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. 14: What is a Community?

Some might suggest a dictionary is the best place to find the definition of the word “community.” Others might point to the entry in Wikipedia. After reading, Wikipedia at http://en.wikipedia.org/wiki/Community, it is readily apparent that the definition depends upon the context in which you are using that word.

You no longer have to live in the same town, nor have direct personal and business contacts, or vote in the same local election to be part of a community. The Internet, e-mail, and other technologies have really broadened what constitutes a community and how many members can belong at any particular time. Also a member of a virtual community takes many forms including being an observer, a registered member, an active participant, and a community administrator. The form can change in an instant. Unlike geographic communities, there are often few ties (a job, home, family, etc.) which bind you tightly. You can simply leave that community and go to another if it doesn’t serve you well.

What do you look for in a virtual community? How about a mission statement you feel comfortable with, that the members believe in, and try to follow. Throw in a code of ethics and list of responsibilities for all its members and participants, including advertisers? How about transparency and full disclosure? And like some geographic communities, security, comfort, and diversity. Deep down a community that promotes the common good, while still encouraging, within reason, self-interest.

Much of business is obtained from referrals. In my experience, writing about CPA firms for many years, they were often the result of a CPA’s relationship building skills with clients and other professionals in the immediate geographic area. The problem is those geographic communities don’t have the stability they once had. Globalization, changing economic conditions, and technology are decimating some communities and creating new ones, often at a dizzying rate.

What communities you belong too is an important decision. In the past, it often revolved around the geographic location and great thought and due diligence would occur before joining a particular community. Because of the ready instant access and the need to participate within these virtual communities, I believe similar standards should be applied in selecting all the communities that we “live” in.

© 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. 13: Two Diverging CPA Firm Business Models

Being a detached, independently paid and unpaid observer of CPA firms for over two decades allows me to freely comment.

The early successful business model was a firm with a number of rainmakers, often as little as two or three. They were great at business development especially via one-to-one contacts, and also adept at maintaining and working a tight referral network where referrals were expected to go both ways.

Over time, this well-established model has morphed itself into two new distinct business models. One is where those rainmakers have become the executive committee of a CPA firm that runs in a corporate style. Where previously, firm policies and strategies were hashed out in open discussion at partner meetings, decisions are now made at closed executive committee meetings. And no matter how it is sugar-coated, it is understood who are the powers-that-be, and how getting into the inner sanctum, the management committee, is only done by invitation or by a successful power play.

Contrast that with the second business model that also developed from the earlier rainmaker model. These are firms that strive to operate as a team with management building consensus and having a real understanding of the importance of the various individual’s contributions in the firm’s successes.

If I were to predict which of these two models will prove better, I would select the later. This modified team approach:
• Grooms successors;
• Encourages collaboration;
• Has greater multi-disciplinary capacities;
• Rewards innovation
• Promotes a firm-wide project management instead of a capture-what-you- kill mentality;
• Is more susceptible at building real working alliances;
• Taps well into intergenerational resources;
• Promotes widespread mentoring in both directions;
• Supports technology at all levels; and
• Is structured for everyone to be focused on their roles in business development.

In both models relationships remain the key, and referrals are still the main source of new business. The real difference is the lack of community in the corporate model. Although lip service might be given; it exists only in name and spin. The second model, the modified team approach, with a real manager rather than a CEO, truly promotes community. This approach will turn out better in the long run as all indications are technology, globalization, outsourcing and many other factors are permanently changing the rules of the game. Businesses and professional firms will be seeking to become members of various communities and will do so only by building trust and cultivating loyalty as the basis for relationships. Only one of these diverging CPA firm business models lives that.
© 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. 12: The Current Decrepit State of “Journalism”

One article entitled, “Ditching a $500,000 Salary to Teach Lit,” says it all. I found the article on Yahoo! Finance at http://finance.yahoo.com/career-work/article/109420/ditching-a-500000-salary-to-teach-lit?mod=career-worklife_balance. It was provided by CCNMoney.Com and written by a contributor.

What I expected as I read the title was a story about a difficult decision and how the transition went. The hope was to learn from this individual’s experience. I would have never read the article if the title, although a bit longer more accurately read “Ditching a $500,000 Salary and Selling Your Business at Age 50 for $6 Million to Teach Lit.” We can work at shortening my title if you want, but you get the idea. By the way, there were three bold faced tips in this short article on how he did it. They are 1. By Taking the First Good Offer; 2. By Investing Conservatively, and 3. By Drawing Down Cautiously.

This is the current state of “journalism.”

© 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. 11: What Is the Best Book You Ever Read? Why?

I read a lot of self-help and business books and always get a few kernels of brilliance from them. However, the self-help books often bother me as many are constructed as workbooks filled with exercises and warnings if you don’t do the exercises you won’t get anything from the book. The business books are also heavy-handed, as authors after making one keen observation apply it in every context he or she can think of to prove its worth.

