Maybe We Should Go Over the Cliff

The writers of this article make a pretty good case for going ahead and diving off the so called "fiscal cliff".  In my opinion, allowing tax rates to be raised on the "rich" without any spending cuts will not help the economy.   One often ignored point that is that many of the "rich" (those making over $250,000 per year) are small business owners.  They own proprietorships,  limited liability companies or Subchapter S corporations, all of which are pass through entities.  That means that the income of the business shows up on the tax return of the owner(s). 

Most business owners I know use about 40% of the profits they make to pay income taxes and plow the rest back into the business.  If tax rates go up on these businesses, that will result in less cash to be invested in growing the business (and more to the government).  In this very fragile economy, that doesn't seem like a good plan for turning things around.    

The Election Results and Taxes

Now that the presidential election is over, the country has spoken (or at least 51% of the people).  Tax increases may likely be the way of the land in 2013.  Even John Boehner, Speaker of the House, has recently indicated he would be willing to accept “new revenue” (i.e. tax increases) and that Obamacare (with all of its new tax provisions) is now the “law of the land”.   Top statutory tax rates in 2013 are currently scheduled to increase 13% (35% to 39.6%).  With the new Obamacare taxes, the top rate could be 43.4% in certain cases.  The top tax rate on dividends will increase from 15% to 39.6% (or 43.4%), and the top rate on capital gains will be as much as 23.8%.  Combined with state and local taxes, many people’s combined effective tax rates will be over 50%.

Joe Johnston, partner in charge of our tax department, will be attending a post-election “think tank” meeting in Atlanta next week.  Some of the best tax minds in the country will be discussing the likely course of tax policy in future years.  Joe will report back to me you once he returns with suggestions on how to best prepare for the increased tax environment.

In the mean time, if you have specific concerns about your tax situation before year-end, please contact me.  I would be glad to sit down with you to discuss this topic based on your specific circumstances.  

Moving On Up

The list of the largest accounting firms was in last week’s Business First. Strothman & Company is ranked as # 6, the highest we have ever been. It is also interesting to note that our firm is ranked higher than Ernst & Young, Ray’s previous firm. Congratulations Ray! In fact, we are larger than 3 of the 4 international firms.

It is interesting to note that the international firms had a total of 117 CPAs in Louisville in this year’s survey. That total was 203 in 1993 and 286 in 1984. In 2010, there was a total of 611 CPAs working for the Top 20 firms. In 1993 and 1984, that total was 461 and 447, respectively. So, in 2010, international firms made up 19% of total Top 20 firm CPAs, versus 44% in 1993 and 64% in 1984. Interesting, huh?

You also might like to know that Strothman & Company is a now a member of the “G400”. The American Institute of CPAs has a Major Firms Group which consists of the Top 100 CPA firms in the U.S. Their next group is the G400, which consists of the next 400 largest U.S. firms. The AICPA told us that we are one of the top 5 largest Kentucky-based CPA firms.

Estate Taxes - This Will Be Interesting

As you may know, there are currently no estate taxes for anyone dying in 2010. The conventional wisdom is that Congress would pass a new estate tax law this year and make it retroactive to January 1, 2010. However, at least two very wealthy people (and probably more) have died during 2010; Dan Duncan (worth about $9 billion) and George Steinbrenner (worth about $1.1 billion). Click on their names for related articles. If Congress makes new estate taxes retroactive, their estates would undoubtedly fight this all the way to the Supreme Court. It will be interesting to see what happens.

New Health Care Law

I was wondering if anyone knew whether I could pick my own End of Life Counselor or whether the government would appoint one for me? Somebody said that they were going to let IRS auditors be the End of Life Counselors, but I'm sure that was just a rumor.

Help For Haiti - Part II

G.O. Ministries has been a client of ours for a number of years. They are a ministry that serves the Dominican Republic, but that also has contacts across the border in Haiti (Haiti and the Dominican Republic are on the same island in case you didn't know). Since the devastating earthquake, they have focused their resources to bring aid and relief to the people of Haiti. They have ensured us that 100% of the donations that they receive for the relief fund will be spent in the relief effort. Click here for their web site and to give.

