Thieving Thoughts

Recently I’ve worked with a number of clients who were the victims of employee theft.  While I like to emphasize prevention, this is so commonplace that it’s also worth visiting what to do if (when?) it happens to you.   Employee fraud is a huge problem, and in difficult economic times it’s not on the decline. In retailing alone, employee theft accounts for almost 44% of total losses.  That’s about 10% less than what stores lose to shoplifting.  Guess which one is easier to do?

Loss of property to theft is generally tax deductible.  As with everything else involving taxes, you have to be prepared in case the deduction is challenged.  For a theft loss to be deducted the event that caused you to lose property or money has to be illegal in your state.  A conviction is not required. The IRS is pretty broad in its definition of theft including:  blackmail, embezzlement, extortion, kidnapping and fraud on their list.  Employee fraud and theft usually qualifies.

In a rare show of common sense, you can deduct the theft loss in the year it is discovered, which doesn’t have to be the year in which it occurred.  However, you have to be prepared to prove that the property was yours, when you discovered it was lost, and that you didn’t just lose track of whatever went missing.  Also, if you are eligible for an insurance claim, or have some other possible means of recovery you need to do that first.  You can’t deduct the loss until it’s completely clear how much you have lost and that it’s permanent.

Other things to keep in mind are that inventory loss can be managed on your tax return by either raising the cost of goods sold or reducing the value of your inventory.  You don’t need to file a special form for either method.  Also, if you lose money on a stock due to accounting fraud or other malfeasance on the part of that company, that’s considered a capital loss instead of a theft loss.  Finally, if you’re the victim of a Ponzi scheme, your ability to deduct the loss is constrained by whether the transaction was part of your trade of business (in that case you’re fine) or a personal loss (this is worse).  If it's personal, you won’t get everything back, and you’ll probably want to hire an accountant to figure out how to calculate the deduction.

On that cheery note I’ll go back to tracking the Frankenstorm headed our way. Hopefully my next topic won’t be about deducting casualty losses.   

It's Tax Planning Time Again

My latest Kiplinger letter was a usual treasure trove of important tax info.  Their analysis of both the Obama and Romney plans for high earning individuals is bleak.   Their take is regardless of who wins the election folks who make more than $200Ka year are going to pay more in taxes.  While this isn’t exactly a shocker it’s worth paying attention to the fact that “simplifying the tax code” is double speak for “you’ll end up paying more in the end if you’re considered a high earner”. 

That was the bad news.  The good news is now is the time to act on year end planning moves.  While there are still many 2012 tax extenders at risk there are business spending choices that if made in the next few months can save you money.  

Asset purchase and use by the end of the year qualifies for lots of deductions.  First you get bonus deprecation (up to 50% of the asset value) and it’s not pro-rated even if you put the asset in service between Christmas and New Year’s.  The asset does have to be new, and have a useful life of 20 years or less.  In addition, companies can expense up to $139,000 of assets put to use this year.  So if you take the bonus and the expensing, you’re off to a really good start. (Kiplinger predicts the bonus will go away after this year, but thinks the cap on expensing assets will go up.)  Cavet emptor if the equipment you are buying is a vehicle.  Deductions are limited if the loaded weight is less than 6,000 pounds.

There are a number of reasons to be strategic with these deductions that let you recognize the cost of capital equipment right away.  First of all if you expense too much now, you may be putting yourself in a position where next year’s tax bill will contain sticker shock.  It’s especially difficult if you’ve financed the equipment, so you’re paying the loans off, but you already took the deduction.  Also, if you buy more than 40% of your assets after September your depreciation gets figured on a pro rata basis, so there’s less bang for the spending buck in the current year. 

If this all sounds too dense, it’s because it is.  Please let me be clear that simplifying the tax code would be a good thing. It’s just that it should be done to simplify, not to obfuscate.  This is also a reminder that these “tips” are complex enough to require a conversation about your personal tax situation to really make sure they will work as intended in your case.

Calculating Labor

To celebrate Labor Day, I’m highlighting the results of two studies done by 24/7 Wall Street on the best and worst occupations in terms of job growth over the next ten years.  There are surprises (at least to me) on both lists.

The number of jobs related to operating the equipment that makes oil refineries work is supposed to drop by 14% over the next ten years.  Demand is on the upswing for petroleum engineers who can work on complex extraction methods for oil and gas.

Work related to printing snagged two of the top ten job declining spots.  Needless to say postal workers were also high on the list.  What did surprise me were people who work building semiconductors also got a top job losing spot.  In that case robots are better and getting more cost effective than people in these jobs.  Factory workers being replaced by technology also made the losers list for industries that assemble products with electrical parts and telecommunications. 

While there’s no trend I’ve heard of regarding people giving up wearing clothes, jobs related to clothing are disappearing.  Textile and sewing machine operators along with people who work with leather are all listed as declining in numbers in the mid 20% area or higher.

