Tax Advice for the Rich (and the rest of us, too)

As we approach the end of the year, all business people should be planning for the next year.  I advise all of my clients to think about the biggest challenges they will likely confront and then plan accordingly.  One of these challenges for all Americans is what will be their tax rate.  The potential expiration of the Bush Tax Cuts puts all of us on uncertain ground that can have some form of impact on all of us.

While the actions of the political parties are predictable, the most fascinating action to me is that two rich people – Warren Buffett and a group of 45 millionaires calling themselves Patriotic Millionaires for Fiscal Strength – are asking Pres. Obama and the Congress to let the tax cuts expire for those making $1,000,000 or more.  Put simply, they want the government to take more of their earnings and those of others who are similarly high income earners.

I will refrain from expressing any political views or comments of the pros or cons of the effectiveness of this strategy to improving our economy.  Rather I will provide advice to Mr. Buffett and Patriotic Millionaires to assist them in accomplishing their goal of generating more tax revenue and reducing public debt.

My first advice is simple – voluntarily pay more taxes.  All Americans have the right and ability to pay as much to the government as they choose.  Mr. Buffett recently claims that his marginal tax rate is less than his secretary.  Assuming that this secretary is not grossly overpaid (not like Mr. Buffett could not afford it), this occurs because Mr. Buffett is  claiming all his tax credits and deductions that he is entitled.  Mr. Buffett can simply ask his accountant to not claim all of his credits and stop utilizing trusts and other tax entities whose sole purpose is to deflect taxable income from the individual.

My second advice is that instead of trying to convince a handful of politicians to increase the tax rate on certain Americans, go to the people directly and convince them through logical argument that a higher tax rate is best for USA.  Assuming that the tax cut does expire for the high income, the immediate reaction is that those who do not want to have their tax raised will contact accountants to find more deductions.  Instead, he should ask all Americans who can afford it to simply not take all their deductions and not use trusts so their tax liability will increase.

Mr. Buffett and Bill Gates have traveled the world recently to appeal to other billionaires to leave most of their estates when they die to various charities.  There is an estate tax that if not adjusted as well with the Bush Tax Cuts, the rate will go from currently 0% to 45%.  It would seem a consistent logic if Mr. Buffett would also argue for the full restatement of the Estate Tax (I have not heard him make a stance on this issue).  For instance, George Steinbrenner of the New York Yankees recently died.  Had he died next year, his family would have had a tax bill of approx. $450 million.  Following the Buffett argument, that would certainly help our government.

In the letter by Patriotic Americans (www.fiscalstrength.com), they argue that our nation needs additional tax revenue to reduce the deficit and debt.  This group may find greater success if they shared that those Americans also interested in reducing the debt can do so at anytime without increasing their taxes.  You write a check to Bureau of the Public Debt and mail it to their office in West Virginia.  Furthermore, this payment is fully tax deductible as charitable contribution so those who hate higher taxes can both reduce taxes and the national debt at the same time.  Side note – I wonder how may of these 45 millionaires who if they made this payment would also not claim the deduction so they pay even more taxes and further help our country.

I have never found it a successful strategy for one group of people to force another group of people to do something like pay more taxes since it can be reasonably argued that our government has not effectively used the money that they have earned to date.  If the goal of Mr. Buffett and Patriotic Americans is to reduce deficit and debt, there are strategies already in place that may be more appealing to others who do not share their belief in the effectiveness of the government to spend tax dollars.

What is in a Name?

Recently I have been faced with a dilemma – the name of my firm is West Palm Accounting Services but my client base runs from Palm Beach Gardens to Wellington to Delray Beach.   Furthermore, the name was a joint decision by myself and my business partners.  That partnership ended in February.  Lastly, often times my clients would confuse West Palm with Williams as they so identified the firm with me (a situation that I am grateful for).  Thus it was time for me to re-consider the name of the firm going forward.

Alas I am now proud to announce that the firm hence forward will be known as Williams Accounting Services.  I am also proud to announce that I have office space at Cityside Suites, an executive suite office located at 401 N. Rosemary Ave in West Palm Beach.  This office is ideal for me in that it gives me a central location for current and future clients while not forcing me with the burden of being in the office all business day especially after April 15 .  The staff at Cityside can meet and forward client needs to me when I am not in.  I will be in the office all day April 15 so please come by if you are one of the many procrastinators that must file a return or extension.  If you need me before or after April 15, please contact me to set an appointment.

When Do I File My LLC?

The popular business entity that most business owners are utilizing are limited liability company or LLC. It is chosen often times because it offers greater flexibility in ownership and ease of operations. Note: I have written another blog where I challenge some of these advantages (http://www.examiner.com/x-15854-West-Palm-Beach-Small-Business-Examiner~y2009m7d15-Are-LLCs-always-best-for-small-businesses). For this blog, I will stay focused on the topic of tax filing.  If you assume April 15 is the deadline for all tax returns, please read on.

