Some of you may remember last year that the State of Florida
received an advance from the Federal Government and the employers were handed
the bill for the interest (see my previous blog posting).  Guess What? 
They did it again.  Employers are
starting to receive “Unemployment Tax Assessment Notice for Interest on Federal
Advances.”  The amounts are based on the
unemployment taxes paid during the time Jul 2010 to June 2011.  The rate is lower than last year (.00092 vs.
.00136) so I guess things are moving in the right direction.

Another change is that Florida, along with 20 other states,
did not repay the money they borrowed from the Federal government to pay
unemployment taxes and as a result now the employers are having to repay the
advance.  For Florida the amount was .003
of the first 7000 in wages earned by each employee or a max of $21 per
employee.

In 2012, the state taxable wages for unemployment are going
up to $8500.  Depending on the
unemployment tax rate this could amount to an extra  $15 to $40 per employee in 2012.

Not much fun, but Recessions seldom are.

Like most everyone else, I am reflecting about this terrible day 10 years ago.  There are plenty of images,  I can still remember exactly where I was and what I was doing when I heard about the attacks.

The one thing that has stood out as we got a full picture of what happened that morning was a single event on Flight 93.  As the passengers were crowded in the back of the plane trying to decide what they were going to do, they voted.  I can think of nothing that defines our nation’s character more than that one, probably unconscious, statement someone made to determine their course of action.

While there are plenty of issues we can disagree on about our response to these attacks and tomorrow we will continue our squabbles and fight over every issue, it is worth pausing for a moment to note that our first victory in the War on Terror started with the words “all in favor…”

I thought I would take a little break from politics and write about a question I received numerous times.  What are business expenses, or more specifically what are allowable business expenses that can be deducted on a tax return.

To start off, a business expense is an expense incurred that is generating, or has the potential to generate, revenue for a business.  It also must be ordinary and necessary for the operation of the trade or business.  For example, a lunch with a potential referral source is a business expense.  A dinner with your spouse and children is probably not, even if you discuss business during the dinner.

If you own a business, then you should keep business and personal separate.  I keep two set of debit and credit cards in my wallet so that if I am out and need something I can pay for it and automatically have it appropriately charged to business or personal.

For people who work as W2 employees, they can deduct unreimbursed business expenses provided they keep good records and can show that the employer doesn’t provide reimbursement for the expenses.  The deduction takes place on the Schedule A and is limited.  You have to exceed 2% of your adjusted gross income to begin itemizing these business expenses.

You can deduct the following items:  liability insurance premiums, membership dues, licenses and regulatory fees, travel and entertainment expenses, tools and supplies, uniforms, and work related education, work related legal fees.

Some items not deductible:  dry cleaning, commuting, health spa dues, personal legal fees, professional reputation fees. 

Professional Reputation fees are specifically referred to as “expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation.” 

While uniforms are deductible, clothes required for work are not.  For example, a salesperson may be required to wear a suit and tie, but that is not a deductible business expense because those are clothes that can be used in a personal setting. 

Expenses to start a new career are not deductible as Misc Business expenses.  For example, the expenses related to preparation and taking my CPA exam were not deductible, even though I had been an accountant for almost 20 years.  The IRS takes the view that public accounting is different than a private accounting.  My view is that CPA’s need better lobbyists.

I had a case where a taxpayer had excellent records showing the expenses, the business purpose of the expenses with receipts and dates.  He was denied because he could not provide a copy of his company’s travel and expense policy showing where the company wouldn’t pay the expenses.  We could show that he wasn’t double dipping (receiving employer reimbursement and trying to deduct it from his tax return).  The service takes the position that if your company reimburses you for expenses and you fail to submit it to the company, that expense isn’t a “real” business expense.  Similarly, if you submit an expense for reimbursement by your employer and it is denied, the IRS will not allow you to deduct it because they take the position that the company would reimburse a valid business expense.

The IRS does have a publication that is pretty good for determining what are deductible and non-deductible business expenses, it is Publication 529.