Generally the highest growth outlook job types were not what I expected.  What did meet expectations is that math and science capabilities help you find work.  People who have the skills to monitor and investigate sources of pollution have no trouble finding a job now and shouldn’t be worried about the future.    Being good at math will get you into 3 of the occupations on the high growth list:  actuary, statistician and market research analyst. 

I didn’t see this one coming –demand for Optometrists is supposed to grow more than 68% in the next ten years.  (Pun intended.)  Demand is driven by a combination of the aging population needing more services, and many people now in the profession looking to take their glasses off and retire.

While many claim technology can do this better, interpreters and translators still get jobs and should continue to do so.  Interestingly the forecast of a 69% increase in job openings over the next ten years includes an assumption that one of your fluent languages is English. 

Here are the growth jobs that really surprise me:  Insulation workers, Glaziers and Pest Control workers. Who thought I’d want to talk with my son about being an exterminator when he grows up? 

Better to Give

Amid all the tax uncertainty we’re facing I’ve noticed some specific suggestions of things you can do protect yourself that I thought I’d pass along.  One caveat is that this particular suggestions list is only good for people who are doing estate planning and have assets they can give now or later. 

The first set of suggestions involves planning for the worst and hoping for the best.  So the worst is that Congress doesn’t act on expiring tax provisions.  The top tax rate on capital gains jumps to 20 percent, and dividends will face a rate as high as 39.6 % up from 15% at maximum.  Next, you need to add the Medicare surtax that will kick in on investment income for high earning households.   If all this occurs in 2013, it would make sense to divest highly appreciated assets in 2012.   Waiting on Congress may mean making this decision while supposedly enjoying the week between Christmas and New Years.  The issue will be that you don’t want to be figuring out what assets are on the list and trying to do the transactions while everyone you will need to actually make this happen is on vacation.  (I’m sure your accountant will help you out regardless, but I can’t speak for your broker or attorney.)

So the suggestion is to build a plan of what would be divested, as well as when and how in doing your 2012 tax planning scenarios.  In the worst case you then are just sending an e-mail saying you are ready for the nuclear option.  While it’s not great – it’s better than the alternatives.

The other item to consider in all this is giving gifts below the gift tax threshold.  You can give up to $13,000 a year to anyone you want without hitting the gift tax. This benefit is not due to expire, and can be helpful in terms of the areas of estate taxes that are in flux.    In addition, the little gifts don’t count towards your per individual lifetime gift tax exemption.  (That stands at $5.12 million now and it’s due to drop to $1 million per person next year unless Congress takes action.)  The only caveats are that it really has to be a gift in that you have to part company with the assets.  In addition, if it’s hard to value, it should be appraised or there can be questions when settling the estate.  One other reason to consider gifts even if you don’t have a really large estate is that every state except Connecticut doesn’t tax gifts.  If that money stays in your estate, many states collect inheritance taxes at much lower thresholds than the Feds.

Olympic Footing

In typical accounting fashion, now that the Olympics are over, I’m looking to see what adds up and what doesn’t.  There are two items I couldn’t help but notice.  The first is the Comcast announcement that  they will break even on the purchase of the broadcast rights to the games, rather than lose $200 million.  Company management said the reason this occurred was unexpectedly strong ratings.  They also cited their much criticized social media efforts as key to bringing in the ratings.

In fairness to Comcast, presenting your earnings publicly is the best time to tell your version of the story.  It would be absurd to think that management is objective in its presentation, particularly when the numbers provide an opportunity to validate a controversial strategy.  It is worth noting though, that Accounting Today (whose latest issue you may have missed) had a different explanation.  Although the ratings did come in better than anticipated, the reason the CFO could state that the event would be positive from an earnings perspective, was a write down taken on the cost of purchasing broadcast rights to the games.  This is perfectly acceptable following current Generally Accepted Accounting Principles in the US, otherwise known as GAAP.  The fact that it presumably helps the Comcast stock price around the performance of a troubled unit shows why accountants are more than bean counters.  Either that or it shows how counting beans can add up to real money.

The other item that fell in the nexus of Olympics and accounting was the publicity about Olympic athletes’ prizes being subject to income tax.  I’ll admit it’s not something I had thought about sooner.  Still, it’s not exactly a shock that any income a US citizen makes is subject to tax.  What is a startling is the context.  The media headlines are full of legitimate concerns about Washington inaction on key tax issues.  Still within a week there’s bipartisan support for a bill to exempt Olympic winnings from taxes.  The Olympic movement symbolizes much of what is great in the world, and it’s been lots of fun to watch this year.  On this tax topic though, I agree with Republican Senator Tom Coburn of Oklahoma, “If tax code gymnastics was an Olympic sport, the idea might get a medal.”