The IRS has given LLC members options on how, where, and when to file your Federal Tax Return. The first question that I ask my client is how many owners? If one (or two if husband and spouse), the IRS views that LLC as a sole proprietorship. Thus, you will file with a Schedule C – Net Profit from Business. The advantage (or disadvantage depending on your view of Social Security) is that you must pay 15.3% of net profit in Self Employment Tax (i.e, Social Security and Medicare Tax).  This is on top of the ordinary income tax. For those who want to avoid (er, minimize) this treatment, the IRS allows for the LLC to request to be treated as a Corporation. Now you have avoided Self Employment Tax but you will still have to deal with a second tax as the Corporation must pay a corporate tax and any money you pay the members in either salary or dividends will be taxed as well.

Now if your goal is to minimize your tax liability, then you must make a second request of the IRS and ask for your corporate LLC to be classified as a Small Business Corporation or S Corp. As an S Corp, the LLC will not pay a tax but all profits will pass through to the members. Furthermore, the profits of LLC now are treated only as ordinary income and thus are not subject to Self Employment Tax. Now before you conclude that you now have found a loophole to avoid Social Security tax, the IRS and most states require that any active member of a S Corp must be treated as an employee and (you guessed it) is subject to Social Security tax.

Not sure what your LLC is? In short, when you first file with the State Government, the LLC starts out as a sole proprietorship with one member or partnership if two or more members.  Only if you take the second step and file Forms 8832 and 2553 with IRS can one have the LLC treated like a corporation.

It is important to remember how the LLC is classified because corporations (or LLC that is treated like a corporation must file by March 15 .  All other LLC’s are due April 15.   I am often introduced to a new client who recently formed a LLC and had their legal firm request S Corp status in early April.  They feel so good about themselves for not waiting until the last-minute to file their new LLC only to be informed that they are late.   Similarly, they are not sure how they are classified as they just “click a few options and provided credit card info to set up the new LLC.”   Unfortunately there is no easy way to find out your status if you do not keep your original filing papers or printouts.  As a tax preparer who can e-file business tax returns, I will submit a form to IRS only to learn that it was the wrong form.  Now I have to re-input the financial information into the correct form (wasted time and effort that could be avoided).  Help your accountant and bring all filing papers and notices.

Accountant or CPA – Which is best for me?

One of the biggest questions a business owner faces when selecting a professional to perform accounting functions is whether to hire a CPA or non-CPA accountant. Most people think that CPA is always best and all non-CPA are not smart enough to be a CPA otherwise they would have it. While CPAs are to be given the professional respect that they deserve, it is ill advised to assume that a CPA is always best for you. Especially if you have a new or small business, you should give serious consideration to a non-CPA firm that can offer total accounting function – monthly bookkeeping, quarterly tax preparation, and accounting advice.

There are situations in which talented accountants do not pursue a CPA designation because they do not meet one or more aspects of CPA qualification determined by the State Government. The most common is no prior experience working for a CPA. Nearly all CPAs earn this designation after college as they work for a public accounting firm in their audit division. Alternatively an accounting graduate can elect to work for a private company in their accounting department. Other reasons for not pursuing a CPA include no desire to work with publicly traded companies or governmental agencies. These entities require accountants to have a CPA in order to be hired.

A small business owner especially in the startup phase needs to consider an accountant that can provide bookkeeping, accounting advice, and tax preparation. By utilizing one firm, the owner will likely pay lower fees as you are paying for one overhead versus two or three. Also the accountant can be one of your trusted advisors as the accountant will get to know both the business and owner.

In order to select the best accountant for you, you must do your home work. On average, a CPA will charge more for the same service as a non-CPA. Also, it is not uncommon for a CPA to outsource small business clients to a non-CPA firm as the CPA elects to directly participate with larger clients.  Here are some questions that will assist you in your search:

• Are you open year round?
• Do you outsource certain work? If so, will my business likely be outsourced?
• What experience do you have with businesses like mine?
• Can you provide me with referrals to contact about your service quality?
• How do you charge for tax returns – flat fee, forms completed, hours worked?
• How do you charge for bookkeeping – hours worked or journal entries inputted?

The best time to start your relationship with an accountant is ASAP and not just at tax time.  Using the above steps along with your own experience will give you a trusted advisor that can assist your business year round and for years to come.

Welcome to My New Website

My firm has a new website (www.westpalmaccounting.com)!  Please take a tour of it to learn more about me and my firm.  A highly functional website is a key part of my business strategy to be a leading service provider to small business owners by fulling embracing technology.  It includes a client portal so files and information can be securely sent to me if regular email does not provide adequate security.  It also has financial calculators and FAQ sections for those do-it-yourself-ers.

I chose the header of a hand placing a puzzle piece because I want clients to view my firm as “the missing piece to the puzzle.”  I believe that business owners make decisions on how to run their business much like a person that solves a puzzle by putting pieces together that are a good fit.  West Palm Accounting Services can help a business put the pieces together by offering solutions to outstanding accounting issues.

Again check out the website.  Let me know your thoughts good or bad.  I always welcome constructive criticism because I want it to be a useful tool for my clients – present and future.