The most recent book I read was Paper Airplane by Michael McMillan mentioned by Tim Storey in Utmost Living. It was very good, but not my favorite. It tried to be too many things: a self-help book, a business book, and camouflaged with brilliant design work, also as a children’s book. In the end, it reminded me of my favorite book.

Tom and Pippo Make a Mess by Helen Oxenbury is hard to find as I believe it is out-of-print. I discovered this so-called child’s book at well over age 50, when it was brought to my attention by Alex’s father. He had been reading the book to Alex for many years (my guess at least eight). Alex, a remarkable young man, who has fought with tenacity since he was born at a birth weight of 21 ounces, loves the book, and often, after his father finishes reading it, rips up the book and makes a mess.

Every adult and child can benefit from its message whether as a gentle reminder or as a wake-up call. Unlike the many self-help and business books, Tom and Pippo Make a Mess has an ever so-light touch, and encourages the reader to think and reach his or her own conclusions. Equally important, the book’s message with Alex’s comment resonates louder the more times you read it or have it read to you.

What’s your favorite book? Why?
© 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. 10: 2011 Accounting Cover Stories

For many years each month as editor-in-chief of Practical Accountant I decided on what would be the cover story. It wasn’t hard do but for one fact; we had to decide on the subject matter as much as a year and a half before the issue came out. The reason was the editorial calendar had to be in place in July of the preceding year and there was no guarantee that each month there would be a development affecting the accounting profession worthy of cover story coverage.

Because habits are hard to break I decided why not have some fun and pick out 12 possible 2011 cover story candidates now for a magazine for the accounting profession.

Tentative and Very Hypothetical 2011 Editorial Calendar
January--Plethora of Estate Tax Engagements
February--How CCH, RIA, Intuit, LexisNexis, and Others Are Utilizing CPA Firms as Business Partners
March--Reverse Mentoring: Overcoming a Firm Management’s Deep-Grained Aversion
April--Success Stories and Best Practices from Early Social Media Adopters
May--Increasing Revenue and Correctly Positioning a Firm During an Economic Downturn
June--CRM: What Firms and Clients Are Doing Wrong
July--Regionals Replacing Nationals as Auditors of Public Companies
August--Outsourcing Manufacturing and Distribution Functions
September--Walking the Cost-Cutting Walk: Fee Reductions on Modified Engagements Complement Advice
October--Tax Prep--Protecting Against Fee Erosion and Client Flight
November--The Practice Development Joint Ventures Art Form
December--Hidden Benefits of Firm Associations, State Societies, and Trade Groups
© 2010
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The above is from the tenth issue of 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. 9: Not So Fast with a Roth Conversion

If it sounds too good to be true, l have learned to pause and reflect. That is just how I feel about conversions of traditional IRAs to Roth IRAs. For some time there has been extensive positive press coverage regarding the fact that in 2010 the income restrictions have been lifted for a conversion and the resulting taxes can be paid over two years. Many of the articles are written as if it is a forgone conclusion that the election makes sense. I think the dangers and reasons why it might not pay to make a conversion must be more fully explored.

The fact that the participant should have adequate additional assets (other than using retirement plan distributions) to pay the tax and how the conversion affects the current tax rate is often mentioned in passing. What specifically isn’t being adequately explored is the immediate impact on an individual’s current and future net worth.

People who are eager to convert as much as possible must understand the taxes due on the conversion and on liquating assets to pay the tax on conversion can be very substantial. It would take a good deal of time to recoup that expenditure and achieve again the same compounding. That nest egg will take a very substantial hit.

Equally important, I see very few detailed projections using the comparisons of the tax impact of making or not making the conversion. Also missing are state tax implications which might include penalties for early distribution if the state doesn’t follow the federal rules on conversion, and the difference if the individual moves to another state. Assumptions also must be made as too whether there will be significant future changes to the income tax rules including the possibility of an excise tax being imposed on Roths of certain values.

Other major considerations are when the money might be needed, avoiding required minimum distributions, the ability to make controlled withdrawals at lower tax rates, as well as what happens if money is withdrawn within five years. The uncertain estate tax ramifications and estate planning implications especially as to possible distributions to heirs and charities also come into play. One article I read raised an interesting point as to whether a conversion to a Roth would more greatly expose the underlying assets if there is a subsequent divorce.

Also not sufficiently addressed is the mindset of the individual considering whether to make a conversion or not. Will they remain comfortable with the conversion if after they pay the taxes, the investment in the Roth goes down substantially or if economic adversity requires tapping into a Roth? How will that participant view the advisor who helped the participant make the Roth conversion? Although a conversion can be undone, the option is available for a very limited amount of time.

Assuming the decision is made that a Roth conversion pays particular care must be taken. For example, if institutions will be changed, make sure there is no tax withholding from the account when the transfer is done. Also it should be reviewed whether nondeductible IRA contributions were made.

Finally, an advisor should ensure that the participant fully understands and acknowledges all the possible ramifications of a conversion as the impact is substantial, immediate, and long lasting. Although the possible future benefits could greatly exceed the costs, the decision is a gamble, and as such, it should be a fully educated one.
© 2010
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The above is from the ninth issue of 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.