Continuing From Last Week

 

 

The reality is that many small business owners and unlicensed contractors that work out of their homes without any employees do not file income tax returns. That way they can eke out a living, but have no retirement benefits, and live in fear of being caught with all of the fearful consequences that follow.

If these individuals need a little help, they pick up “day workers,” many of them illegal aliens, I believe, who wait at shopping centers and other locations and work by the hour paid by the day with no payroll deductions, and no payroll reporting. Even though this method of payment with no deductions and no payroll reporting is 100% illegal, it appears to be tolerated by officials to the degree that fixed locations are being talked about (like a union hiring hall.)

Although I sympathize with all of the individuals and their families involved in this practice, it makes it extremely difficult for legitimate contractors to compete in the non-public, non-housing markets.

Of course, we the public see nothing wrong with this as it provides a source of low priced help as needed in maintaining our own net worth.

A few of these self employeds become successful to the point they have acquired assets, have money in the bank, have substantial net worth, and either they wish to become legitimate out of fear of losing it all from being audited; or, wish to expand by becoming licensed, and hiring permanent part time or full time employees.

Over the years three of these individuals have come to me for advice on what they have to do to “do it right.” When confronted with all of the costs involved, like required licensing, required liability insurance, payroll taxes, workers compensation insurance (not even suggesting medical insurance benefits,) not one of them has been able to “make the switch.”

Occasionally, an individual who has made a somewhat successful living working alone would like to hire one or more employees. The person has been working long hours and maybe turning down some business. I have to tell that person that based on my experience, it will be necessary to have four full time employees fully productive to get the net profit back to where it was working alone.

IT AINT EASY OUT THERE IN THE SMALL BUSINESS WORLD.

Why have I been trying to survive in this world for 44 years? Because I can’t give as much help to small business working alone as I want to. Guess I just like “beating my head against the wall.”

AND, all of us at MBBA LIKE THE PEOPLE THAT MAKE UP THIS WORLD.

AND, our presidential candidates are talking about increasing the rate of social security taxes. They have no understanding, or more likely just don’t care about the meek!

Now a Little Something About Taxes

I am a Seeker of Truth.

The thoughts set forth herein are the result of many years of looking for truth.

What I have to say is not necessarily factual. The reader will have to decide for one’s self whether or not it is fact or nonsense, but it will be what I BELIEVE TO BE TRUTH!

When I was a boy in Fresno a doughnut shop had the following saying in its window.

Probably many doughnut shops used it:

“As you wander on thru life, brother, whatever be thy goal, keep thy

eye upon the doughnut not upon the hole!”

When talking about income taxes, of course, taxes are the “hole.”

Assuming one takes advantage of all legal loopholes, the goal should be to pay LOTS OF INCOME TAXES.

I have found that the people that pay the most taxes, also have the most left after taxes.

After all, the first level of earnings all goes to take care of basic needs. Once one exceeds that level, although ones taxes might take 40 cents of each dollar earned, that leaves 60 cents of each dollar to add to ones net worth. Those are the ones that can be put to work (because they are not needed to put food on the table) that can be invested to earn even MORE dollars that will, also, increase income taxes but will add YEAR AFTER YEAR to ones net worth.

My heart goes out to the multitude of people that do not have enough income to require payment of income taxes.

I suffer even more in dealing with self employed contractors (as well as other small business owners) who are required to pay 100% of self employment tax to pay for future social security program benefits.

A typical example is a person earning $75, 000 from self employment income and trying to buy a home with payments of $2,500 per month of which $2,300 per month is deductible interest. Then property taxes will be about $4,000 per year. If the person is married with two small children, after credits of $1,000 each for the two children, federal income tax based on 2007 tax rates would $729, hardly a problem!

But self employment tax would be $10,600, an insurmountable problem in many instances.

The family would have $41,000 left after house payments, but only $29,675 after income taxes and self employment tax, not a lot to cover food, auto payments, clothing and education costs.

An employee earning a salary of $75,000 under the same conditions would have an extra $5,300, not a lot, but helpful, because the employer pays 50% of the social security taxes.

Why Small Business Consultant instead of Public Accountant

Public Accountants, regulated by The California Board of Accountancy, are REQUIRED to be INDEPENDENT, meaning that the practitioner firm cannot be an active part of the management of a company with whom it might audit.

I have never wanted to be an independent auditor. I would rather be part of the MANAGEMENT of a company, and by installing a good accounting system with adequate internal controls try to PREVENT a THEFT, rather than coming in after the fact to FIND A THIEF.

In other words I did not WANT TO BE INDEPENDENT.

