessica interviewed with Don and decided to join our firm. 

She is thorough, professional and proactive and her contributions to our firm grow each year.  Her clients love her and often take the time to let us all know what a great CPA and person she is. 

She has propelled the firm’s baby boomers into the 21st century leading development of our website design and blog content.  She also monitors our quality control program on the attest side of the practice. 

She is a dear friend to us all and raises the bar by her dedication.  This is going to be a great year for her as she and her husband Brett are expecting a new brother or sister for their 21 month old son Chase!


It's Your Money, Not Theirs

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