Help for Haiti

I saw a poll last night that said over 50% of respondents had not given anything to the Haiti relief effort. I thought this was high, and am guessing that many people don't know where to give their money. Becky and I gave money to World Vision International. They had people on the ground in Haiti before the earthquake took place, and are in a good position to get aid to the people quickly. Also, their Chief Financial Officer is Larry Probus, a CPA who was previously with PricewaterhouseCoopers in Louisville. Consider giving to Haiti through this organization (click here).

Where Did You Come From?

Every Christmas, a number of media campaigns always seem to spring up from atheist organizations to convince people that there is no God (the one above is from Portland, Oregon). Here is one question that I believe every human being, atheist or not, needs to be able to answer in an intellectual manner: Where did you come from?

Prevent Theft

As this article states (click here), the poor economy is likely to result in an increase in theft, especially for nonprofit organizations. As the article recommends, having more than one person involved with the finances of any organization is important. Having two signatures for all checks over a certain dollar limit is another good control. In addition to adopting this as a policy, set it up this way with the bank and have the limit printed on the face of the check (e.g. "All checks over $250 require two signatures.").

There is one key control you can put in place to significantly cut down on the possibility of theft. Have one board member or officer, who is not otherwise involved with the organization's finances, receive the bank statement directly. He/she should open the bank statement, review it, and ask questions about any checks or other transactions that don't seem to make sense.

Please feel free to contact me if you have any questions about preventing fraud at your organization.

Interesting Perspective on the War in Afghanistan

This is a letter from a former member of the military who was serving the State Department in Afghanistan (click here). It gives an interesting perspective on what is going on there.

Honduras - The Other Side of the Story

I must admit that I had not paid much attention to the story of the removal of the president of Honduras. I saw a news report about it the other night, and decided to research the issues a little more. There is a pretty good article by the current president of Honduras that appeared in the Wall Street Journal (click here) explaining his side of the story.

I Know I Have Been Dwelling Too Much On Health Care, But Have You Heard About the "Medical Home"?

There is another article (click Here) you need to read about the health care debate. You will apparently be assigned a primary care doctor, who will be your "medical home". He or she will then decide if you need to see any specialists and, if so, where you should go. The "medical home" doctor will be rewarded for keeping your medical costs down (e.g. by not sending you to a specialist).

Health Care Taxes, Fees, Penalties, Caps and Limitations - An Analysis of What the Senate is Proposing

Here is an analysis from Forbes magazine of some of the things the Senate is considering related to possible health care legislation. Is this stuff nutty or what?

WIll the IRS Have to Provide Your Tax Records to the New "Heath Choices Commissioner" and the States?

I read a news report (here) that said the new health care bill will require disclosure of your income tax records to other agencies with the federal government as well as various state government agencies. I couldn't believe it and looked it up myself. I found it under Section 431(a) of the bill (click here and go to page 194). The IRS currently keeps pretty tight wraps on personal income tax data. Under this provision, your income tax data could be passed around outside the IRS to other federal and state agencies. Another one of the bad provisions of this bill.

Raising Tax Rates on Small Businesses is Not a Smart Strategy

Business First published my "Guest Comment" today on the subject of raising taxes on small businesses (click here). The text of the article follows:

On the surface, raising income taxes on individuals making more than $250,000 seems reasonable to many people (especially those making less than $250,000 per year).

When politicians talk about these higher earners, they paint the picture of the public company executives making millions of dollars per year.

However, I want to discuss another class of people for whom raising taxes will have a negative effect on our economy. This is the small-business owner.

Many small businesses are organized as pass-through entities such as S corporations or limited liability companies. The profits from these businesses pass through to the owner’s individual income tax returns.

As such, many of these small businesses will be caught up paying higher tax rates under tax schemes currently being proposed. This will have two possible negative effects.

