Monday, April 28, 2008

Depreciation - The Hard Way or The Easy Way

I have often said that there are 2 ways to do things: the hard way and the easy way. The hard way takes less time up front but more time in the long run. Naturally, the easy way takes more time up front but less time in the long run.

Depreciation calculations and recordkeeping used to be tedious and difficult. That was before software. Once you know how to properly use the software, it isn’t that bad anymore.


Why I bring this up is that too often I’m seeing companies having no differences between their book (GAAP) depreciation and their tax depreciation. This gets to be a big problem when there have been substantial Section 179 deductions take in recent years.

Section 179 is a part of the Internal Revenue Code that allows a business to immediately expense, subject to limitations, certain property and equipment purchases. The alternative would be to depreciate these items over time. For 2007, the maximum deduction was $125,000.


The problem is that you can’t take a Section 179 deduction in a GAAP basis financial statement. GAAP requires you to expense long-lived assets over their estimated useful life and using an acceptable depreciation method (such as straight-line or double declining balance). Immediately expensing property and equipment purchases means you are overstating expenses and understating assets.

The tendency to assign the same depreciation method and useful life for tax and GAAP has greatly contributed to this problem. Tax depreciation methods, commonly referred to as MACRS depreciation, are often reasonable for GAAP. For example, MACRS depreciates equipment usually over a 7 year life on a 200% double declining balance method. This is generally a reasonable estimate for GAAP too.


What happens is people just automatically copy over the tax depreciation treatment for the GAAP treatment. And they start taking Section 179 for book and tax.

This becomes a problem when the business wants a CPA to issue an audit, review or compilation report on its financial statements. This often occurs when a company wants to borrow money from a bank and for many other reasons. If the financial statements are to be on a GAAP basis, the CPA will have to disclose the departure from GAAP, or fix it. Fixing it costs money. The alternative is issuing what we call an OCBOA (Other Comprehensive Basis of Accounting) statement – this means you are producing financial statements but they aren’t GAAP. Many companies do this, but I advise against it if possible.


Frankly, the technology is there. Take the 10 extra seconds when you enter an asset into the fixed asset software and give it an intelligent depreciation method that reflects what you expect to occur in your business. And don’t take a Section 179 deduction for book.

Like I said at the beginning, there are 2 ways to do things. The hard way here is to take shortcuts. It will cause you problems in the end. Invest 10 more seconds (or whatever it takes) and do it right up front.

Friday, April 25, 2008

You CAN Qualify for 2 Homestead Exemptions in Michigan

Like the rest of the country, people are having a hard time selling their homes here in the Detroit area. My friend Gregg Nathanson, a real estate attorney with Couzens Lansky in Farmington Hills, just sent me an email on this subject. And I'm hopefully accurately quoting:

Earlier this month the State of Michigan passed a new law permitting an additional exemption, under certain circumstances. If you bought a new home and are having trouble selling the old one, then you might be able to claim a homestead exemption for both houses. You can claim the second homestead on the old house if that property is not occupied, is for sale, is not leased or available for lease, and is not used for any business or commercial purposes. To claim this second exemption, you have to file a conditional rescission form with the local assessor, and verify annually, on or before December 31, that the property is still eligible for the special exemption. The form, Treasury Form 4640, Conditional Rescission of Principal Residence Exemption, is available at the Michigan Department of Treasury website. To qualify for 2008 tax relief, you must file this new form before May 1, 2008.

Gregg notes that "this letter is intended to be a summary of new law, and not legal advice." He's right. I'm not an attorney either, so ditto from me.

Thursday, April 24, 2008

Developing Team Members

One of our team members is helping me two audits right now. This team member is bright and hard working.

And just told me that they don't like auditing. Sadness for me.

But I'm going to look at this as an opportunity. I think most firms would say tough this is what you have to do. That's not me. And it doesn't help out this team member. Because if this team member is miserable, then they will look for a firm elsewhere that will meet this person's needs.

