Looking at the Jobs Numbers

While jobs data is relentlessly bad these days, for those of us still required to make a living, finding nuggets of information that can improve decision making is worth the effort of checking these numbers in detail.  I read the jobs data pretty religiously with a focus on geographic,  industry sector and size information.  There are two reasons I do this.  Honestly, sometimes seeing another area or target market that's worse off than mine makes me feel better.  It's not necessarily a productive use of time, but it does dispel some gloom.  The flip side is seeing where there might be opportunity driven by either

-  the biggest  new problem areas, or

-  specific areas of economic pick-up.

 The most recent Department of Labor jobs reports shows a decline in the number of jobs, primarily due to less employment in government.  Total public sector jobs are down by 159,000, while the private sector added 64,000 jobs in September.   For context, economists estimate it will take additions of 150,000 jobs a month to keep the unemployment rate flat.

   The data from Small Businesses is mixed.  According to the National Federation of Independent Business in September only 8% of small business owners said they plan to increase staff this year.  Contrast that with the Business Roundtable Economic Outlook Survey update that shows 31% of large firms are looking to hire.  The latest ADP / Macroeconomic Advisers data shows firms with less than 500 employees cut 28,000 jobs last month.  (Companies with more than 500 employees laid off 11,000 US workers in the same time period.)  Interestingly, really small companies (less than 20 employees) did add jobs.  According to Intuit’s Small Business Employment Index  the less than 20 employees segment grew by 27,000 jobs in September.  That still puts small business job growth at a run rate of only 1.6%. 

What stands out about this addition to the really-small business workforce is that access to credit for small business remains a big problem. The SBA loan guarantee enhancements that expired in May were renewed in the new Small Business Jobs Act, but only until the end of 2010.  While it may be hard to borrow money now, it sounds like it’s only going to get more difficult.  (Note to self, ask local bank rep about this and pass on intel to clients.) That said, somehow it's the least likely to be credit worthy that are hiring (albeit at an anemic rate).  Presumably this is a mix of the SBA program having an impact or some business improvement that produced enough working capital to finance new workers.  Hopefully this little hiring increase can be interpreted as a green shoot from the people who by necessity run the leanest businesses around.



Fighting Fraud

The link between fraud and economic downturn is both intuitive and well documented.  By the middle of 2009, the Association of Certified Fraud Examiners indicated more than half of their members had seen a rise in fraud in the past year. Almost 90% of the membership expect a rise in scams and schemes in the coming months. The Fraud Examiners also highlighted that small businesses are most at risk for fraud.  The logic behind this is that the level of fraud prevention in a small business tends to be low.  The small business owner has too much to do and not enough time to get it done.  In addition to that real obstacle, there are 2 popular myths that limit fraud prevention for a small business: 

(1)  it won’t happen to my business and

(2)  anti-fraud activities don’t work reliably, so why bother. 

While it’s true there’s no guarantee of  fraud elimination – consistent and easy steps do have a  big impact on protecting your business. 

My Five Step Business Protection Plan starts with the famous (infamous?) fraud triangle.

You can’t control the base here-- motive and rationalization.  Reducing opportunity is where you stop fraud cold. 

 Five Step Business Protection Plan

 1.  Have a plan.  Having a plan means you thoughtfully and consistently allocate resources to this issue.  Fraud control works if you do it. 

2.  The way to catch both legitimate errors and dishonest bookkeeping is  a technique called “Segregation of Duties”.  In it’s simplest form this means the same person should not  conduct the following activities in a transaction:

*  Authorization

*  Custody

*  Record Keeping

*  Reconciliation

If you can’t afford an employee for each category, then designate someone to check the work. (It’s not that collusion can’t happen when you use this method, but it’s far less common than single operator fraud.)

3.    Be inconsistent in how you check for fraud.  I know we just discussed the value of consistency, and yes having a set of procedures that you implement relentlessly is important.  That doesn’t mean though, that you check on how those procedures are working in an equally systematic way.  You should check, and you should do so regularly.  What and how you check should be guess work for a potential fraudster.  Again, this catches errors unexpectedly as well as a thief.

4.    Make sure you consider how technology both helps and hinders the cause of honest work.  The popular small business program QuickBooks can assist the owner in catching fraud as well as enable a thief.  Use of the audit trail, occasional changes to who-does-what-tasks in QuickBooks, and knowledge of the program’s blind spots are all important components of an anti-fraud plan.

5.    Last but not least --  Make sure conversations about fraud prevention occur often and on an ongoing basis.  Again there's a double benefit of moving the rationalization component of the triangle a out of kilter, and it recruits like minded employees to be vigilant for fraud. 

Small Business Jobs Act

The Small Business Jobs Act that has now passed both Houses of Congress is a grab-bag full of incentives and tax breaks for small business. How much they will help, or if they will help is a legitimate question regardless of one's political outlook.  It's tough to effectively assess what tools will be helpful to small business because it is a heterogeneous group.  Also there’s not a lot of good data available to analyze small business reality vs. image.  Just look at all the arguing about whether the Bush Tax cut extension is important to small business to get a feel for what I’m talking about. 

That said, to fall back on cliché, this new legislation for sure is "better than a poke in the eye with sharp stick.”  Some key highlights:

 -       The Section 179 deduction allowance (designed to increase capital spending) has just been raised from $250,000 to $500,000 of qualified equipment and software. That means capital purchases that otherwise would be deductible over time can be expensed for tax purposes in the year of purchase. These limits are set for 2010 and 2011 spending.  The benefit used to get phased out after a business spent more than $800,000 on equipment in that year, now that cap is set at $2,000,000. 

o   The bill also expanded the definition of eligible expenditures to include up to a $250,000 deduction for qualified:   leasehold, restaurant and retail property improvements.

