Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for June, 2002

Posted by taxguru on June 30, 2002

Self Employed Retirement Plans

Here’s a good brief summary of some of the options available to self employed individuals. SEP-IRAs have long been the preference for my clients over Keoghs for a number of reasons. Unlike Keoghs, which require that they are established before the end of the tax year (i.e. 12/31/01 for 2001 1040s), a SEP-IRA can be established & funded as late as the extended due date of the tax returns (i.e. 10/15/02 for 2001 1040s).

SEP-IRAs also have the same high dollar limits as Keoghs, but aren’t required to submit any 5500 forms, as are required each year for Keoghs.

One big word of warning. Most of these plans are based on the same income that is subject to the 15.3% self employment tax. It is often a much wiser move to take steps, such as using a C corp, to reduce or eliminate the SE tax, and invest that tax savings in something that will grow for your retirement years, such as your business or some real estate.

KMK

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Posted by taxguru on June 30, 2002

Intro To Creative Accounting

Here is a good explanation of the way in which companies like WorldCom artificially inflated their net profits. This has actually been very common practice for many companies for several years. Any claim that it is a new concept is completely bogus.

I can recall dozens of stories during the late 1990s dot-com stock hysteria where it was reported that companies such as AOL and Amazon were routinely capitalizing marketing and other operating costs that should have been included in normal expenses. Every few years, in order to clean up their balance sheets and please their outside auditors, they would take an extraordinary charge for a huge amount, as WorldCom & Xerox recently did. The sneaky strategy behind this maneuver was that most investors and stock analysts valued share prices based on “normal” earnings and did not penalize them for extraordinary charges, such as writing down the values of fictitious assets. Some analysts were able to see through this scam and valued the stocks accordingly. Others, who didn’t understand the true nature of extraordinary charges, were fooled.

Here’s a brief accounting lesson for those of you curious as to what an extraordinary charge should be. It is meant to be used only for large expenses that were unusual & unexpected in nature. Losses from catastrophes are properly reported as extraordinary expenses because they are freak events. The write-down of improperly capitalized expenses, as WorldCom and Xerox are doing, does not fit that description by any stretch of the imagination. It was routine and completely expected.

This trick has also long been used by our rulers in DC, which is why they were able to claim that they had balanced the annual budget, yet the overall Federal debt was still climbing. They have been moving more & more types of expenditures out of the normal operating budget and into non-accountable extraordinary expense categories. It is absolutely no different from what WorldCom, Xerox, et al have been doing. That is why I scoff at demands by our esteemed rulers in DC that corporate America clean up its act with its accounting. Hypocrisy of the highest level.

Lou Dobbs has a good look at how our rulers in both parties are trying to exploit the recent creative accounting scandals for their own power grabs.

Income Taxes

This entire issue points out the different goals of financial statements. For lender & investor purposes, we want them to paint a picture of a money making machine. However, when it comes to reporting to IRS, we normally try to expense as many things as quickly as possible in order to appear to be making the least amount of profit. At first blush, the tricks WorldCom, Xerox, et al were playing should have also artificially inflated their income taxes. That would be true if they didn’t keep two sets of books, which is standard practice for large corporations. I can still recall learning how to account for the income taxes on the difference between the two sets of figures in my early accounting classes at Cal State Hayward almost 30 years ago; so this is not a new practice.

Are the corporate executives on the lam?

KMK

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Posted by taxguru on June 30, 2002

New Stamp

I found this at Something Awful.

KMK

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Posted by taxguru on June 30, 2002

Tax Deductible Vacations

For those of us who are self employed, it isn’t hard to find ways to justify a perfectly legitimate tax deduction for travel anywhere in the world. I work with a lot of Realtors and have to constantly remind them that any trip they take can be considered as deductible business travel if they check in with local real estate offices wherever they go to see what properties are available for their local clients and to show the other offices what properties they have listed.

Gary Klott has an interesting article with some other tips for writing off what would normally be non-deductible vacations for W-2 wage slaves. Happy trails.

KMK

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Posted by taxguru on June 29, 2002

Making A Bad Situation Worse

One very consistent thing in this world is the utter incompetence whenever our rulers in DC deem it necessary for them to intrude into the marketplace and fix a problem. You can be sure that they will succeed in making the problem worse.

With the recent revelations of creative accounting at some large corporations, politicians are literally chomping at the bit to take over the auditing profession. I couldn’t agree more with this prediction of even less reliable numbers if our rulers succeed in getting their fangs into our profession. As I’ve said ad infinitum, the accounting tricks our rulers in DC have been pulling for decades are so much more nefarious than anything I have seen so far with the private corporations.

KMK

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Posted by taxguru on June 29, 2002

No Such Thing As A Free Lunch

With both of the big political parties working to continue their expansion of the imperial Federal government’s control over every aspect of our lives by providing prescription benefits for senior citizens, the impression is that all seniors are demanding this costly benefit.

