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Celebrating 35 Years of Growth
Congratulations to Ray Strothman on the 35th anniversary of Strothman and Company February 1, 2018! Ray left the relative security of an international CPA firm to form his own firm, focused on entrepreneurial businesses. His first desk was a card table and his first employee was himself. Since that humble beginning, with the help of many top quality people, the Frim has steadily grown into the third largest Louisville-based CPA firm, employing over 70 people.
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Our Founder and President, Ray Strothman, circa 1983.
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Strothman and Company Tax Insights
The new tax law changes are pervasive and are still subject to much interpretation. Regulations will likely be coming out from the IRS for years to clarify what Congress passed. Periodically, we will use this space to update you on key things that are happening in the aftermath of the new tax bill as we learn more about it. Following is our first installment:
- I want to be a C Corporation when I grow up. One of the questions we get most often is - Should I switch my S Corporation or LLC to a C Corporation? The corporate rate of 21% is tough to pass up. However, we have found in the vast majority of circumstances that pass through entities such as S Corporations and LLCs are still beneficial from an income tax standpoint. The trouble with a C Corporation is that you have to take the money out of the company someday. When you do, there are capital gains taxes at that point. So, for example, if you pay 21% at the corporate level and 23.8% capital gains rates at the individual level when you distribute money, the total tax rate is still more than pass-through entities. And, pass-through entities could potentially be able to exclude 20% of their earnings from taxation in many circumstances. If you would like to have us analyze your specific situation, please contact us.
- No parking. Parking paid by the company on behalf of employees is no longer deductible. Consider setting up a qualified transportation plan to let your employees pay for parking themselves on a tax free basis. You can increase your employees' pay to make up for the difference, which would still be deductible.
- No entertaining. Yes, you can still entertain your customers and prospective clients. It's just not tax-deductible anymore. Meals are still 50% deductible, but other types of entertaining are not. On your company's general ledger, remember to set up separate accounts for meals and entertainment so that you can track these separately.
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Cryptocurrency Tax Essentials
Cryptocurrency is hot right now. As it emerges as an asset class of its own, many people are still confused how to treat it for federal income tax purposes. In response, the IRS issued guidance back in 2014 that treats virtual currencies that are convertible to cash as a capital asset - but it's not as simple as it appears.
Taxable Events and Imputed Income
A major concern for the IRS is that coin-to-coin trades and buying items and services with coins are often mishandled for tax reporting purposes. The IRS considers these all to be taxable events, but this might not be evident to most people. Coin holders are supposed to "impute" an exchange transaction and report gains/losses in all these cases.
While it might seem absurd to have to report a taxable event each time you buy or sell something, remember that the IRS considers cryptocurrencies intangible property and not actual money, which makes the crucial difference.
Coin to Cash Transactions
Capital gains and losses are the difference in the price you sell the asset at (minus transaction costs such as commissions) and your basis in the asset. Your basis is what you bought the asset for (plus transaction costs such as commissions). These types of transactions are straightforward and common sense - just think of buying and selling a stock.
Coin to Coin Transactions
Cryptocurrency traders often exchange one type of coin for another, such as trades like Bitcoin to Ethereum. Purchases of alt coins usually require using another coin such as Ethereum - you simply cannot purchase some cryptocurrencies with U.S. dollars directly.
Some taxpayers delay capital gains recognition in situations such as these by treating coin-for-coin trades as Section 1031 exchanges; however, the new tax law has eliminated this treatment for sure and it was questionable at best before.
Let's look at a simplified example of a coin-to-coin trade and the tax consequences. Say you bought 1 Bitcoin for $3,000. Now it is worth $12,000 and you exchange it for 10 Ethereum. Technically, you have a taxable gain of $9,000 ($12,000 minus $3,000 basis) and your new basis in the 10 Ethereum is $12,000.
Coins for Goods Transactions
Similar to coin-to-coin transactions, using a cryptocurrency to purchase goods or services is a taxable event. Let's look at an example of how this works.
You were brilliant and bought some Ethereum in early 2017 for $12 per coin and now it is worth $1,100 per coin. Feeling rich, you wander over and buy yourself a new Aston Martin DB11 for 196 Ethereum coins, or the equivalent of $215,600 cash. Aside from being the proud new owner of a fine sports car, you also owe the IRS taxes on $213,248 in gains (196 coins x $1,100 value at purchase, minus your $12 cost). Hopefully you have some cash or coins left over to cover the tax bill.
Investing in Cryptocurrency Outside the United States
You do not need to report your cryptocurrency on your FBAR, according to an IRS statement issued in 2014. The IRS confirmed this position again for 2017.
Conclusion
Big gains in cryptocurrency prices over 2017 mean there is A LOT of tax money at stake, and the IRS is cracking down in an effort to get what they consider their fair share. They are using legal efforts to force major exchanges such as Coinbase to turn over customer records and institute reporting measures to stop fraud. Stay ahead of the IRS and make sure you report your cryptocurrency trading properly.
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Retirement: Living on Less
By 2035, millions of baby boomers might well be living a meager existence. That's because today, close to half of the households in the United States have absolutely nothing saved for retirement. Over the past 25 years, pensions have rapidly died out and their replacement - defined contribution plans - have been woefully underfunded.
Combine this lack of savings with the rampant increase in healthcare expenses - that manage to keep us alive longer than any other time in history, resulting in a greater need for assisted living and long-term care - and many folks are looking at a more pared down retirement lifestyle than they expected. Many will live solely on Social Security benefits.
In fact, very few retirees these days get to travel the world and live out their dream retirement. Most folks - or at least those who survive to a ripe old age - settle into an existence that derives happiness from spending time with friends and family, fixing up and then puttering around in their homes, and working on small, day-to-day goals.