In 1941, the US was put on a watch for a credit downgrade.  The obvious reason being a world war and the need to determine how it would progress.  Despite having debt grow to 110% of GDP, rampant inflation, huge government expenditures on the war, the US wasn’t downgraded. 

Over the last few years, I have become increasingly annoyed with the Tea Party, Conservatives, and the Republican Party in general.  Over the last three years we have seen a political party that is more concerned with bringing down a president than doing what is right for the country.  Some may dismiss me as a partisan hack, but the facts are facts. Simply look at how many filibusters have occurred since 2009.  Listen to the Republican leaders who talked about their first priority is defeating Obama in 2012.  If it means they have to destroy the economy in the process, what do they care?

 The fact of the matter is that the downgrade on Friday by S&P is a direct result of the Tea Party Republicans to work with the President and the Democrats.

Read the report here:

http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

While there is a discussion about the medium and long term debt situation, the credit downgrade and the potential future downgrade in the next two years is related specifically to the inability of the government to develop a workable solution.  They also cite specifically the use of the debt ceiling as a “bargaining chip” and the “brinkmanship” we saw last month during the debt ceiling debate.  Obviously, when you have congressional leaders holding press conferences talking about a default wouldn’t be a big deal or in some cases actually hoping for a default that does nothing to inspire confidence in bond holders.

The whole reason for the downgrade is because the Tea Party and Republicans live under the delusion that we have to keep lowering taxes and that we cannot increase taxes on anyone.  Had the Republicans voted for the so-called “grand bargain” that would have reduced the long term deficit by $4 trillion dollars.  It would also have given the markets the confidence that the government has the capacity to deal with the long term debt issues and this first ever downgrade in US credit would not have happen.

A revenue number that we thought we could reach based on a flatter tax code with lower rates and a broader base.  That would produce more economic growth, more employees and more taxpayers. 

John Boehner July 22, 2011

At the press conference on yesterday Speaker John Boehner made this comment when discussing his reasons for “walking out” on the debt ceiling negotiations.  I bring this up because I found it particularly interesting.  It reminds me of a comment by an Economics professor that I have never forgotten:  he stated that the purpose of political parties was to redistribute wealth to its constituents.   It didn’t matter if it what they called it, but the bottom line is both parties redistribute wealth to their constituents.

Take a look at what Boehner is saying:  he may claim he doesn’t want to increase taxes, but that is only partially true, what he doesn’t want is to increase taxes on his constituents the wealthiest households in the nation.

In 2007, 97.1% of taxes were paid by the wealthiest 50% of the nation.  That is people making over roughly $32,000 per year.  According to the Tax Policy center approximately 45% of households paid no income taxes.

http://www.taxpolicycenter.org/publications/url.cfm?ID=901335

However, they do pay other taxes (Social Security and Medicare pay roll taxes).    The reason I mention this is because look at what Boehner is saying, he wants “flatter” taxes with a “broader base.”

So let’s see what would happen with a flat tax system.  The taxes on the lower income households would have to go up and the higher income households would go down.  In a perfectly flat tax system households making less than $32,000 that comprise 50% of households would have pay their “fair share” of 50% of the tax burden up from 3% under the current system.  While, I don’t think Boehner would propose a perfectly flat tax system, any “flattening” of the current system will necessarily mean that taxes for the wealthy will go down and for the middle class and poor will go up.

As a CPA, I will tell you that the tax code is in need of reform and cleaning up.  We haven’t had a major reform of the tax code in 25 years and it is about time; however, one constant of the tax code since its inception in 1913 was its progressive nature in that those people with the higher incomes paid a higher percentage on their marginal income. Currently, the highest marginal rate is 35% that doesn’t mean people pay a 35% tax on all their income, but they pay 35% on their last taxable dollar earned.

Make no mistake, the Republicans are about reducing the income taxes and steering government benefits to their constituents just like Democrats are about steering lower taxes and government benefits to their constituents.  The only real question is what benefits the US economy the most.

