No Profiles of Courage in this Congress

As a result, do not expect any action on the two toughest tax decisions until after the November elections.

Cut, cut, cut

The longer Congress dawdles, the greater the chances that there will be a short extension of the Bush tax cuts for all taxpayers.

President Obama wants to allow the Bush tax cuts to expire for individuals making more than $200,000 a year, and for couples making more than $250,000. That includes thousands of small businesses, 75 percent of which file their business income on their personal taxes, reports the National Federation of Independent Business.

If the tax cuts do expire, the top rate for business owners will increase from 35 percent to 39.6 percent. For a business that brings in about $400,000 a year, that’s about $12,000 more in taxes and for a business with income of $2.5 million, taxes would go up about $108,000.

Those are big increases for small business people.

On the other tough decision, estate taxes, the odds of retroactively reviving the estate tax for 2010 grow longer every day because Congress fears to act because of the questionable constitutionality of such a law.  It is looking more probable that there will not be a federal estate tax for 2010.

If Congress continues to pussyfoot around, 2010 will be the first year that the estate tax has lapsed since it was enacted in 1916. America’s first billionaire, John D. Rockefeller, was taxed at a 70% rate when he died in 1937.

However, under current law the estate tax will come roaring back in 2011.  If your estate is worth $1 million dollars or more your estate could be taxed up to 55% starting in 2011. 

It really is not funny, but there may be some nervous sick rich people who depend on life support hoping to make it through to 2011.  Their heirs may be conflicted about continuing such life support.

For the families of several wealthy people who died this year, the estate tax lapsing means that they will end up saving billions of dollars in taxes that would have been levied had their loved ones died in 2009 or 2011.

One of the most prominent examples is George Steinbrenner.  Steinbrenner passed away this year, leaving an estate estimated to be worth over $1.15 billion dollars. If he had died next year his estate would have been taxed at the 55% rate, meaning the family would have lost over 500 million dollars to estate taxes. Since he died in 2010, however, if the estate tax was no longer in effect, his family will save over half his fortune.  $500 million will buy a lot of baseballs (and baseball players.)

What will it take to leave the Great Recession behind?

Friday, August 27, the government reported that the economy grew at a much slower pace in the second quarter than previously estimated. The gross domestic product, a broad measure of economic output, grew at a 1.6% annual rate, down from an initial estimate of 2.4%, and slower than 3.7% in the first quarter.  This means the growth in Q2 was less than half the growth in Q1.

Will the Great Recession become Great Depression II?

Housing sales have been a disaster.  Since the home buyer credits expired, housing sales have declined in some areas to low numbers that have not been seen since the Great Depression.  Sellers who put their houses on the market this summer have been very disappointed with the tepid response.

New home sales collapsed by 12 percent in July to an annual pace of 276,000 units, the lowest level since the Commerce Department has been keeping records.  The median price of the average sale is the lowest since 2003.

The American economy could experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed, according to some experts.

The challenges are formidable.  There is poor and declining growth, a stubbornly high unemployment rate, sky-high deficits and a national debt that makes the US one of the most fiscally indebted countries in the world as far as total amount due.

What can we do?

Federal Reserve Chairman Ben Bernanke said the nation’s central bank has not exhausted potential cures for what ails the limping U.S. economy and is willing to take new measures to boost growth if needed.

Bernanke said the Fed’s policymaking committee will “strongly resist” the economy falling into a dangerous bout of self-reinforcing price declines. Such deflation “is not a significant risk for the United States at this time,” he said.

The Fed will adopt “unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” he told an annual gathering of central bankers in Jackson Hole, Wyo., according to a copy of the speech released by the Federal Reserve.

The US bailed out the big piggy banks.

The feds successfully bailed out the big banks.  What are they going to do for the rest of us?

Buying a laptop? Consider these factors.

Tis the laptop-buying season, with students going back to school and the rest of returning from vacation, resolving to work with better tools.  What is important when looking at laptops?

Price.  This is usually the most important factor for me.  With laptops becoming more and more of a commodity, features are often the same when comparing machines.  It does pay to shop.  You can save $200-$300 per machine if you wait for deals.  Do not think that discount stores do not provide good service either.  Some discounters provide superior service.

Battery Life.   Sometimes this important feature is overlooked.  It does vary significantly from machine to machine.  When you work out of the office you usually need at least five hours of battery life.  Five hours will make it through one cross-country flight.  Batteries do deteriorate.  The five or even eight hour laptop battery will only be giving you three or four hours of life in a few years.  Look for laptops that offer affordable extra battery options.  Also, consider buying the replacement battery now, when you buy the new machine, while it is available.  A new battery will be harder to find in three years.