Capital for expansion will decline

First, capital for business expansion will be decreased.

About 40 percent of the income generated by S corporations and limited liability companies goes toward paying income taxes. In the majority of cases, most of the other 60 percent goes toward reinvestment in the business.

This usually takes the form of hiring new employees, buying new equipment and expanding into new business areas.

If tax rates go up, businesses are going to have less money to reinvest in their business growth. In this poor economy, we should be doing all we can to encourage small businesses to hire people and expand their operations.

Owners will be encouraged to ‘coast’

Second, small-business owners might “coast” and not work as hard.

I have talked with a number of small-business owners about the possibility of tax increases. Many of them have an interesting perspective on this.

Small-business owners as a group generally have a natural instinct to grow and expand their companies. Of course, one key benefit of doing this is to make more money.

However, there are downsides to growing a business. These include risk, stress and time. Actively expanding a small business involves significant risk that the expansion will fail.

This, and the worries that accompany business growth, usually cause significant stress on the business owner. And, of course, any efforts beyond the norm are going to take more of the owner’s time.

Owners could scale back

A disturbing number of small-business owners are telling me that they are going to “kick back” if tax rates go up. They are going to maintain their businesses at a level adequate to support their families — but no more.

If tax rates are going to increase disproportionately as taxable income increases over a certain level, why take the risk and incur the stress of growing their business beyond current levels?

In fact, I think some of them actually are looking forward to having a legitimate reason to “coast” for a while. This is not the attitude that our tax policy should encourage.

Thus, increased tax rates on small businesses are likely to create incentives for their owners to not expand their operations and may even cause them to scale back.

And that’s not a smart strategy in these challenging economic times.

Are You Over 40 (Or Will You Be Someday)? Introducing the "Complete Lives System"

Have you heard of Ezekiel Emanuel? You should, because he is an adviser to President Obama on health care matters (click here). He is also the brother of the Presidential Chief of Staff, Raul Emanuel. He co-authored an article, Principles for Allocation of Scarce Medical Interventions (click on the title to see the entire article), in which he promotes the idea of "The Complete Lives System".

The Complete Lives System for allocating medical care considers a number of factors, including age. As the table above shows, people between age 15 and 40 are favored with respect to the distribution of medical care. As the article states, "the complete lives system produces a priority curve on which individuals aged between roughly 15 and 40 years get the most substantial chance...". The article says that the system "prioritises younger people who have not yet lived a complete life...". It goes on to say that the "allocation treats life-years given to elderly or disabled people as objectively less valuable."

These are the people that are now directing our country's health care strategy.

Whole Foods CEO in the Doghouse for Correct Views on Health Care Reform

One of the more talked about matters on the Internet today is an article written by John Mackey, the CEO of Whole Foods Market, about the current health care debate. Apparently, many of the Company's customers are up in arms about what he wrote, some even calling for a boycott. I immediately went to find the article (here) and found that it was well-written, well-reasoned and almost 100% in accordance with my views on health care reform. For example, I have long believed that expansion of health care savings accounts, along with more transparency of health care charges, was the beginning of the solution to spiraling health care costs. Having people spend their own money is going to make people better consumers of health care services. When the insurance company covers the majority of the costs, there is no incentive for the individual to review and understand the charges. At any rate, Mr. Mackey is in the doghouse with many of his customers for expressing his views (see the Whole Foods Forum page here ); however, I admire him for taking a stand.

Hurricane Bill

I finally got a hurricane named after me (here). I hope it doesn't hurt anyone. Track it here.

Health Care "Call In" Town Hall Meeting

I read today (here) where Congressman Yarmuth held a health care "town hall meeting" over the phone. They allowed people to call in and ask questions, but only after they were pre-screened. All of his fellow legislators are holding live town meetings and apparently taking a lot of heat over opposition to the health care plan. It didn't take Mr. Yarmuth long to figure out how to hold a town hall meeting in a way to avoid any controversy.

