California Prop 30, Nevada Margins Tax and Our Unique Opportunity

We have a very unique opportunity in Nevada over the next coming months/years. Thus, I want to be very up front that this means there will be some tough decisions but also some very important decisions.

This comes from a couple conversations I have seen on facebook re: margins tax in Nevada and what occurred in California with Prop 30 and Prop 38.

Basically Prop 30 was approved to increase tax on income over $250K, Prop 38 was to increase tax on all. Of course when you ask a voter – do you want tax increased on you or increased on others – the answer is others and that is what happened Prop 38 failed and Prop 30 passed.

This is what Nevada is facing with the petition signing for the next election of the margins tax. The question is do you want tax increased on you as an individual or small business with revenues less than $1 million or on businesses over $1 million in sales. The answer is “others”. The unintended consequences will be far reaching even down into the people who voted to tax the others by them losing their jobs.

Let me over simplify this to illustrate the point – For every million in sales that is $20,000 in new taxes. I have a retail client with $3 million in sales that pays all their employees between $8.25 and $10 an hour. This new tax conservatively will make them pay at least $20,000 a year (but you could see it could make them pay upwards of $60,000 $3M * 2%). This business has a net of between 2 and 5% that it uses to pay back debt on the purchase of the business, and return money to the investors that gave some of the initial cash to get the business running and expand its operations and buy assets. Thus, this tax could effectively make the business not profitable or down to 2% to 3% profitable at the extreme high end of their operations. Thus, this company will have to let go between one and 4 of its employees to have sufficient resources to pay the tax. (8.25 * 2080 = $17,160). This business and its investors are privately held and owned 100% locally. As a side fact, the owner/president of this business only takes less than $50K salary and has no benefits and offers no benefits to its employees because the costs are so high and competition is so tight.

So the question is this – Do we want Nevadans to make the same decision and tax others like California did with Prop 30? Do we want such an open ended initiative like Prop 30 is and like the Margins tax is written that says – we increase this tax and it can be used by the legislature as they please but we will say it is for education but the initiative is open ended, vague, and funds are not sequestered to funding education?

This is our unique opportunity. We can make the tough decisions to 1) change funding allocations and priorities, or 2) we can make the decision to fund education by increasing taxes together or 3), we can all share the burden in some other form.

I believe the opportunity is #1 – make the tough decisions and make Nevada a darling to all those income earners and business owners sitting in California looking at their taxes about to increase at minimum 1% in California and at minimum 3% federally and make Nevada the destination for them to move. The increase of them moving will provide increased property tax receipts and thus increase funding to our education system.

I agree with Paul Kempler – what is our plan? Are we prepared? We have to make the most of this opportunity as Nevadans.

When Is The Last Time You Asked Your CPA A ‘Smart’ Question?

We have all heard the old adage, “There is no such thing as a stupid question”.  That would be good advice to keep in mind when meeting with your CPA.  It is never too late to start a new and continuous practice of preparing a list of questions before your meeting.

This is especially key at this time of the year.  While the majority of people are looking ahead to the holidays and shopping, you can turn your mind towards huddling up with your CPA and making year-end tax moves towards trimming back Uncle Sam’s funds request.

Pre-preparing the questions you want to ask assists in directing your meeting with your CPA and helps to keep things steadily moving while staying on track.  If time doesn’t allow for everything on your list to be addressed, you can start your new list with what was left out of the discussion.

What would be a possible number one question on your list? How about, “What are my projected taxes this year and for the next two years?”

These estimates from your CPA make it possible for you to formulate knowledgeable decisions on whether you should defer or take income, and if you should accelerate or cut spending. All are priority decisions to be completed before attending any New Year’s Eve celebrations.

Would it be helpful to know what tax strategies you’re CPAs other Clients are employing?  If their profiles are similar to yours, then their tax moves might be useful considerations for integration into your current strategies.

A proven smart move by one Client can easily become the next shrewd tax move by you.  Since your CPA already has a Client that is running smoothly after making a switch the error factor is lessened for you to try the same strategy.  For instance, a Client has moved into a high deductible health plan and realized a cut in taxable income through the addition of contributing to the employees’ health savings accounts. In this type of move there may also be industry-specific strategies.  It is worth asking your CPA for their insight.

Do you have any excess inventory that has just been lying around?

If you have been trying to sell excess inventory items at full price, tax laws prevent you from taking a write-down.  Turn this around by asking your CPA if you can take a write-down if you can provide proof that you have been offering the items at discounted prices.  Proof can consist of such things as an email advertisement, distributed flyers, or personally written invitations to your client list.  If you meet the burden of proof, the inventory itself doesn’t have to move or show any decrease for you to be able to claim it as a write-down.

Do I have to depreciate the computers I purchased, in the same year they are purchased?  Not necessarily.

Tax code section 179 maintains that you can immediately deduct up to $108, 000 worth of new business equipment and property as long as it is placed in service by the end of the year in which you procured it and are claiming it.  Does it matter whether you paid cash or placed it on your credit card?  No, but this deduction does have some restrictions and will require a discussion with your CPA to know which will apply to you.

Putting my kids on the books, should I or shouldn’t I?  They actually do work!

Well, the reality of them emptying the garbage, cleaning the business site inside and/or out, or if they are modeling for your product catalog all leads up to their ability to earn up to $3,300 without paying any income taxes.  In this case you will be responsible for covering payroll taxes around 20%, but you can still come out ahead if your business falls into, approximately, the 35% tax bracket.

What is the manufacturer’s deduction and is my company eligible to take it?

There was a tax change in 2005 regarding the tax code that lets companies deduct a percentage of their profits for products they’ve made in the U.S.  As an example, the 2006 deduction was 3 percent and increased in 2007 to 6 percent.  Ask your CPA for today’s deduction percentage and whether you are eligible.

Is there an advantage to buying a hybrid as a company car?

This appears to be a good move for your money holder and the environment.  Just take a look at the quickly vacillating gas prices across the nation and see if that helps you decide.  Ask your CPA what tax credits, if any, are available from the IRS.  It seems that the amount has quantifiable components such as the make, model and year of the vehicle.  There might be a component related to how many hybrids the car manufacturer has sold for the given year.  Your CPA has the current guidelines, just ask him.

Are my QuickBooks an advantage for my CPA when preparing my tax returns?

QuickBooks are only an advantage if the person operating the tool is doing a great job of tracking income and expenses.  If the tool information you provide your CPA is inaccurate, it is a waste of your CPA’s premium time during tax season.  Give your CPA plenty of time to review your QuickBooks information ahead of meeting and set deadlines so they can review and make any necessary mistake fixes.

Conclusion

The best source of up-to-date and credible information is your CPA.

 

Before making any changes or long-range plans it is good advice and simple wisdom to ask your CPA first.

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