Compatibility With Your Current Equipment.   Look for equipment and software consistent with what you are using now.  Why waste time trying to understand why, for example, a graphics driver has changed.  A new video driver can conflict your security software.  And you do need to worry about the driver for that old printer that you love.  Make sure it is available.  The pre-installed software should remain consistent. There should be no surprises like unwanted bloatware or incompatible applications.  The operating system version should be the same, too, where possible.  If a critical piece of hardware has changed, you could experience a lot of frustration adapting.  Docking stations and power supplies you already have would ideally work on all systems you consider.

Durability.  I do not treat my laptop gently.  I have dropped mine on the floor, flooded it with Mountain Dew, and bumped the device interfaces against rocks and hard places.  It does not take much of a fall to crack a motherboard or a screen or destroy a hard drive.  You should look for manufacturers that build reliable systems, offer three-year warranties, and will fix failing hardware if necessary.

Security.  I believe that in our security conscious world, some security concerns are overblown.  One thing to consider though is that many laptops are lost in the backs of cabs, on planes, and in airport security lines.  If the finder (or thief) of your wayward machine pulls the hard drive from the system, it should be able to be disabled so it is impossible to read.  Even inside the system, the encrypted hard drive’s data should be impenetrable. No one wants the finder to start perusing your personal identifiable information. An encrypted drive is, at least, one level of protection.

I wish you best luck looking for your new laptop.  It can be a fun process.

You should always correct your mistakes on your federal tax return.

There are procedures you should follow.

Math errors.  Many mathematical errors are caught in the processing of the tax return itself.  The IRS computers will find that the math is wrong and send you a notice.  Unless the error is really egregious, the mater usually ends here.  I once worked for a partner in an accounting firm that would intentionally make a math mistake on a questionable return because he felt it would side track it from further audits.  I do not think that this is true and I certainly would not try it.

Not filing a complete return.  If you did not attach a required schedule, the IRS will contact you and ask for the missing information.  If you leave out required info the Service will ask that you supply it.  If you forget to sign your return, the IRS will send you a form for you to sign to authorize your return.

Failure to report your income.  This is the most serious offense you can commit in the eyes of the US Treasury.  This is especially important if vendors are reporting this income to the IRS on Forms 1099.  If you discover that you did not report all your income, you should immediately file an amended or corrected return using Form 1040X, the Amended U.S. Individual Income Tax Return.  When filing an amended or corrected return include copies of any schedules that have been changed.  Also include any Forms W-2 or 1099 you did not include.

Missing tax credits.  Generally, to claim a refund or a credit you should have taken, the Form 1040X must be received within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later.  Please allow the IRS 8-12 weeks to process an amended return.  And good luck in trying to follow up on the phone.  You will need the patience of Job.

Many factors go into your credit score.

Every one looks at your report from the credit bureau these days: prospective employers, associations you volunteer for, and of course, new creditors.  What can you do to drive your score higher?  We offer these recommendations.

Pay down your credit cards.  Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. (It is a version of the old cliché; creditors like to provide credit to those who do not need it.) Getting your balances below 30% of the credit limit on each card can really improve your score.  Pay down the cards first that are closest to their limits.  The utilization rate is the account balance divided by the credit limit.  Closing an account with a low utilization rate can lower your score.  For example, let’s say you have two cards and one has a zero balance and one has a $2,000 balance. If each card has a $4,000 limit, your total limit (across both cards) is $8,000. Your utilization rate is $2,000/$8,000 = .25, or 25%.  If you close the account with the zero balance, your utilization rate jumps to 50% ($2,000/$4,000). Obviously, the amount of the impact on your score will vary according to your individual circumstances, but since the utilization rate may account for almost 30% of your score, you’re FICO score will take a negative hit if your utilization rate goes to 50%.

Check your credit limits.  Your scores might be artificially depressed if your lender is showing a lower limit than you’ve actually got. Most credit-card issuers will quickly update this information if you ask.

Do not max out your credit cards.   Many consumers make the mistake of thinking that their credit limit is an invitation to spend until it’s gone.  myFICO.com recently did a study of how much a score drops when one individual has a FICO score of 680 and the other individual has a FICO score of 780. Maxing out credit cards was one the factors they used in the comparison.  Their results showed that the consumer with the 780 score experienced a 25-45 point drop and the score fell into the 735-755 range when that consumer maxed out his credit card. The person with the 680 score saw only a 10-30 point drop and the score fell into the 650-670 range.