The Future of "Health Care" in America?

This is a story that has apparently been around for a while, but I just heard about. Barbara Wagner was covered by the Oregon Health Plan, the health insurance plan offered by the state. Her doctor prescribed a drug in an attempt to treat her lung cancer. However, the state health plan refused to pay for it. They did; however, offer to buy her some poison for a physician assisted death. Nice.

Hopefully, this is not a picture of the future of health care in America.

p.s. Here is the video with the "take a pill" comment by President Obama.

Benefits of Global Warming "Research"

The Wall Street Journal recently reported (here) that 10 members of Congress went on a global warming fact finding "mission" to Australia. Global warming "research" apparently included diving and snorkeling at the Great Barrier Reef, cable car tours through the rain forest and a side trip to the South Pole. Of course, many of their spouses came along for the "research". I can see now the benefits of being interested in all this global warming stuff! By the way, we haven't been hearing much about global warming recently since the average July 2009 temperatures in most of the country have been 2 to 8 degrees lower than the 30 year average.

Good News for U.S. Energy Production?

I didn't even know there was such a thing as oil being in rock, but that's what this article says. I found this company that says it is already drilling test wells in North Dakota. Here is an older article that explains the process. Interesting.

More Planes for Congress?

It seems that the folks in congress that write the budget have penciled in some extra airplanes to the Air Force budget that the military didn't ask for (click here). The Air Force apparently asked for one C-37 and three C-40s. Congress added two more C-37s and two more C-40s. It is interesting to note that these planes just happen to be the type that the Air Force uses to fly members of Congress around. It also interesting to note that the C-37 is really a Gulfstream G550 business jet and the C-40 is a Boeing 737-700 business jet. Spend away!

I Have Been Down The Hole

Here is a good article from The Lane Report about the Louisville Water Company's Riverbank Filtration Project. It outlines in very understandable terms, the advantages of this type of system. Earlier this year, I was fortunate to be able to tour the project. We were lowered down a 150 foot shaft (that's about 15 stories for those of you bad with math) in a "cage" at the end of a crane. Definitely not for the faint of heart. Once I got down there, we were able to go part of the way back the 1.5 mile tunnel that ran out towards the river. Pretty cool!

Illustration of the New Health Care Plan

Here is an illustration of the new health care plan. Simple, huh?

I Hate To See Any Company Go Out of Business, But In This Case ....

I read today that the "Crocs" could be on their way out. The company that makes them lost $185 million last year. It seems that they are falling out of favor with the trendy and fashion conscious. See the report here. I hate to see any company go out of business, but this was some of the worst looking footwear ever conceived. The stock price hit almost $70 per share in October 2007. It closed today at about $3 - ouch!!

Calvinism Gets Some Press

I ran across this article in a Nashville newspaper. It seems that the tenets of Calvinism are gaining a resurgence among some younger Christians. While I wouldn't label myself as a "Calvinist", I generally believe that Calvin interpreted the Bible correctly. For me, this "high view" of God helps explain many of the difficulties I used to have with some of the things I read in the Bible. Here is another older article I found that discusses Calvinism. I would encourage you to read the Bible and make your own determinations about wthat it says after careful and reasoned study.

IRS 1099 Forms For ALL Business Payments?

Here is an article about the proposal to require 1099 forms for all business payments, even from corporation to corporation. Right now, Forms 1099 are only required only for payments non-corporate recipients (e.g. individuals). Can you imagine the increase in 1099 volume that would be required for all businesses to give 1099s to all other businesses they make payments to? And how would they match up all of this? As the article states, an IRS study found that businesses with gross receipts under $500,000 currently spend about 5% of their revenues on tax compliance. This might be good for CPAs who would likely have to help their clients implement the new requirements; however, it would be bad for the business community.

The Missing Link?

