January 5, 2009
The Ridiculous Year End DanceBy C. Edmund Wright
Memo to Barack Obama. And his voters. This is what Joe the Plumber was talking about.
Like most business owners, we spent the last weeks of 2008 doing the annual year end fiscal dance. Whether a business is a Subchapter S cash basis taxpaying entity (like LLC's, for example) or a C Corp accrual basis taxpaying entity (like INC's), this annual exercise involves making your business look as "poor" as possible for that magical midnight moment January 1, 2009. The parameters for defining "poor" are different for cash versus accrual tax payers, but the need to position a business for midnight of the New Year applies to both types of entities.
This ritual is especially curious for all cash basis businesses. (And by cash basis, I mean for tax purposes as opposed to an accrual tax payer. This is not the same thing as a "cash business.")
Consider: when our evening crews began their December 31st shift at around 9:30 p.m. -- and yes we had to run a skeleton crew on New Year's Eve -- they punched the timeclock with their employer's dollars in the corporate payroll account worth roughly one dollar. When they punched out on that same clock ending that same shift around 6 or 7 in the morning, those same dollars were worth only about 50 to 60 cents.
And it gets worse. Like many millions of workers across the country, they were paid the very next day on Friday January 2nd. And trust me, they did not accept 60 cents on the dollar in their pay checks. Neither will the places where our business will buy the fuel and other supplies to replenish our day to day operations that were used up during the December 31st shift.
Welcome to the magic of midnight for every LLC, DBA and other various Limited Partnerships and corporations at every year end. Essentially, every dollar in an account owned by the business at the witching hour is deemed "profit" by our wonderful tax code. For all such businesses, that profit will be payable to the Internal Revenue Service on or before April 15th at a rate that assumes the profit is all owner salary. What the IRS does not get, your friendly state revenue department will. And it matters not whether the business owner ever pays or even plans on paying him or herself that profit, it only matters that it is in the bank at 12 o'clock.
So do the math. For a business of any size, depending on which state you live in, the combined tax burden can get close to 50% if you have so much as a few days of operating expenses in the account at year end. If you have ever run a business with a large payroll, you understand the incredible pressure of having only a couple of days of expenses in the payroll accounts. Actually, even if it involves a tiny payroll, it is scary enough.
The net result is that a business finds it almost impossible to create a large cash cushion. You know, in the unlikely event of an economic downturn. (Ahem.)
This is a cash cushion that could, for example, allow businesses to not lay-off employees during a short dry spell. It would allow a business to keep vendors and suppliers paid even if money is not rolling in. By extension, this would allow those interdependent businesses to keep from having to lay off employees. This is a cushion that could probably prevent many of the small business failures that our economy absorbs. This is the inherent safety net that trickle-down provides.
But that cash cushion cannot be built up easily or effectively thanks to a tax code based on the arbitrary idea that the financial universe will change with one tick of the clock. Never mind that nothing in the real world works that way. This is government at work. It has nothing to do with reality. Only legality.
In other words, this is a system that could only have been created by a bunch of lawyers who have no idea what it is to run a business. This system is the collective wisdom of many hundreds of congressmen and their bureaucrat buddies in Washington who run the government. By the way, have you checked the Federal government's balance sheet lately?
Now without making this a tax seminar, this description is somewhat simplified and the rules do allow for business owners to use the financial levers of ownership to reduce the huge tax burden. The point is this, pulling those levers wisely and legally is not all that easy. It takes a lot of time and analysis to do so and usually forces decisions that make no business sense other than tax survival.
It is not easy to navigate a 66 thousand word tax code. And all of this time and analysis has nothing to do with making your business better. It has nothing to do with making your business bigger. It is not even vaguely related to creating jobs. This is all about doing your damndest to keep the tax code from sinking your business based on the strike of midnight once a year.
Now while Barack Obama was not even a twinkling in some Kenyan socialist's eyes when the basics of our current system were devised, his campaign and election told us many things. Among them are the fact that this son-of-a-socialist has not the faintest clue about how this tax code affects jobs and business. When confronted by the owner of a plumbing business the President-elect came in a distant second place in economic understanding among the two of them. Moreover, he promised to make this situation even worse so he could "spread the wealth around."
His election told us that many of his voters, who also voted in a lot of Democrat power via the straight ticket ballot, have not burdened themselves tremendously with an understanding of our government and the liberal Democrats role in our economy. (According to the November jobs report, some half million of them, now have more time to perhaps google something more meaningful than Britney Spears.
Meanwhile, many of the rest of us are busy. We cannot print money to shore up our balance sheet. We do not have sweetheart loans from Countrywide Mortgage. We are busy trying to play this system before it plays us. And since the system is only going to get bigger and uglier with the upcoming inauguration and congressional seating, we are briskly pulling the financial levers at our disposal and laying folks off.
It's the annual year end fiscal dance. It is ridiculous, but we have to play. At least it is over. Until next December.