Letting My Hair Grow Back: DIY is Not Always Better

Me, back when I thought a shaved head would save me big bucks.
Me, back when I thought a shaved head would save me big bucks.

In June 2013, I decided to shave my head. My logic was, why should I pay someone $10 or $15 each month just to cut my hair?

I’ll just shave it off and be done with it. No more haircuts, no need for shampoo. I felt like I had made a brilliant decision.

About 6 weeks ago, I scrapped the whole “shaved head thing.” I’m growing my hair back and will be paying someone else to trim it every now and then.

Why?

Because the cost savings associated with doing it myself DIDN’T EXIST.

In fact, I believe I spent MORE MONEY shaving my head than I did on paying someone else to cut it.

I ran through razor blades more quickly. I used far more shaving cream. Since I shaved my head in the shower, showers took twice as long, resulting in more water usage.

Those are true dollars-and-cents costs.

What’s the point of this personal anecdote (or “Oprah Crap” as one reader calls my personal stories)?

The point is: DIY is not always better. Paying a professional to help you is not always bad.

With tax preparation, I tell people the following: if you feel comfortable doing it yourself, you know what you’re doing and you have time to do it, then certainly you should try doing it yourself. But know your limitations and know the value of your time.

With business bookkeeping and accounting: at first, it will make sense to keep the books yourself. But as your business grows, you’ll feel the crunch of time, and keeping the books yourself will be a major drag.

DIY is great sometimes, but it’s not always the most efficient or most cost-effective strategy.

The IRS Says I’m Not Authorized to Speak On My Own Behalf

IRS Notice 9-23-14Filed under “dumb but true things the IRS does.”

A few months ago, I received a letter from the IRS, in which the IRS disputed which payroll form my company should be filing. Without going into all the details, the short version is: I think I’m supposed to file a Form 941; the IRS thinks it should be a Form 944.

In August, I wrote a letter to the IRS, asking them to please update their records to show that I am to use Form 941 as my reporting form.

Last week, I got the following letter back from the IRS.

This is in response to the inquiry of August 12, 2014, from your accountant. We have no record that you authorized him to act for you in this matter. Please notify him that we have replied directly to you. If you wish to authorize a third party to represent you, please complete Form 2848, Power of Attorney and Declaration of Representative.

Where to even begin?

The first page of the letter is attached as an image to this blog post. As you can see, after the IRS tells me that I am not authorized to speak on my own behalf, they go into excruciating detail about the history of payroll forms. The rambling details continue onto a second page.

Here are the thing that stand out to me:

  • A human at the IRS must have looked at the letter I sent in August. This human then made a conscious decision to send me this letter in response. How could this human not make the connection between my company and me? I even signed the letter as “President, Dinesen Tax & Accounting, P.C.”
  • Once the mind-numbing detail of the history of payroll forms is over, the letter apologizes to me for any inconvenience the IRS may have caused, and then the best part of all….
  • The IRS says they are sending a copy of the letter to my authorized representative — meaning, a second copy of the letter was included in the mailing I received.

So to recap:

  1. The IRS says I am not my own authorized representative so they can’t make the changes I requested
  2. The IRS sent me a duplicate copy of their letter because I am my authorized representative

Or at least, this is my interpretation of things.

This isn’t 850 days of incompetence like with the identity theft saga I helped a client deal with, but it’s awfully crazy.

Things Tax Preparers Say: S-Corporation Compensation (Again!)

ID-100264846This really should be filed under “Things Tax Preparers DIDN’T Say”.

And again it’s about S-corporation compensation.

SCENARIO:

S-corporation owner hasn’t been paying himself a salary despite having large corporate net income, and despite taking large withdrawals of money from the corporation. Those withdrawals had always been called “shareholder distributions.”

On the owner’s personal return, all of the corporate net income was reported as ordinary income. He also makes contributions into an IRA.

PROBLEM:

The salary issue is the obvious problem here. But it’s not the only problem.

Normally, contributions into a traditional (pre-tax) IRA are deductible on your personal tax return. But that’s only if you have “earned income.”

Pass-through income from an S-corp is not considered earned income.

He had nothing else happening on his tax return other than the S-corp and IRA parts.

Because he had no earned income, his deposits into the IRA were not deductible.

Worse yet, because he had no earned income, he also owed an excise tax on those IRA contributions because he made “excess contributions” into an IRA.

So to recap: he was working in his S-corp “earning” all of the income the corporation generated. He was reporting this income as ordinary income on his personal tax return. But because he wasn’t paying himself a salary, he had no “earned income” under tax law, so he was reporting all of this income on his tax return, not getting the deductions for the IRA contributions, and paying an excise tax on the IRA contributions as well!

And his accountant had never said a word to him about the need to pay himself a salary or the issue with the IRA.

Things like this don’t shock me anymore.

It would be one thing if the accountant had brought these issues up but the client decided to just keep doing things the same way (this does happen).

But in this case the conversation had never, ever happened.

And since I’m on a roll, I’ll continue with my rant even though the word count on this post indicates I should stop.