Recently, Obama is quoted as saying that Social Security checks are in danger.  Many are claiming it is a scare tactic, and perhaps they are correct, but it is a scare tactic based on reality.  On Aug 3 the government is projecting to bring in $12B in revenues and Social Security payments for that day are projected to be $23B.  So if you can’t borrow where do you get the money from?

The Bipartisan Policy Center and PBS Newshour have put together a day by day analysis of the month of August that is rather interesting

http://www.pbs.org/newshour/rundown/2011/07/the-debt-ceiling-crisis-day-by-day-blow-by-blow.html

So tell the Government to cut back like we all did during the Great Recession

Even if we ignore the day to day consequences, the simple fact is that 44% of the government spending is financed (not paid for with tax revenues).  According to a CitiBank analysis a 44% cut in government spending could result in an almost immediate GDP loss of 8-9%

http://www.huffingtonpost.com/2011/07/13/wall-streets-warns-congress-debt_n_897472.html?1310586684?igoogle=1. 

To give you a little scale the worse the economy did during the Great Recession was -4.1% during the Q2 2009.  We saw close to 10% unemployment at that time.

http://www.data360.org/dsg.aspx?Data_Set_Group_Id=274

The economic contraction will cost us and the federal government much more than the additional interest on a couple trillion more in debt.

So what happens if the government defaults:

US Treasuries are supposed to be the safest investment on the planet and if the US defaults that means EVERYBODY’s interest rates will increase.  It means that credit will dry up again. 

Without credit a modern economy stops functioning.  In the fall of 2008 GE couldn’t get overnight financing, and there were rumors that McDonald’s was having a hard time securing financing.  We will have a worldwide financial crisis the likes of which have never been seen in our lifetimes, if ever.   The result will be a massive Depression that will take decades to recover from.  This is what the Republicans, or more specifically the Teaparty Republicans, are trying to do.

Imagine and 8-9% contraction of the economy during the next 3 to 6 month period.  The pitiful recovery that we have now sputtering along would stop immediately.  Just as in 2008 the collapse of Bear Sterns brought down Lehman Brothers and then Wall Street, we would see other countries default and then banks.  If CitiBank or Bank of America had a bank run there would nothing the Federal Reserve or the FDIC could do to save them.  Remember the scene from It’s a Wonderful Life where George Bailey has to rescue his Savings & Loan with his honeymoon money?  Imagine that repeated in every state and every city, but with no Mary Bailey offering $2000 in cash to help everyone get by until the bank reopens.

You may say that I am using “scare tactics” or exaggerating, but this actually did happen in the 1930’s resulting in Banks being completely shut down for 10 days. 

So what is the solution?

Beats Me.

I think that in the long run (5 or more years) we need to have the government do more to help control the costs of healthcare.  It has a powerful leverage in the form of Medicare.  I also believe that by making Medicare available to everyone (not just the over 65 crowd) we could offer effective competition to the major insurance companies to help reduce costs.

We (the 40 somethings and younger) are going to have to accept that we need to work a few years longer and have a little less social security to help pay back the Bush spending spree.

Personally, I think eventually you will see the social security tax extended to all wages, not just the first $106k in wages.  I also think ALL the Bush tax cuts should expire.

We need to reduce our military spending.  The Soviet Empire is gone and the Cold War is over.  We need to get out of Iraq and let the Afghans take responsibility for their own country.  I am not suggesting we abandon Afghanistan, but certainly there are better ways to spend $200 million per day than on a large military footprint.  Historically, the US has always demobilized after a war, which allowed us to focus on industry and technological development.

Right now we need to try some good old fashion Keynesian economics.  The problem with the economy is that nobody wants to spend.  So we need the government to step in as a spender of last resort.  Right now the government should be rebuilding the roads and energy infrastructure with all the cheap labor and low interest money that the government has available to it. 

Think about this:  the government interest rate is nearly 0 despite having the highest debt to GDP ratio since WWII, and now some in Congress want to trash it’s credit rating.

