2011 Organizer

Below is a link to our 2011 business tax organizer/checklist. You can use it to prepare all of your 2010 business documents for our accountants.

 2011 Business Organizer


The Can Has Been Kicked

As expected Congress sent a tax bill to the President that leaves the Bush tax cuts in place for another two years. This is good news if for no other reason it allows tax planners to forecast the tax costs of business plans for the near term.

I expect many business owners and advisors are as frustrated as I am that there is no clear tax policy coming out of Washington. Democrats, licking their wounds from November, followed a "lame duck" course of action and did the only sensible thing, which was essentially...nothing. I know, I know. "Doing nothing" would have meant the tax cuts would have expired.

That wasn't going to happen. On his worst day Chuck Rangle wasn't delusional enough to propose across the board tax hikes in the middle of a recession without realizing he'd be sticking a political gun in his mouth. The only real effect November had on this debate was that it stripped the Democrats of the political capital they needed to increase rates on incomes over $250,000.

Small business owners will be interested in the following provisions of the bill that is expected to be signed by the President shortly.

  • If you're a small business owner with an estate and your NOT planning on cashing in your chips for a trip to the pearly gates this year you'll need to know that the estate tax will come back in 2011. The bill includes a $5 million exemption under the unified credit to be adjusted for inflation after 2011 and a 35% tax rate.

  • There is a 100% bonus depreciation allowance for property placed in service after September 8, 2010. As before this only applies to new property. For profitable small businesses this isn't such a big deal since they have access to section 179 depreciation on up to $125,000. After 2012 we go back to $25,000 of 179 expense and no bonus depreciation.

  • For 2011 only employees get a break on their Social Security taxes with a 2% reduction to 4.2%. Employers are still on the hook for 6.2%. 

That's it. Pretty much everything else is an extension of the rules were were dealing with in 2010. Most important we will have the same tax rate structure and continuation of the 15% capital gains rate, at least for two more years.


IRS Wants Your Euros

Last week IRS Commissioner Doug Shulman spoke to the attendees of George Washington University's annual conference on Current Issues in International Taxation. Shulman's focus on just two areas during his prepared remarks is telling. He singled out foreign asset disclosure and transfer pricing as the only two topics for his talk.

Both of these are relevant to sections of our client base so I took particular note of Shulman's published remarks on IRS' website. They signal where IRS is focused on developing new regulations and procedures to enforce existing tax law.

Foreign Asset Disclosure

IRS has long sought to close the loopholes and wiggle room that might allow US residents to send assets overseas without reporting the income earned by those assets. Earlier this year there was the much publicized case of UBS handing over the names and account details of its US customers to IRS. Several of those account holders were prosecuted on April 15, an irony not lost on the American public.

Here is the deal. If a US resident owns foreign bank accounts and an account balance exceeds $10,000 at any point during the year the resident has to report the account to IRS on an annual informational filing. IRS does this to make sure that any interest or other income from these offshore accounts is making its way onto the taxpayers income tax return each year.

IRS received broader powers this year under the Foreign Account Tax Compliance Act, but most of those provisions will not be enforced until 2012.

For law abiding US residents the moral is this. If you have relocated here from your home country to manage a subsidiary of a foreign company you may now be a US tax resident (regardless of your immigration status). If you have a bank account back home you need to let IRS know about it. While it's true that you are a small fish and that you may have nothing like the evil intent exposed in the UBS case the penalties are just too stiff to risk (up to 50% of the account value). The same goes for foreign corporations doing business in the US. Earnings from your offshore accounts may be subject to US tax and the accounts themselves may be subject to annual information disclosures.

Transfer Pricing

Transfer pricing is a completely unrelated but increasingly critical matter. Related corporations that do business with one another across borders are subject to the transfer pricing rules. Basically, transfer pricing works like this. You need to make sure that you are selling and buying goods and services from foreign related parties at prices that are similar to what an arm's length (unrelated) buyer or seller would have to pay.

These rules exist to keep corporations from gaming the tax systems in different jurisdictions. Picture a manufacturing company in India producing parts that are assembled and sold by a sister company in the United States. If India has a really low tax rate and the US has a really high tax rate there is an incentive for the Indian company to charge an exhorbitant price for the parts. This would produce bumper profits in India and only marginal profits in the US thereby reducing the combined companies' total taxes. Transfer pricing exists to prevent such arrangements.

For businesses that are either US subsidiaries of foreign parents or who have foreign subsidiairies themselves the lessons are clear:

  1. Document how prices between related parties are set and update the documentation every time the pricing changes.

  2. Change pricing to reflect market conditions. A transfer pricing arrangement that hasn't changed in ten years is ripe for audit.

  3. While transfer pricing audits are usually reserved for larger companies greater efficiency in this area means IRS will be able to do more audits. Smaller companies are less likely to invest in the documentation process and are more likely to fall prey to audit adjustments.

  4. Transfer pricing isn't just a concern for large, multi-national manufacturers. An area that has been getting increasing scrutiny is the fees companies charge one another for intellectual property. Knowledge based small businesses like software developers and professional services providers need to pay attention to their transfer prices with overseas sister, child or parent companies.

Over the last few years it has been hard to divine the direction of tax policy, but at least in this case IRS is giving us a glimpse of its enforcement playbook. Companies of all sizes would do well to pay attention.


Everyone Has a Budget (part 2)

In part one I talked about the budgeting process from the perspective of the professional providing a quote. Today I want to talk about it from the client's perspective. Engagements begin the first moment the client and the professional begin to talk about the project. By being more intentional during the earlier stages clients stand to gain a lot.