Now I have to see if I can rise to the occassion.

Wednesday, April 23, 2008

The Dignity and Morality of Business

My colleague and mentor Ron Baker at Verasage Institute recently recommended the book Thou Shall Prosper: Ten Commandments for Making Money by Rabbi Daniel Lapin. Being the dutiful disciple, I promptly ordered it (and one of Ron's books) from Amazon.

I'm almost through Chapter 3, and overall am very impressed with the book. Rabbi Lapin is an Orthodox Rabbi (I'm more of an observant Conservative Jew which is a bit more to the center) and his politics are definitely to the right of mine, but he makes some very good points.

Chapter 1 is called The Dignity and Morality of Business. At the end of the chapter, he suggests writing an article on the subject for the local newspaper. I'm going to do it as a blog entry instead.

We constantly see business portrayed as evil. Think of the 1987 movie Wall Street and Michael Douglas' character saying "Greed is good." Think of all of the different TV shows where the business owner is portrayed as being evil. I still remember an episode of The Six Million Dollar Man where a defense contractor made a product at the exact bottom end of the specifications, so as to maximize profit, and of course the product didn't work and Steve Austin had to save the world. There are countless examples of this.

Then there are the headlines: GM lays off 10,000, Delta lays off 8,000 (I made those up). The TV news show all of the employees on TV and they don't know what they are going to do and so on.

But what isn't always reported is while GM may be laying off 10,000 there might have been a greater number of new jobs created elsewhere. Furthermore, does it make more sense for GM to keep these people and risk destroying its own business. Seems to me that would be even worse.

In 2007, Pfizer closed a major facility in nearby Ann Arbor, Michigan (home of my alma mater the University of Michigan). I think over 2,400 people lost their jobs. But you know what is happening? Ann Arbor has become much more entrepreneurial. New businesses are appearing. Ann Arbor Spark, a business incubator, is booming.

People also bemoan the death of the Main Street merchant. "We don't Wal Mart in our town." But what has Wal Mart done wrong? They are offering good products at good prices - they are providing something people need and want and are willing to pay for. Is it unfortunate the old line Main Street merchant loses his business? Absolutely. But those are the risks you take going into business.

I have learned that my job as a CPA and consultant is to help my customers make more money. Sometimes kind of hard to see how performing an audit of a financial statement can do that. But it can. I have one customer who bought out a minority partner and having the history of audited statements helped make the transaction occur. The bank often will require an audit, so the business may think they are buying an audit with a gun to their head. But what would the loan cost without the audit? Probably more than the cost of the audit.

I am very much looking forward to seeing what else I pick up out of this book.

Tuesday, April 15, 2008

And Another Tax Season Ends

Which means I'm going car shopping tomorrow.

Monday, April 14, 2008

Worth

I spend a lot time thinking about what my work product is worth to my customers. What is the value I provide to them.

1040 clients especially like to complain about the bill.

I have one new 1040 client that has been, frankly, just a pain in the side. I don't think it is intentional on his part. His wife died suddenly last fall, and she took care of the finances. She had also just retired, so there wasn't as much withholding. When I told him he owed money on the return he basically freaked.

Turns out this gentleman had always gone to H & R Block in the past. I looked at the 2006 return - beyond aggressive bordering on tax evasion was the approach taken on Schedule C and possibly on Form 2106. They also missed a $150 credit on the Michigan return; I'll file an amended return for him after April 15 for that.

Let's get back on track: what am I worth to my customers. H & R Block charged him $409. And it was wrong. Another return I saw that was prepared by Jackson Hewitt charged about the same amount for a very simple return.

I am rapidly moving away from billing based on hours. I don't believe in it. If I were to do that for return described above, I would be billing this guy at least $1,500. Unbelievable number of phone calls. But $1,500 isn't a fair value on the return.

Shouldn't I get a good deal more though than H & R Block. My CPA certificate is dated 1986.

I'm raising ALL of my 1040 prices next year. I'm worth more than H & R Block.