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.”

It's "ill-eagle"

Today’s New York Times, in between some serious news stories, carries the tale of an IRS enforcement action that would be funny if it were not true.  The heirs of art dealer Ileana Sonnabend paid quite an estate tax bill when they got the $1 billion or so art collection that she left behind.  However, they did not pay taxes on a sculptural piece by Robert Rauchenberg, because it contains a stuffed bald eagle.  As it is illegal to sell a stuffed bald eagle art appraisers valued the piece at $0 because it has no market value.  (The restriction on the sale is no joke.  In fact, the heirs can’t have custody of the piece as the former owner had to agree to keep it on exhibit in a museum as part of complying with the law around the conservation issue.)

The IRS does assess taxes on artwork based on “market value”.  In fact they even have an Art Advisory Panel that helps determine the true value of the piece.  This panel came up with a figure of about $65 million for the piece, not knowing that it couldn’t be sold.  The IRS is aware of the restriction, but has decided to assess tax because the heirs could choose to sell the piece illegally.  Which while they could do this, they actually haven’t.

The good news is this is an unprecedented case.  Lawyers interviewed for the article couldn’t cite anything that showed the IRS using a hypothetical black market value to compute a tax liability.  An example of this distinction is Al Capone.  He was sent to jail for not paying taxes on ill-gotten gains, but he had in fact gotten said gains.  The bad news is when you fight the IRS without paying up front; they keep piling on the penalties and interest. At this point the heirs’ tax bill is up an additional almost $12 million on that amount alone.  There has to be better way.

Growing with Small Business

While the economy in general is doing so-so, there are industries that are sweet spots for growth right now.  Many of these are perfect start up opportunities for a small business looking to expand or a new entrepreneur getting started.   That said, there are also business areas in free fall now that you’d do best to avoid, and despite the global village created by the Internet, location apparently matters now too.

Roughly half of all new business start ups fail within 5 years.  On the “don’t-go-there” list are the following industries:

1.  Men’s suits, coats and trousers top the list.  As best I can tell the only folks who still have to wear these things work in investment banking or law firms.  Not big areas for growth right now.
2. Photofinishing or a one hour photo shop.  Revenues in the industry have dropped 70% over the past ten years, and there’s no sign of a reversal or bottom in sight.
3. Same is true for video, DVD and game rentals.  Even with Blockbuster gone, the market continues to shrink.
4. This is the only one of the list to surprise me – small appliance repair is a losing proposition now.  It’s currently cheaper to replace small appliances than to fix them.  In a case where that isn’t true, the manufacturer now often insists that they do the repair.

On the flip side consider elder care and wellness as areas of opportunity.  Demographics of an aging population that on one side needs care and on the other side is trying to stay healthy drive growth here.  Other big areas growing and poised for more growth are warehousing and transportation logistics.  As more retail sales shift online, businesses in these areas are capturing what is being lost from bricks and mortar.

According to the folks who publish the Business Journals, where you have a business can be a success indicator.  Austin wins the top spot on this index for all the US.  It is worth noting though that Pittsburgh takes the prize for the northeast, and ranks 7th nationwide for best places to start a business. 

Taxidermy for Performing Artists?

This week I’m scheduled to speak at Point Park University on the subject of tax issues for artists.  Teachers there asked the PICPA to find someone to talk about the topic.  Let’s face it, artists have an uphill climb economically to start with, and yes it turns out their typical tax situation is more complex than most of us will face.

There are three areas where artists stand out from the crowd from a tax perspective.  Artists are more likely than not to:

• ·         have multiple income streams,
• ·         be both an employee and an independent contractor, and
• ·         be taxed in multiple jurisdictions.

 And you thought the threat of chronic poverty was enough to keep someone from wanting to be the next American Idol.

The discussion at the University will focus on income taxes.  Performers get income like most of us from employers or contracts, but they also can be compensated through barter arrangements (I’ll play at your wedding if you’ll cater my party) or get free products for appearances or endorsements.  All of that counts as compensation, and the IRS knows this better than most performers.

Then there’s the issue of what is deductible.  If an artist works as an independent contractor they can deduct the costs associated with the “business”.  Typically this will focus on supplies, research, travel and entertainment and rehearsal / work space in the home.  All of these are favorite topics for IRS auditors, who unlike the artists are doing tax stuff for a living.  So guess who usually knows more.

Another potential trap for artists is related to income fluctuations and paying enough taxes in the current year.  You’re supposed to pay taxes as you go.  For an employee that means your employer holds the taxes from your paycheck and for contractors you pay estimates of your taxes every quarter.  While this seems straightforward notice I used the word estimate as to what you pay.  Our Federal tax system is progressive, which means the more money you make, the higher tax rate you pay.  (This is not a time to get into Warren Buffet’s and Mitt Romney’s tax returns!)  If your employer withholds at the wrong rate because you have multiple jobs, you pay the penalties and interest for underpayment.  Same goes for calculating your estimates.  Changing income levels is a problem for may people, so the IRS does allow the “safe harbor” of essentially paying the same amount in taxes as you did last year until you file your return.  At that point you need to make sure you have enough money to pay Uncle Sam what you owe. 

One person who had particular problems with doing just that was Mark Twain. While there are more contemporary examples of artists with tax troubles, I couldn't resist Twain's take on the situation -- which unfortunately is still relevant. Hopefully some of the students I see this week will enjoy a version of Mark Twain's artistic success, but not his tax problems. 

Auto-Tax

You have to wonder about the IRS.  In the same week they announce a plan to discuss a real time tax system that would provide feedback on your return before you file,  they also acknowledge $153 million in refunds that they can’t get to people because they don’t have a correct mailing address.  The US found Osama Bin Laden, but they can’t find taxpayers who filed and overpaid taxes?!

The average size of the undelivered refund check this year is $1,547.  I’m thinking that means at least some of these people are actively trying to get the checks that the Service can’t get to them.  According to the IRS people who e-file get their checks – it’s just snail mail that creates a problem.  If you are one of the folks whose refund has gone missing,  the Where’s My Refund tool on the IRS website has an address updating feature.  Don’t know if that will solve the problem, but it’s probably worth checking.

This brings us to the crux of most IRS problems, which is that they have different information about you than you have about you.  Somehow they’ve decided that automating that disinformation will make the situation better.  Like much of the “logic” around the tax code, I don’t follow that line of reasoning.

This new system would pre-populate key information on your return, so you would know if your view of what you earned matches the IRS records before you send in the return.  According to the Commissioner, the average taxpayer has between 10 and 15 information returns associated with their tax filings, so this is a big chunk of information. Given the current state of affairs, this would at least let taxpayers know when and where there’s an issue.  What it wouldn’t do though is give you any way to solve the problem. 

Right now not every information disconnect results in a problem with the IRS.  Under the proposed system, every mis-step would be flagged.  This might solve the nation’s unemployment problem, as the IRS would need to hire lots more people, but net at the end of the day I’m not sure that more taxes would be collected.  My guess is pharmaceutical companies that sell sedatives and psychologists would also benefit should this new system be implemented.  We’ll see…