In the early 20th century, Henry Ford had a problem on his assembly line that his engineers couldn’t fix. Ford called on the renowned scientist Charles Steinmetz, who worked at General Electric.
Steinmetz arrived at the factory in Dearborn, Michigan, and asked that he be given a notebook, a pencil and a cot—and that he be left alone. Two days and nights later, he called in the foreman. Putting an “X” in chalk on the machine, he told the man to “remove a plate behind the mark and replace 16 windings from the field coil.” It worked. Ford was delighted—until he received the bill for $10,000. He demanded General Electric justify the amount. Steinmetz himself responded: “Making chalk mark on generator—$1.00. Knowing where to make mark—$9,999.00.” Henry Ford paid.
When the taxman cometh, think about Steinmetz when you work with your financial advisor, perhaps chafing because they make more an hour than you do. “With computers, isn’t it just inputting numbers I provide and pushing a button?” you may ask. Not quite. Your accountants must sustain their hourly rate to keep themselves as well as their staff up to date on thousands of pages of constantly changing federal, state, county and city tax laws. For some, that means 12-hour days. However, others can do it in half that time. It’s not the amount of time you’re paying for. It’s knowledge and experience that are paramount.
Midyear Meeting with Financial Advisors: Priceless
When readers call me about tax matters, I don’t give advice. But I do offer some questions to ask their advisor. One CEO was operating at a loss, resulting in a “Net Operating Loss (NOL) carryback.” It had been used up, so it had become a “NOL carryforward.” His family members had punishing personal income tax bills. He also told me the business was borrowing to pay rent to the family on the store they occupied. Those facilities were owned by family members and leased to the company.
I asked what had been discussed at their midyear tax-planning meeting with their CPAs. Did the CPAs agree with borrowing money to pay rent to the family, making the rent to the family taxable to them while the deduction to the corporation had no present tax benefit?
After an awkward silence, he asked, “What do you mean ‘midyear tax-planning meeting?’” They hadn’t had one for years. The CEO’s father had stopped them because “they cost too much!”
I urged the CEO to set up a 15-minute meeting with his financial advisor. His first question should be: “How would you rate our relationship with your firm?” The answer told the story. The firm didn’t bend over backwards for this client, which they saw as uninvolved and dissatisfied. Instead they met the minimum requirements, sent the tax returns with the invoice and braced for complaints about their fees. They didn’t offer advice or suggestions. That takes time, and they were working under the client’s refrain, “Keep it as cheap as possible.”
The CEO realized that “saving” a few thousand dollars a year on financial services was costing family members tens of thousands in personal taxes. I’m happy to report this client and accountant have mended fences and the tax outlook is rosier.
Oh the Use Tax
Another CEO, who has a busy equipment rental component, complained about the use tax he was paying. I suggested working with his accountant because putting equipment into the rental department not only triggers use tax, it can also require the product be listed on your depreciation schedule. This can be beneficial to some retailers by allowing a “timing” of when the depreciation starts and when to sell it. This enables them to put the profit into the most opportune year for tax purposes.
Their accountant looked at the fixed asset list. There were items that had been acquired decades ago. He asked if the retailer knew their county personal property tax was based on the original cost of all assets shown on the financial statement, even if they were fully depreciated. If they remained on the list they would be taxed. Updating that list to include only assets in use generated enough first-year savings to pay for the initial meeting with the accountant.
The retailer also learned if he purchased product for resale and utilized it in displays or for internal work or in any way “using the product for the purpose intended by the manufacturer,” this triggered an obligation to pay use tax.
Retailers are frequently targeted for use tax audits. That is because they yield nice size collections with delicious penalties plus interest, making it a fat catch for hungry auditors.
Remember, your tax advice is worth what you pay for it. You may pay more and get less than optimum advice, but you’ll never get the help you need if you choose the cheapest advisor on the list.
Opinions expressed are those of the author and do not reflect the policies of Digital Imaging Reporter. Bill McCurry would love to hear from you. Contact him at firstname.lastname@example.org.