HERE’S A BONUS PROBLEM:

The bonus problem is: the propensity that we tax folks have for saying the following: “Oh well. The client gave us financials that showed $0 of compensation. We prepared the return based on that information. Our engagement letter states that we will prepare the return based on the information the client provides, without review or audit. If tax advising is desired it will be given under a separate engagement agreement. If the client doesn’t ask for help on the S-corp salary or IRA issue, it’s not our problem.”

Sure, that’s what our insurance providers make us say in our engagement letters. But I don’t think that absolves us from at least MENTIONING the salary issue, and bringing the IRA issue to the client’s attention.

But I suppose this is a topic best addressed in its own blog post.

Image courtesy of Stuart Miles / freedigitalphotos.net

Entrepreneurial Maturity

I wish I could take credit for the term “entrepreneurial maturity” but I can’t. Credit goes to Jason Jones, a licensed public accountant who offers CFO services to businesses. In writing about his challenges in working with businesses, Jason says:

(T)he challenge I immediately discovered was in finding small business clients who had the entrepreneurial maturity to realize what they needed to know financially in order for their business to thrive and survive, and who had a strong awareness of their own conscious incompetence accordingly.

All too often, I got referrals from professionals and inquiries from prospective clients, only to engage in power struggles with the client in formulating business/financial strategies, which were often rooted in a combination of unconscious incompetence (they don’t know that they don’t know) and “Founder’s Syndrome” (since they’re the founder/owner, they know everything about the company they need to – they often hire “yes men” to help reinforce their flawed way of thinking). But I digress.

In other words, a business owner who has entrepreneurial maturity knows what they don’t know.

The challenges Jason writes about in his blog post are the same challenges I have faced in working with some small businesses. Here’s an example of a real conversation that took place with a business owner who’s business was always struggling with cash flow in its first couple of years of existence. The owner had been complaining that his advisers weren’t asking the right questions, so I was trying to be proactive:

Me: “Let’s look at where the money is coming from and where it’s going and start setting up strategies.”

Business owner: “Well, a growing business consumes resources. No business in its first few years has a big profit margin. That’s just the way it is.”

Period. Conversation over.

No review of finances was done.

ID-100260221This owner would go on to periodically complain about how hard it was to run a business, and how no one was helping him.

That’s an example of an owner who hasn’t matured enough to realize that he was talking to a knowledgeable professional who was trying to help him. Instead, the owner made a declaration that indicated he knew all about it and nothing further needed said. Yet, this same business owner still complains that the professionals around him aren’t giving good advice.

This scenario happens far more than it should.

As a professional, it’s hard to deal with.

I like working with startups, especially the people who started like me — on the side, from scratch — and have grown. But logically, these are the folks who have the least entrepreneurial maturity.

Sometimes I catch myself lacking in entrepreneurial maturity too.

I’m not sure what the solution is.

Time. Experience. A realistic view of the struggles of running a business.

And an acknowledgment that as business owners, there are things we won’t know.

Image courtesy of Stuart Miles / freedigitalphotos.net

IRS Says Online Sorority Is Not Tax Exempt

computer-room-415141_1280Tax law says certain clubs and social groups are exempt from income tax. This can include college sororities. But according to the IRS, this doesn’t apply to sororities created by online schools where the sorority members never meet face-to-face.

Background

A national, for-profit college (the IRS ruling didn’t say which one) started an online sorority. Reading through IRS Letter Ruling 201434022, it appears that this sorority operates similar to other sororities, except almost all activities take place online.

Section 501(c)(7) of the Internal Revenue Code says organizations organized as a club for organized for recreation is exempt from paying income tax. This would seem to apply to a sorority, but the IRS relied on a series of old revenue rulings from the 1950s thru the 1970s, and a court case from 1965, in ruling that an online sorority doesn’t qualify for tax-exempt status.

What is “Social”?

The IRS ruled that because the group didn’t have face-to-face meetings, it didn’t qualify. From the ruling:

Commingling and the promotion of fellowship are not a material part of your operations. Commingling is a necessary and material part in the life of an organization exempt under Sec. 501(c)(7) and is deemed present if such things as meetings, gatherings, and regular facilities are evident…. Face-to-face interaction is important for members of a social club. Organizations that do not afford opportunities for this personal contact among members are not entitled to exemption under Sec. 501(c)(7), even though they may be organized not for profit with no part of their earnings inuring to the benefit of shareholders.

In reading through the rest of the ruling, it appears to me that the IRS may be open to saying an online group could qualify for not-for profit status if there are recreational aspects to the group and/or if the group forms local chapters that engage in periodic group events and activities:

While you engage in some face-to-face interaction at your conferences held once a year, the majority of your activities are performed in an individual capacity and over the Internet rather than face-to-face. Additionally, the topics discussed at your face-to-face meeting and over the Internet pertain more to your organizational aspects rather than the promotion of any recreational or other nonprofitable purposes. Further, you do not expend money on social or recreational purposes.

Conclusion

It looks like the group has the right to appeal this ruling. If I were them, I would immediately update bylaws and create local chapters that have periodic meetings and social outings and see if that would help get the not-for-profit status approved.

Image courtesy of user “Stux” on Pixabay.com