I was glad to see this letter to Rich Lowry of National Review from a man who understands the trade-off between freedom and government benefits. As Queen Hillary’s failed socialist health care plan so explicitly laid out, when individuals accept Federal assistance, they cede to our rulers in DC the decisions as to what, if any, health care is allowable. I hope there are more people like this letter writer who understand the connection between money & freedom. Government payment plans always have very restrictive strings attached.

KMK

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Posted by taxguru on June 28, 2002

Postal Dis-Service

I’m sure there are business professors on college campuses out there who use the United States Postal Service as the epitome of how not to run a real capitalist for profit company. However, being a taxpayer subsidized monopoly means that the normal rules don’t really apply to it; so maybe such a comparison isn’t fair. However, the head honchos of the USPS keep telling our rulers in Congress that their goal is to make it self sufficient. If so, they are again heading in the wrong direction.

I could write endlessly on the idiotic mistakes they continue to make. However, I will limit myself to a few recent ones.

Raising Rates

The PO allegedly needs more money because of the losses it suffered after the 9/11 attacks. The geniuses at the USPS automatically jumped to raise their rates. As with almost every government policy, the result will be exactly opposite from the stated goal. Anyone with even the most basic understanding of elementary economics knows that an increase in prices for a product or service will result in lower consumption. With plenty of alternatives to sending things through the mail (fax, e-mail, FedEx, etc), the actual revenue will drop. Idiots.

I’m not a big fan of the GAO (General Accounting Office); but even they acknowledge that the USPS business model is destined for failure according to this press release from Citizens Against Government Waste.

Delivery Time

The PO has a nice website. They even allow you to order stamps online. However, what’s wrong with this picture? This is an actual quote from the USPS site:

Question & Answer Page

Question: How soon after I place my order will it arrive?

Answer: Please allow 3 to 5 business days for processing and delivery. Please allow 3 weeks to receive orders sent to foreign addresses.

If anyone has a head start in trimming delivery times, it would be the Post Office. Why is it that I can order a hard drive from a company on the Left Coast and receive it the very next day; but if I order a roll of stamps, I have to wait three to five days? Incompetence doesn’t even begin to describe this situation.

Anonymous Stamps

It’s always irked me when buying stamps around the time of a postage rate increase and finding that the stamps have a letter instead of the amount of postage. I’m sure we’re not alone with a drawer cluttered with lettered stamps and no idea of how much they are worth. Showing that there is no limit to stupidity with the PO, they have outdone themselves this time. Sherry just bought a roll of new 37 cent stamps and they have no number or letter. Just a picture of a US flag. How stupid is that?

It’s not easy to find, but I was able to locate the values of the previous lettered stamps from the USPS website. They call them Nondenominational Postage. I seriously doubt if our local PO knows these amounts; so I will be writing the amounts next to the stamps I use.

A breakdown of the A-H stamps with their denomination is as follows:

A $0.15

B $0.18

C $0.20

D $0.22

E $0.25

F $0.29

G (Old Glory) $0.32

G (postcard) $0.20

G (Dove) $0.03 (MAKE-UP)

H (Hat) $0.33

H (Rooster) $0.01 (MAKE-UP)

It would be good to print this out & keep near your stamp collection.

KMK

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Posted by taxguru on June 28, 2002

Double Standard Accounting

I in no way intend to defend the crooked accounting now coming to light by large corporations. I just couldn’t help but laugh at the hypocrisy of Bush threatening jail time for the book cookers, while these kinds of phony accounting techniques, and plenty of much worse ones, are routinely done by the Federal government’s own accountants.

How soon do you think it will be before any of them are sent to prison? About the time that Hell sends an ice hockey team to the Olympics. The fact that there are hundreds of millions of victims of the crooked government accounting (many times the number of WorldCom, Enron, et al victims) is beside the point.

KMK

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Posted by taxguru on June 28, 2002

It’s Our Turn

There was a time not very long ago that the accounting profession was rated in high regard among the public compared to other professions. With all of the recent disclosure of creative accounting in large corporations, that has changed. This joke from last night’s Letterman show makes that very clear.

There’s all these corporate scandals. First Enron and now this WorldCom thing. Things are getting so bad that New York Mets catcher Mike Piazza held a press conference today to say he wasn’t an accountant.

How long will it be before Willie Nelson’s song is changed to “Mama, Don’t Let Your Babies Grow Up To Be CPAs?” In fact, with Willie’s history of blaming his tax problems on his CPAs, I’m surprised that hasn’t already happened.

KMK

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Posted by taxguru on June 27, 2002

Big Government Is Expensive

Do you think the outrageously high & insatiable appetite for tax dollars by our rulers in DC could have anything to do with the fact that there are now 15 cabinet agencies, as opposed to just three when the country was founded? The Bush plan for another cabinet post, without eliminating any of the redundancy & overstepping in the existing ones, is just more of the same. Stephen Moore has a good take on this.

KMK

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