About 30 years ago I was called before the Board of Accountancy because I had overlooked the phrase, “Prepared Without Audit,” on a financial statement prepared for an applicant for a contractors license. It was quickly established that I just overlooked requirement “this one time only,. and this was quickly “put to bed.” We then went on to the subject of “an OWNER of a non-professional corporation cannot sign tax returns as a public accountant, and wondered why MBBA was incorporated in that manner.

Inasmuch as I wanted MBBA to be an active part-time participant in providing management advice, I would not be allowed to do audits because I would not be “independent.” Therefore, there seemed to be no need to become a professional corporation.

One member of the Board immediately said something like, “”There is no need to worry about being indepent, that can be managed.” I replied, “I do not want to MANAGE that” and I instantly made an enemy on the Board

Then related to the problem of preparing income tax returns, after a few minutes of lively conversation, the Executive Secretary of the Board, a female CPA from Fresno, who just happened to know my older brother Clive, and just happended, also, to have a brother, also a CPA, who had been part of audit of Vangas or its predecessors said, “There is no need for a fight. Could you work for your wife?” If so, just put the stock of the company in her name, resign from the Board of Directors, and as an officer of the corporation, just be an employee. Then you can sign returns as a Public Accountant.” This worked very well until my wife came down with alzheimers disease, but more about that in a later posting to this blog.

The “enemy” sicked a special agent on me to investigate my activities. He was very nice, and after two or three days of contacting MBBA’s clientele, etc., he said, “You get a clean slate, except you must remove the word accounting from the sign outside your office, and all of your stationery” (More on this in a later posting, perhaps.)

Therefore, MBBA must advertise as bookkeepers, but I can assure you we do EXPERT ACCOUNTING..

I am not a CPA.

 

If I am not a CPA, how does MBBA qualify to be your part-time expert staff?

Graduated from Roosevelt High School, a commencement speaker, in February 1940. Attended Fresno State College into February 1942 as which time I left to work at Rheem Manufacturing for a month or so followed by a few months at the Kaiser Shipyards in Richmond, CA, while waiting to be inducted into the Navy Airforce.

Upon leaving the Navy Air Force In January 1946, I went back to Fresno State College as a business major, specializing in accounting. Skipping early details, our advanced accounting class taught by Victor Storli consisted of 19 world war two veterans, all but one of whom were married + a few other students. There were 19 “A”s given by Victor Storli, one of whom was to a female, the brightest one in the entire class. The one married veteran that did not get an “A” still became a CPA. Victor Storli had tears in his eyes upon announcing he had always dreamed of having a class like that, but thought it would never happen.

A few months after returning to college, Jim Quick, who, also, had been a Navy Pilot and Landing Signal Officer, and who later became head of the Agricultural Laboratory at U C Davis, became partners in operating a Texaco Service Station, each of us working 40 hours per week while carrying a full 16 unit load in college. One customer offered me a job with Santa Fe Railroad; another offered me a job with Caudill & Austin, Public Accountants. This job I took, and Jim and I turned the service station over to others.

While installing an accounting system in a Kaiser Fraser Auto Agency, I was offered a job with the Kaiser Fraser Company. That job would have involved much traveling which I did not want to do.

Skipping the several months in which I worked for a Mr. Austin, I was enticed by “Dean,” my next door neighbor and Chief Accountant for United Liquid Gas Co/Butane Propane Supply, which corporations had seven branches in the San Joaquin Valley, to become office manager for the two corporations. This looked like the opportunity I was looking for.

Dean was fired about nine months later, but talked the management into making me “Chief Accountant.”

A merger with Van Horn Butane Service headquartered in King City, CA, doubled the size of the operation, and became Vangas, Inc.

I became Secretary/Treasurer of the enlarged operation and then went on to complete in excess of 15 years with the most wonderful job in the world as far as I was concerned. It took 70 hours per week, but I was involved in all stages, negotiating, legal, and accounting, while the company grew to 84 branches in 6 states. By the time I left there were 25 subsidiary corp-orations, (at that time there was a $50,000 per year surtax exemption per corp-ration) 45 people in the accounting department, and six regional controllers. We had an annual audit by Arthur Andersen & Company, then later after Tidewater Oil Company purchased majority ownership, Price Waterhouse did the audit. Law firms I worked with were Bacigalupi, Elkus & Salinger in San Francisco, then later with Thomas, Snell, Jamison & Asperger in Fresno (a wonderful bunch of lawyers.)

Following the merger, Board of Directors meetings were held in San Francisco, and then after Tidewater became majority owner the meetings were held in Southern CA, usually in Santa Barbara and would involve a weekend of golf as well as a meeting.

To cut this short, I left because the wrong person became President and it was no longer fun! He wanted me out of a line position (to become Secretary only) because I held management accountable for its actions in my reporting to the Board of Directors.

I realized this was going to happen in any large company. My wife, Barbara, and I discussed how to spend our future years, and decided it would be nice to try to “eke out a living in Santa Cruz County.”