Clients who deflect questions about budget are often doing so as a negotiating tactic. There is a mistaken belief that "the first one to mention a price loses." I understand where this comes from and I've often used this tactic myself when buying cars, washing machines, lawn mowers and furniture. However, professional services are not the same as tangible goods, and one cannot use the same tactics that work so well on the used car lot.

The problem with professional services is that they have no shelf or inventory cost. Refusing to talk about budget when contracting for professional services is somewhat like asking a mechanic to build you a car from scratch without telling him how much you want to spend.

To stay with the car analogy you have three basic choices when you come in talk about a new engagement as a client:

  1. Describe the outcomes you want to achieve and specific goals of the engagement. This is somewhat akin to telling the sales person the make, model, mileage and options you are looking to purchase.
  2. Describe the budget you have at your disposal and the non-negotiable pieces you must accomplish. This is like the buyer who says "I have ten thousand dollars to spend. I'm not too concerned about the interior because I'm going to replace it anyway. What I really want is a solid engine and transmission that I can build a hobby car around."
  3. Do neither 1 nor 2 and tell the salesperson "I'll know it when I see it."

This third option is what we are trying to avoid. The client may not know it but this approach hurts their project in several ways. First, it wastes a lot of time. Rather than focusing on exactly what you need the professional stumbles around blindly hoping to either discover the outcomes you wish to accomplish or the money you have to spend. The thing about professionals stumbling around in the dark is that they don't appear very competent. If clients are going to lose faith in their professional it's more likely to occur at this point in the process than any other. Frustration builds and relationships fall apart before they were given the opportunity to accomplish anything meaningful.

Second, the more time the professional has invested in this "stumbling" process, the less room there is for pricing flexibility. Even the most progressive firms understand that time is money when working on low value tasks. And believe me, trying to guess a client's intentions is low value. Professionals will be forced to recoup these lost hours later in the form of a higher fixed fee.

Third, focus is lost. Regardless of the client's negotiating methods there really exist one or two or three primary objectives or outcomes that need to be accomplished for the project to be successful. Stumbling around for a couple of days or even a couple of hours takes attention away from what is most important. If the professional you are dealing with is incapable of meeting your budget expectation or delivering on your non-negotiables wouldn't it be better to know that in the first fifteen minutes so that you can move on and find the right person?

The best approach is to outline the exact outcomes you need to accomplish AND to come to the table with your budget in hand. Clients suffer an interminable fear of paying too much, but what they should really be focused on is accomplishing their objectives. Too much focus on paying the lowest price results in sinking dollars into commodity projects with no enduring value. Focus on accomplishing objectives at an acceptable level of investment results in an ROI that continues to pay dividends long after the project is over.


Everyone Has a Budget (part 1)

I have this budget conversation a few times a week when discussing new projects with existing clients or when interviewing prospective clients.

Me: What is your budget for this project?

Gee I don't know, we haven't really thought about it.

At this point I have to wonder if a) I'm dealing with someone for which money is no object, b) they really haven't thought about the budget yet or c) they have a budget figure in mind, but they just won't share it with me under the belief that "the first one to mention price loses." Back to the conversation.

Me: Well, it would be tough to quote this blind. Any ball park you want to give me?

Well, we trust you. You're the expert on these things.

This is tough. You need to know the value expectation to provide a valid scope of work and quote, but you need the client's price neighborhood to understand their value expectation. If you know the client well enough you can get candid and just say "Really, I need to know how much we have to work with or I'm going to give you a number that's way too low or way too high. I might get lucky, but do you really want to roll the dice and try to get lucky with something this important?"

As Michelle Golden (@michellegolden) pointed out to me a client's indication that they don't know what the budget should be is a great opportunity to explain the value you can add. She's absolutely right. The art to pricing is being able to discern when prospects truly don't have a budget expectation from the times when they simply won't share it with you. In the former you can educate. In the latter you may be dealing with gamesmanship or poor negotiating skills.

If you don't know the client very well yet and they just won't share the budget expectation you can choose not to quote or you can quote blind. When you quote blind here are three rules I follow that may help you.

  1. Put yourself in the client's shoes and quote based on what you would pay WITHOUT making assumptions about the client's ability to pay or thriftiness. You know the scope of work, or at least the scope you are willing to commit to. You have a value proposition you are willing to accept based on an ROI you think favorable. If the client won't give you theirs, use yours and quote accordingly.
  2. When in doubt include it in the scope. For instance, if it is hard to know how much information the client has at their fingertips and how much you are going to need to dig up yourself, assume you will need to assist in the information gathering phase. It is better to do this than to go back later and admit you assumed the picture was rosier than it really turned out to be.
  3. Explain your position. More information yields better quotes and better execution. If the client won't share information with you they need to understand the position they are putting you in and the disadvantage this creates for them. More on this in part 2.

However, seriously consider not quoting blind. Just say "It's our policy not to quote until we are given some budget parameters from the client. Price is too important an issue for us to guess at what you want to pay." This takes guts and I don't do it as often as I should.

Part 2 is for clients. It explains how you hurt yourself when you fail to set budget expectations with your vendors and professional partners.

A special word of thanks to the #geeksunite community for their input and contribution to this post, especially @michellegolden @taxman45 @deductme @DeepSkyAcc @JodyPadarCPA and @CFarmand. You guys are awesome.