At no time in American history has it been more important to keep
tabs on changes in the tax code--and believe us, plenty are on the way.
Dealing
with the impending deluge won't be fun, but better to be prepared and
sulking than caught off guard and suddenly short of cash. Meanwhile,
there are plenty of moves to make before the end of the year--and
certainly by next April.
Assuming your business runs on a calendar year and you want to cut
this year's tax bill, you have three basic options: collect less money
from customers, increase expenses or both. To what degree you do any of
these should depend on how much cash you need today--and what you think
President-elect Obama and company have in store for the tax code down
the road. (That second part matters a lot to entrepreneurs looking to
pass on their fortunes to the next generation.)
Have questions about running your small business better? Go to the Forbes.com Small Business Exchange and ask our cadre of experts.
If you keep your books on a cash basis, every penny you collect
before Dec. 31 will be taxed in April; likewise, every penny you spend
will reduce taxable income and shrink your tax bill in four months.
If
you keep your books on an accrual basis--meaning that you match
revenues and expenses regardless of the timing of cash flows--you have
a bit more flexibility. With big changes to the tax code on the way,
"clients are asking more questions about the timing of income than ever
before," says Mark Nash, a partner at PricewaterhouseCoopers.
A former executive of a New York company that ran dozens of Days Inn hotels
has pleaded guilty to tax fraud and agreed to pay $105 million.
Federal prosecutors in Manhattan announced Friday that Stanley Tollman
entered the plea via video link from London. The 78-year-old was immediately
sentenced to one day of probation.
He agreed to pay $60.3 million in restitution to the Internal Revenue Service
and $44.7 million to settle a civil forfeiture action arising from the
multimillion-dollar tax evasion scheme.
Prosecutors say English courts ruled against extraditing Tollman earlier this
year because of his wife's poor health.
Tollman was a principal in Tollman-Hundley Hotels, which owned and managed
more than 50 Days Inn hotels nationwide.
Slugger Manny Ramirez,
one of baseball's more quixotic characters, will likely receive this
off-season's largest contract. The free-agent signing period doesn't
begin until Nov. 14, but Ramirez's current club, the Los Angeles
Dodgers, has already offered him a three-year, $60 million deal.
Signings
before the first of the year are rare, though this season, with the
prospect of a Democrat-administration tax hike on those making more
than $250,000 annually, there are grumbles that athletes will angle for
signing bonuses paid before the New Year. Such bonuses would be paid at
the current 35% tax rate, not President-elect Obama's proposed 39.5%
top marginal rate. It's only a 4.5% difference, but at Ramirez's income
level, that adds up.
Based on Ramirez's 2008 salary of $18.9 million, Obama's tax plan
would mean $850,500 less in take-home pay for Ramirez. Prorate that out
over a four- or eight-year deal, and you're talking $3.4 to $6.8
million lost to the government.
Scott Boras, Ramirez's agent,
told the Associated Press last week, "There's some consideration to be
had with the impact of the election." But is there any reason to think
that athletes are going to succeed at renegotiating contracts around tax policy?
Not really. Chances are, even star baseball players will have to pay up.
Business As Usual
"I think there are a lot of agents who like to think they're creative
and like to hear themselves talk," says Matt Sosnick, founder of
Sosnick Cobbe Sports, a baseball player agency. "It's a meaningful
amount, but teams not only have budgets, their cash flow
is very carefully considered. It's hard for me to imagine that teams
are going to be willing to part with $5 million or $10 million early
for some of these long-term deals."
Republicans have been hammering away at swing-state voters with their "Joe the Plumber" argument. They say a tax increase levied against families earning more than $250,000 a year--something Obama says he'd do as president--would hurt the middle class.
The "Joe the Plumber" argument came from a voter who confronted Obama and said he was concerned that if he buys a business that would move him above the $250,000 threshold, he would be subject to a tax increase under Obama's plan.
Maybe some business owners make that much, but even top-paid plumbers don't. A new study by a leading compensation data service, PayScale.com, examined salaries for a sampling of jobs with special attention to pay in three swing states.
According to the study, it is nearly impossible for Joe the Plumber to make $250,000 a year as just a plumber.