 -      If Section 179 isn’t enough, this legislation also extended the 50% bonus depreciation deduction that has been in place since 2008.  It allows immediate write-off of 50 percent of the cost of depreciable property place in service in 2010.

o   There’s an extra spiff in the bonus depreciation that helps construction companies with long term contracts capture this benefit that before wouldn’t have been allowed.   

Some of the comments about this legislation complain that there isn’t much time left in the year to make capital purchase decisions.  That’s a pretty reasonable point; after all we’re not talking deciding to make a quick trip to Walmart here.  Who knew the North Pole lobbyists had such sway with Congress?

 Other tax “perqs” in the Small Business Jobs Act include:

-      The amount of start up expenses you can deduct moves from $5,000 to $10,000.

-      Business owners can now deduct their health insurance premiums in a way that reduces their self-employment tax bill.  Based on the tax returns I see regularly this will get plenty of use. 

-      The way you deduct cell phones has changed to make it just a regular business expense. 

The one down-side in the bill really worth noting is an expansion of the soon-to-be-required 1099 reporting of all expenses more than $600.  Add rental housing to the list of business activities that will involve this type of "informational reporting".  Even if you’re not primarily in the rental business, if you rent a house that’s not your own home, chances are you’ll get caught up in this.  It doesn’t take effect until 2011.  Unfortunately it’s worth noting now since how all this new filing of information is going to be done is something we’ll have to figure out in the meantime.  (I'll be interested in seeing how Elf Outfitters manages their W-9 process.)



Health Care Reform Gets Going

A bunch of new measures associated with what I think of as the health care reform law, but is actually officially the Patient Protection and Affordable Care Act took effect this week.  While it’s worth following from simply the perspective of a consumer of health care and health insurance, it’s also interesting to watch the unexpected (at least to me) consequences unfold. 

The LA Times was where I first saw an article about insurance companies eliminating new insurance plans issued for children only because they don’t want to cover pre-existing conditions in these types of policies.  It sounded really dramatic, but apparently it’s not as draconian as it sounds.  The article says kids on family plans and children insured through a parent’s employer are not included in this ban.  Experts cited in the piece estimate it will impact about 500,000 children nationwide. The US Census bureau puts the number of children under 19 in the US at north of 78MM.  So this change would impact a little more than a half a percent of US kids. 

 It’s not clear to me who would purchase a child-only.   I guess it’s an option for parents who can’t afford or can’t get insurance for themselves, but want their kids to have it.  The insurance company spokespeople in the article indicated the worry is parents will only purchase these policies when their kids get sick now that the pre-existing conditions are eliminated.  As a former insurance company spokesperson myself I can identify with that concern.  Interestingly, my son has such a policy (with his pre-existing conditions excluded) that the insurance company insisted was my only option for coverage for him rather than family coverage.  Less than 1-percent of kids nationwide are impacted by this and my son is one of them.  Rats.  Well, I guess I’ll learn more about this particular topic first hand.

 In the meantime, I found this graphic on the implementation of the new law that I think is worth sharing. For something this complicated I'm not too proud to admit I appreciate a visual aid. (In the interest of full disclosure:  Using graphics as a means to understanding complexity is a pre-existing condition for me.) 

 



More thoughts on Roth Conversions

Some other item related to Roth Conversions that have come up in client conversations in the past few weeks that I’d like to pass on.

First --  if you are Married Filing Jointly and you both have traditional IRAs you want to convert to Roth plans, the decision about whether to pay the tax in full at conversion or pay it over two years can be made differently by each individual. (See the previous post for more on this.) Even though the decision can be made separately for each social security number, once a taxpayer decides the timing all converted IRAs in 2010 are subject to that election.    

The option to elect to defer the taxes on your conversion is for 2010 only (at least at this point), however the ability to convert regardless of your income will continue.  For people who hit the income limits on contributions to a Roth, and who think tax rates are likely to go up, this creates an opportunity to continue shifting retirement savings. 

The said, even if you want to convert, it may not be practical to convert all your IRAs in one year (and therefore pay all the taxes at once).  But you could make a plan to convert over time, and take the tax hit in a way that fits into your budget. 

 In addition, you still have the opportunity to contribute to a non-deductible IRA and convert that, again without considering income limitations.  One caveat here is that the IRS considers the tax consequences of all your IRAs when you go to convert.  Here’s an example straight from the Practical Tax Expert:

Jane has made 15 $2,000 contributions ($30,000) to her non-deductible IRA.  This year, when the balance in the account is $40,000 she converts it to a roth IRA.  Jane also has an IRA that she established with a rollover from a former employer’s 401(k) plan that has $60,000.  If she converts only the non-deductible IRA into a Roth IRA, she can use only $12,000 of her basis (($30,000/$100,000 X $40,000) and is taxed $28,000 ($40,000 - $12,000).

So the good news you can “re-balance” your retirement portfolio if your “bearish”  on tax rates.  (I’m using that term assuming the definition is that bears think tax rates are going up.  I just can’t make the image work of being bullish on taxes and thinking you’ll have more of them.)  The bad news is that the IRS continues to stalk your retirement savings at every turn.