Howard’s Inner Circle, No. 15: Dramatic Changes in Tax Planning

I met Dean Zerbe a number of years ago when he became National Director in alliantgroup's Washington, D.C. office. He was formerly a Senior Tax Counsel on the Senate Finance Committee. I took a liking to him immediately and was lucky enough to hear him speak last week at a Firm of the Future free breakfast hosted by Philip Whitman of Whitman Business Advisors and Robert Fligel of RF Resources.

Dean Zerbe understands intimately the dynamics of tax legislation and is especially attuned to the changing winds in Washington. I like that his free newsletter is only sent out when he has something important to say. Most importantly he pulls no punches when he describes the factors and the players that influence tax legislation.

There were some keys points he made that morning indicating to me that accounting firms should be making changes in their approach to tax planning, and in identifying which clients and potential clients are impacted by tax legislation.

Tax legislations’ increased industry focus.--It was particularly evident in the recent health reform legislation according to Zerbe that taxes were imposed on industries or a tax benefit was given to an industry. Take the therapeutic credit/grant which is a limited $1 billon program which ends once that amount is allocated. Interestingly if a qualified company picked by the IRS can’t use the credit it gets a grant. Zerbe points out the IRS form for applying was expected to come out momentarily and there is a very limited time to file. He expects future tax legislation to continue to focus on specific industries as that is easier than changing tax rates in general. Another example of this continued type of focus is a controversial proposal trying to increase payroll taxes for S corporations where shareholders are professionals.

Taking the penalty.—Zerbe expects more companies to pay the penalty for not proving medical insurance benefits as that will result in a greater savings than continuing to pay the benefits. He predicts taking the penalty as increasingly being viewed as a viable option in other situations.

Choosing to pay the estate tax for those dying in 2010.--Zerbe predicts one option that Congress might select is allowing certain estates of those deceased in 2010 subject to carryover basis to pay an estate tax instead and get a stepped-up basis for the property. If this option is adopted or the carryover basis rules are left alone, there are significant fiduciary obligations for these executors and administrators and planning opportunities for the disposal of property with a carryover basis with regard to heirs.

Watch out for tax whistleblowers—According to Zerbe, underpayment of tax whistle blowing is on the increase such as the reporting of companies taking advantage of promoted tax shelters. With downsizing, a move to independent contractors, and the informality of e-mails, it should come as no surprise that a disgruntled ex-employee might seek a reward from IRS. What is fascinating is the number of law firms who are specializing in this. Just do a search on the Internet.

Highlight costs of compliance-- CPAs and the organizations representing them need to put a greater effort in convincing Congress to calculate the costs of compliance when a tax law change is proposed suggests Zerbe. The figures could be included in Congressional reports the same way the revenue impact of specific law changes are displayed.

© 2010
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The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Howard’s Inner Circle, No. 2: Businesses Turning to the Independent Distributor Model

The greatest overhead expenses are often those associated with employees. This is why many companies are reducing severance benefits or eliminating matching contributions to 401(k) plans. Some are being more creative and instead minimizing the size of their workforces by utilizing so-called “independent distributors.”

I have recently seen this with an energy provider to businesses and personal residences as well as a company that sells video telephones. The attraction is savings on guaranteed salaries, payroll taxes, employees’ benefits, and many of the costs associated with supporting inside salespersons. These companies might provide some help on setting up a Web site by providing templates, but the ones I came in contact with didn’t even provide a uniform style for business cards for these independent distributors.

Businesses are doing a great job by promoting this new status, and rather than using the old term “commissions” speak of “residual income” and play up the fact that it is a new industry or a new product subject to exponential growth. In this tough economic environment, any source of potential income draws interest. Because younger individuals might not see the importance or availability of medical insurance and retirement plans benefits and have difficulty finding jobs, independent distributor opportunities have great appeal.

Companies like the fact that underperforming independent distributors won’t hurt their company’s bottom line as much as full-time underperforming employees and are likely to give up after awhile.

There are a number of downsides to relying on independent distributors including the expected government scrutiny asking if these individuals aren’t really employees and should be treated as such for payroll taxes purposes. “Look for an Obama administration to aggressively challenge independent contractor status.” is the prediction (at http://www.webcpa.com/prc_issues/2008_10/29348-1.html?pg=2) from Dean Zerbe, former senior counsel and tax counsel for the Senate Finance Committee and now national managing director for alliantgroup. Another potential disadvantage is the fact that an independent distributor might be working for more than one company at a time and place his or her maximum efforts and loyalty with the product or service that is generating the greatest revenue at the time.

This will be an interesting trend to watch and advisors to businesses especially lawyers and accountants are sure to benefit as they counsel the many businesses who might consider utilizing independent distributors, as well as defend those when federal and state agencies question this status.

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The above is from the second issue of my newsletter, Howard’s Inner Circle, which periodically appears on my blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is given credit as the author.