Do not make late payments.  This may seem obvious, but many consumers still make this mistake.   A 30-day or more delinquency can make your score drop like a rock.  Someone with a 780 score could experience a drop of 100 points or more with a 30-day delinquent payment. If your score is in the 680 range, expect to lose about 60-80 points.  If this late payment stretches into collections, then expect a really big drop.

Do not open many new accounts at one time.  When a cashier tempts you with a “get 15% off if you open an account today” offer, be careful.  When you open a new account, this results in a hard inquiry, which affects your score.  Inquiries knock only about five points off your score.  If you’re on the bubble between having good credit and excellent credit, those five points for each inquiry can have a big effect.

Understand the value of your credit history.   A long history is better.  Sometimes when creditors close a card, they close one they have had a long time. The length of your credit history makes up 15% of your FICO score.  FICO scores are calculated based on the average length of time you’ve had your credit cards. The score considers both your current accounts and any closed accounts still included on your credit report.  If you stop using your oldest cards, the issuers may stop updating those accounts at the credit bureaus. The accounts will still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts. Credit bureaus typically keep account histories on your credit report for many years after you close the account or pay off the loan.  If you close a card you’ve had for ten years, this can eventually bring down the average length of your credit history.  Keep using those cards with the long, good history.

Open source describes practices in the production and development of source code that promote open access to the product’s source materials.  That does not mean that you can do anything you want.  There are licenses and rules for source code users. 

 Open Source Linux is spreading into mobile and embedded devices.  Developers are increasingly using complex combinations of open source code and commercial code and need guidance on what rules govern the operation of the two systems.  Linux often underlies telecommunications companies’ operations.  Linux is often bundled with other open source code to finds its way into the operation of product as an embedded operating system.

 The Linux Foundation is launching the Open Compliance Program to guide users on how to stay within the open source code license limits. Open source licenses have gained a new, court-backed support, and Eben Moglen’s Software Freedom Law Center has taken several well-publicized enforcement actions against General Public License (GPL) violators. The GPL governs use of Linux and other open source code.

Does Linux have a light side?

The Linux Foundation is trying to make compliance as simple and easy as possible for companies that want to expand their use of open source code.  The Linux Foundation has released a set of code scanning tools to address compliance issues.

Bill of Material Checker.  The Bill of Material Checker is capable of detecting changes in the bill of materials that indicates that new code components have been added to product. The tool’s capabilities have been expanded to report on new open source components added to a product, something that’s hard to do with rapidly changing mobile devices and embedded systems.

Dependency Checker.  Dependency Checker can identify what code is linked to what. If open source code is linked to commercial code, that affects how the open source code can be used, and the tool offers a license policy framework that would allow a code manager to define what licenses he needs in his application.

Code Janitor.  Code Janitor checks comments in the source code to insure developers didn’t leave statements about future products, product code names, and references to competitors. The tool checks code against its database of keyword to make sure the code is ready for public use.  Open source does not mean open advertising.  No open season on the competition either.

Does Linux have a dark size?

These tools are designed to drive down the cost of staying in compliance with open source licenses.  IBM, Motorola, Nokia, Adobe, Intel, AMD, Cisco, Google, HP, Sony and Novell are all supporting the initiative.

Call me, please!

Will your view count as much as a big bank?

The Federal Deposit Insurance Corporation (FDIC) has announced an open door policy that will make it easier for the public to give input and track the rulemaking process as the agency implements the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The policy goes well beyond what is required by the Administrative Procedure Act that governs federal rulemakings. Under the new policy the public will have a larger role in the process than ever before, especially being able to participate even before regulatory reform rules are drafted and proposed.  Public disclosure of meetings between senior FDIC officials and private sector individuals will enhance openness and accountability. This voluntary public disclosure policy will apply to meetings discussing how the FDIC should interpret or implement provisions of the Dodd-Frank Act that are subject to independent or joint rulemaking by the FDIC.

The new policy expands steps normally taken in the formal notice and comment rulemaking process:

The FDIC wants to hear from YOU!

First, the FDIC will hold a series of roundtable discussions with external parties on implementation issues. These will be designed to provide balanced public input throughout the rulemaking process and will be available for public viewing via webcast. In addition, any interested party can request a meeting with FDIC officials or staff by submitting a form that will be provided on the FDIC’s webpage.