If you paid into the worker’s unemployment fund between 7/1/2009 and 6/30/2010, you will be getting a notice from Uncle Rick Scott that you have an additional assessment on the unemployment taxes you’ve already paid.

What happened is Florida had to borrow money from the Federal goverment to cover the unemployment compensation during that time.  So they are now sending the bill to the employers for the interest owed to the Feds.  The additional tax is .136% of the taxable wages (.00136) during that time period and the payment is due by 6/30/2011.

I have a client that is divorced from his wife.  He has agreed that he is responsible; he has the divorce decree stating that he is responsible, but the IRS has decided to levy his wife’s accounts.  He has filed an amended return for this particular year and it has been in process for 15 months and counting (actually we hope to resolve it at the end of this month). 

The ex-wife has filed an innocent spouse relief, which has been denied.  The theory is that if she had knowledge, or should have had knowledge of the finances, then she signed the return and she is responsible.

 While I understand the reasoning on the innocent spouse relief denial, the law should be changed to allow a spouse to claim innocent spouse relief when they have a legal document agreeing to split the liability.

So the moral of the story is:  when you marry make sure your future spouse is good about paying their taxes, because it could come back on you.  Second, make sure you understand what you sign.

For more information about Innocent Spouse Relief you can check out Publication 971.

This man served two tours of duty in Vietnam and worked as a manager at the IRS. He is survived by a wife, children, and grandchildren.  The only reason he is dead is because an idiot was trying to use a “home church” called the Universal Life Church to avoid paying his back taxes.  The fact that this shelter had been declared illegal 30 years ago was irrelevant.

The guy that killed Mr. Hunter was nothing more than a terrorist like Timothy McVeigh.  You may remember McVeigh as the person who blew up the Federal Building in Oklahoma City to start the revolution against ZOG (Zionist Occupation Government).

In a previous blog, I lamented the lack of civility in our public discourse.  Specifically, I was discussing healthcare reform, but this lack of civility has spread to other areas of discourse.  

Too many politicians and pundits secure their reelections and their ratings by creating environments that encourage these types of people.  For example, how many times did anti-abortionists refer to Dr. Tiller as “tiller the baby killer?”  How can those same people, who compared abortion to the Holocaust, then plead innocence when a Scott Roeder carries out their rhetoric to its logical conclusion?

We are now seeing a time when people show up to protests with guns and holding signs about watering the tree of liberty with blood and they feel no shame.  Others talking about how Democrats are trying to destroy America and comparing healthcare reform to Nazi concentration camps.

We have people being made paranoid about the 2010 census and how it’s the Obama Administration trying to learn too much about us, when the 2010 census is asking for less information than the 1910 census did.

We now have too many politicians and pundits screaming about Obama conspiracy theories:  Michelle Bachman is convinced the census is going to be used to put conservatives in concentration camps, Sarah Palin keeps harping on those fictional “death panels.”  Glenn Beck is convinced everyone is out to get him, Mitt Romney is complaining about leftist neo-monarchists, and even Tim Pawlenty was talking about taking “a 9 iron and smash a window out of big government” as the firefighters were looking for the dead and injured in the Austin IRS building.  All these people have one thing in common they make money or garner power by generating fear and creating an environment that rejects civil discourse and encourages the Scott Roeder’s, Joe Stack’s, and Timothy McVeigh’s of the world.

Maybe the time has come for our leaders to realize that their words do have consequences and those consequences can encourage the idiots of the world to take extreme actions.

Maybe the time has come for the conservatives to realize that extremism in the defense of liberty IS a vice.

http://www.reuters.com/article/domesticNews/idUSTRE5A23FB20091103

There isn’t any good news in a situation like this, but the IRS has made some changes that can mitigate the damage.  As I reported on my blog in June, the IRS is allowing the losses to be deducted as a casualty loss rather than an investment loss.  The result is that you can carry back your losses up to 5 years and take more than the $3000 capital loss against ordinary income.

It doesn’t make up for everything, but it does help a little.