PayScale.com studied a number of typical middle-class jobs and the wages they pay in three swing states: Ohio, Florida and Colorado. They found in many cases that the top 10% of earners in these jobs would still fall short (very short) of $250,000 a year.
The average plumber in Florida makes $54,800 a year. The top earning 10% of plumbers there make at least $111,900. But these aren't entry-level positions. These numbers are based on those with 15 or more years of experience. A family with two top-notch Floridian plumbers could still make only about $224,000 a year--falling short of that $250,000 threshold.
PayScale's database pools 15 million compensation profiles. From this database, they found that even some jobs that are traditionally considered upper class made median incomes far less than $250,000. Among them: corporate attorneys ($141,000), pediatricians ($151,000) and chief financial officers of companies with about 500 employees ($167,000).
Jobs that cross the $250,000 a year threshold on average are few and far between. Cardiologists ($270,500) and surgeons ($298,600) make the cut rather easily. CEOs barely top the mark, with an average income of $251,100--but only when looking at companies with about 500 employees. Accounting firm partners make an average of $267,600, but only at firms with 50 or more partners.
In politics, the more things change the more they stay the same.
With less than seven weeks remaining before the November presidential election, John McCain is turning to a tried and true tactic: attacking Barack Obama as a serial tax raiser who favors a "massive government".
McCain makes the case in a new ad released this morning:
"Obama and his liberal congressional allies want a massive government," insists the ad's narrator, adding that the Illinois senator favors "billions in spending increases" including "painful income taxes, skyrocketing taxes on life savings, electricity and home heating oil."
"Can your family afford that?" the narrator asks at the commercial's close.
McCain's campaign is also held a conference call today focused on the economy with the stated purpose of exploring Obama's "claims that paying higher taxes is 'patriotic'".
On that call, McCain senior policy adviser Douglas Holtz-Eakin alleged that Obama has voted to raise taxes 94 times in the U.S. Senate and had proposed more than $800 billion in additional spending during the presidential campaign. "He has no credibility in his promises," insisted Holtz-Eakin.
The tax attack is not only rooted in decades of successful Republican campaigns -- from the statehouse to the White House -- but also backed by polling that seems to show people believe Obama would raise their taxes.
In the Washington Post/ABC News poll conducted earlier this month, more than half of those tested (51 percent) said that if Obama was elected federal taxes would go up; compare that to the 34 percent who said taxes would go up in a McCain Administration. The New York Times/CBS News poll released last night echoed the findings of the Post survey. Forty-nine percent said they believed their taxes would go up if Obama was elected president while 34 percent said their taxes would rise if McCain wins in November.
Given those gaps, it's easy to see why McCain is focusing on the issue in the final weeks of the race. As we have written many times before, successful political strategies are almost always rooted in playing on the preconceived notions about the two parties.
For Republicans, that means portraying Democrats as advocates of a nanny government that is involved in every part of your life and is funded by huge tax increases that take money from your pocket.
For Democrats, it's casting Republicans as favoring a go-it-alone, every-man-for-himself attitude and driving that message home specifically on domestic issues like health care and the economy.
The reality of the two candidates' economic plans then is secondary to the preconceived notions voters bring to the issues. (Again, we aren't saying this is the "right" way for politics to operate, merely acknowledging that it is the way politics works. Looking for a good, objective breakdown of what the McCain and Obama tax plans mean to you? CNN does it well.)
The big unknown when it comes to the tax question in this election is whether Obama's bet that people are, at their core, sick and tired of politics as usual is the right one. Obama has centered his campaign around the idea that the GOP attacks against Democrats that worked in the past won't work this time around due to the damage done to the Republican brand by President George W. Bush.
If Obama is right, McCain's attacks will fall on deaf ears as people will no longer see Republicans as credible messengers on the economy and taxes. That, in a nutshell, is what happened in the 2006 midterm elections when Republican candidates realized too late that casting their opponents as tax-and-spend liberals was not enough to win races.
Have things changed in the intervening two years? We'll know the answer to that question in 47 days.
By Chris Cillizza | September 18, 2008; 11:23 AM ET
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