Second in this new process will come additional public disclosure. The FDIC will release, on a bi-weekly basis, the names and affiliations of private sector individuals who meet with senior FDIC officials to discuss implementing the new law through independent or joint rulemakings. The FDIC will also release the subject matter of those meetings. As always, the FDIC will webcast all open Board meetings, including those regarding regulatory reform.

Third, to seek input from the widest audience possible, the public can submit views via email on how the FDIC should implement the new law. These comments will become part of the record and will be posted on the FDIC website. The public will also be able to sign up for a subscription service for receiving notices on major developments. The FDIC has also crafted bill summaries and added a fact sheet that will be regularly updated to reflect policy decisions during the implementation process

Will the Great Recession help bank reform as much as the Great Depression?

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 7,932 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. 

The agency has been criticized in the past for supporting the big banks against the consumer.  We will see if all of this new input changes its perspective.

A new tax law takes away some of their special benefits.

Multinational corporations, whether American or foreign-owned, are supposed to pay taxes on the profits they earn in the United States.  American companies and individuals are not supposed to gain tax advantages from moving their operations or investments to low-tax offshore “tax havens.” Sadly, our tax laws have often failed miserably to achieve these goals.

New legislation enacted into law this summer may cut back some international manipulations.

The big piggy global corporations will no longer be able to split creditable foreign taxes from their foreign income. The taxpayers will have to take that income into account in order to take the associated tax credit. This means the big companies cannot take the tax credit if they do not report the related income.  This provision will be effective for foreign taxes paid or accrued in tax years beginning after December 31, 2010.

No more sweat shops on US taxpayer's time?

The bill also prevents corporations from claiming foreign tax credits where they engage in asset acquisitions.  One of the most infuriating credits that the global companies have been taking are credits against their taxes for outsourcing jobs to low wage countries.  Hopefully it will be harder to buy a foreign sweat job and take a big tax credit on your return. This provision is also effective for covered asset acquisitions after December 31, 2010.

In addition, the bill limits the amount of foreign taxes assumed to be paid.  If a domestic corporation includes in income an amount attributable to the earnings of a foreign corporation that is a member of the domestic corporation’s qualified group, the inclusion amount is limited to the amount of foreign income taxes that would have been deemed paid if cash in the amount of the inclusion had been distributed through the chain of ownership starting with the foreign corporation and ending with the domestic corporation.  Simply, if you earn money in this country you should pay taxes on it here.  Perhaps this will limit the deductions that companies take for “assumed” taxes that are not actually paid.

Do the Japanese pay their fair share of US taxes?

The bill also terminates the special rules for interest and dividends received from persons meeting the 80% foreign business requirements.  There should not be special rules for the especially infuencially big global companies.

More 1099's for small business.

If you are a business owner, new laws passed in 2010 will require your firm to provide more documents to the government in future years.

The health care bill and other legislation enacted this summer could fundamentally change the way we do business and keep records in the United States.  I may dramatically increase the information reporting requirements for business transactions.

Beginning January 1, 2012, virtually all payments by a trade or business aggregating $600 or more to any single vendor during any calendar year will have to be reported at the end of each calendar year to the vendor and to the IRS on Form 1099. Vendors include almost anyone a trade or business pays in the course of doing business. 

Many small businesses have evaded taxes on monies paid to them that are not reported to the IRS.  There is a huge underground economy business jungle that pays no taxes on the incomes earned.  These new reporting requirements are designed to try to collect some of these unpaid taxes.

Better order plenty of 1099 forms.

Now is not too soon to start thinking about the massive increase in record keeping that will be required for your small business.  Get a good accountant.  Accountants like me are rubbing our hands about the possible increased work.  Our clients are not as gleeful.

Will the IRS be able to match all of the documents?

There are questions about whether the IRS will handle the volume.  In the US economy trillions of transactions will have to be identified and re-sorted by vendor, summarized, and reported to the IRS by more than 30 million US businesses.  Businesses will be required to record the Taxpayer Identification Number (TIN) of the payee, or some other unique identifier, for each transaction during the year.  Most businesses probably don’t now routinely obtain a TIN for every party from which they make a purchase.   Now they will have to.  The IRS’ TIN matching program allows a payer to validate a TIN against a name electronically, but it’s unclear how much help that will be with vastly more names and TINs to check.  Will the already creaking IRS computers be able to handle the load?