Perhaps you have heard about "Ida", the new fossil that is being presented as the missing link between humans and their supposed ape-like ancestors? Ida is about two feet long and is apparently similar to a modern day lemur (below). The National Geographic people are proclaiming that the missing link has been found. Others think it is all "hot air". At any rate, I am not seeing the resemblance to any humans I know (although, I will admit, I don't know any two foot people).

"A People Belonging To God"

In matters of faith and religion, there are many debates on different theological positions and on different interpretations of the Bible. The discussions of these can be endless. When you boil it all down, what would you say is the overall point of the Bible and the Christian faith? Is there an overarching theme?

I would argue that the primary reason the world and mankind was created by God was to develop a group of people that would be His forever. Consider the following:

• 1 Peter 2:9-10 - "But you are a chosen people, a royal priesthood, a holy nation, a people belonging to God, that you may declare the praises of him who called you out of darkness into his wonderful life. Once you were not a people, but now you are the people of God ..."

• Titus 2:13-14 - "... while we wait for the blessed hope - the glorious appearing of our great God and Savior, Jesus Christ, who gave himself for us to redeem us from all wickedness and to purify for himself a people that are his very own, eager to do what is good."

• Deuteronomy 26:19 - "He has declared that he will set you in praise, fame and honor high above all the nations he has made and that you will be a people holy to the LORD your God ..."

• Ephesians 2:19 - "Consequently, you are no longer foreigners and aliens, but fellow citizens with God's people and members of God's household ..."

God doesn't need humans in order to be complete. But, for some reason, He decided He wanted a people "that are his very own".

Pascal's Wager

Blaise Pascal (1623-1662) was a French mathematician, physicist, and religious philosopher. He developed an interesting way to look at the question of the existence (or not) of God. He argued that a person should "wager" as though God exists, because in living in this way, that person has everything to gain and nothing to lose. His reasoning can be summarized as follows:

• If I believe and God exists - I'll be happy for eternity and have infinite gain.
• If I believe and God does not exist - I've lost nothing and gained nothing.
• If I do not believe and God exists - I'll be punished for eternity and have infinite loss.
• If I do not believe and God does not exist - I've lost nothing and gained nothing.

So, why not live for God and "wager" on infinite gain for all eternity?

AIG - Another Perspective

It always makes sense to hear both sides of an issue before passing judgment. Here is a letter from a top level AIG executive to the CEO of the company.

It Was Too Cold To Do Global Warming Research!

It was interesting to note that the global warming researchers were having trouble doing their work at the North Pole because it was too cold! Here is the article.

Hard to Comprehend!!!

I can't see any amount of economic growth or tax increases getting out of this one if it happens. Talk about red ink!

Fast Fifty Again!

I am pleased to let you know that Strothman & Company was named a "Fast Fifty company by Business First for the second year in a row. The Fast Fifty represents the 50 fastest growing private businesses in the Louisville area. We are the only CPA firm that has ever made the list. Thanks to our great clients and staff for allowing this to happen.

U.S. Auto Industry Bailout?

It is interesting that the current Business First poll has almost 80% of the respondents saying that the government should not bail out the U.S. auto industry. An article in Today's New York Times by former presidential contender Mitt Romney makes that case. I've had several clients who wanted to chit-chat about the issue, so I though I would pass on some information.

p.s. It probably wasn't too smart for them to fly to Washington in their private jets. See the article.

Financial Accounting Standards Board Codification

One of the most difficult things about accounting is getting one's hands around the various accounting rules. There has never been a good "one stop" place to get all of the answers about generally accepted accounting principles ("GAAP"). The Financial Accounting Standards Board ("FASB", pronounced "fas-bee") is trying to rectify this by creating the Accounting Standards Codification. The first draft of the Codification has been completed and is available free here. Just click on "Registration".

Purchase Accounting Changes Are Coming

This was a fascinating article about the upcoming changes to purchase accounting. Click here. The changes will be effective for calendar 2009 and after. One interesting change is that acquisition costs will be written off. Also, acquirers may be able to recognize a gain from a "bargain" purchase of another company.