One way to prepare for living on less money during retirement is to start living on less before then. Learning to live within (or under) your means is part skill, part art - but it doesn't necessarily mean you have to live without. If you start early and learn to live lean, retiring won't seem like such a big life change.
Better yet, the more you tighten the belt today, the more money you can save for tomorrow. The following are a few ideas for how to make your money last over the long haul.
Housing
Even once you pay off your mortgage, owning a home can be expensive during retirement. Consider the annual cost of maintenance, repairs, property taxes, insurance and utilities for a large family home. With this number in mind, consider what you might save by moving to another housing option, such as a smaller home, duplex (with rental income from the other unit), townhome or condominium. It also may be worth considering moving closer to family to benefit from a support network in your later years. Bear in mind that it will be easier and cheaper for everyone involved if you live closer to them than if they must care for you from hundreds of miles away.
Food
You might have enjoyed home-cooked meals for a large family, but in retirement it'll just be one or two people in your home. Start learning how to cut down recipes, prepare simpler meals, and discover good values for dining out (like early-bird dinners for seniors). On the other hand, you could start inviting friends over more often to share meals and/or host regular potluck dinners. Break out those cost-saving meals you planned when the children were young, such as slow cooker recipes and freezing leftovers so you always have a meal on hand. Consider cultivating your own garden to grow fresh herbs and produce.
Frivolities and Entertainment
When you're working, a little retail therapy to make yourself feel better is a small indulgence. But while you're living on a fixed income, this habit might actually rob you of a few meals. If you have troubles brewing on your mind, look for less expensive solutions such as a brisk walk in nature or inviting a friend over for coffee.
While you're at it, think about what types of hobbies and social engagements you can engage in that won't cost a lot of money. Walk instead of playing golf. Read novels instead of going to the movies. When it comes to periodic vacations, visit friends and family to save money on lodging and meals.
Cost of Living Increases
This year, Social Security recipients will benefit from a 2 percent cost of living increase; the highest since 2012. Still, this increase is anything but large in reality, with the average beneficiary receiving an additional $25 per month. Whether still working or in retirement, think about a strategy for what to do with windfalls, no matter how small. For example:
- Put it in a savings account earmarked for emergency expenses
- Set it aside to use for co-pays, prescription drugs and other medical expenses
- Save it in a Christmas account for gifts next holiday season
- Pay for a vacation, season tickets or some other entertainment perk
- Upgrade to a better phone or computer at year's end during holiday sales
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Technology: Can the World Economic Forum Tackle Cybercrime?
The Wannacry cyberattack in May 2017 highlighted the major problems that bedevil the various nations affected by devastating ransomware crime. Namely, that targeted nations are often slow to track down the source of such cyberattacks - and once they have done so, they also lack any effective means to punish the perpetrators. Technology experts quickly determined the Wannacry source - almost certainly North Korea - but the British and American governments took five to six months to come to the same conclusion. As for penalties for those responsible, neither country was able to effectively force the North Korean government to change their tactics.
Therefore, it's no surprise that The World Economic Forum, which recently took place in Davos, Switzerland, announced the formation of a new group, The Global Centre for Cybersecurity. This is an effort to tackle cybercrime through faster, more effective information sharing between nations and private technology companies. Expected to be fully operational in March, the organization, which seeks voluntary participation, has already gained the support of BT Group (a major British telecommunications company); U.S. microchip maker Qualcomm; the Russian financial institution, Sberbank; and Interpol, an international crime fighting organization.
Few would argue with the idea that a truly collaborative effort based on common standards is needed to successfully counter organized digital crime. What remains to be seen is how this will work in a global community that lacks consensus on the following key issues:
Putting Rules in Place
Cybercrime is the cheapest way for nations to undercut and disrupt other countries they deem adversaries. President Obama called cyberspace the "Wild, Wild West," an accurate comparison considering the lack of accountability, lawlessness and anarchy that presides. To date, the nations of the world have yet to agree about what should be off-limits, and what should be allowed. If that sounds strange, consider this. The United States and European nations raised the alarm when they found foreign "implants" in their networks (e.g., tampering with last year's elections) but they don't want to see rules imposed that might limit their own espionage efforts. It is no secret that the Obama and Bush administrations both infiltrated Iran's nuclear network with the so-called Stuxnet code. It remains to be seen how the new Global Centre for Cybersecurity plans to address this double-standard.
The Role of Technology Companies in Monitoring Content
British Prime Minister Theresa May took technology leaders to task in Davos, accusing them of not doing enough to collaborate with world governments to police social networks. Ms. May decried social networks for failing to police their platforms for content that supports terrorism and child abuse (pornography). She urged investors to pressure entities like Facebook and Twitter to use their significant resources to better monitor for fake news, hate speech and other forms of abuse. While this might appear to be a reasonable goal, giving governments the right to step in to determine what "fake news" is has obvious dangers. Likewise, the call for social networks to reveal real identities on the internet might be abused by authoritarian governments wishing to crack down on dissent and free speech.
The new global initiative is a step in the right direction. However, an effective cure for cybercrime has been elusive to date and may prove a significant challenge to this new international agency.
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When is it Necessary to Hire a Public Relations Firm
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When it comes to organizations getting the word out, using internal public relations professionals can be quite effective. But how do you know when it is necessary to retain the services of an outside PR firm?
One important step in determining if you should hire an external PR company is to have a goal in mind. Is a brand-new company being launched? Is a PR campaign necessary to win back customers after the rebranding of a new bar or a remodeled store?
Depending on the need, a PR agency might be more helpful because they are experienced in pitching to prominent bloggers and journalists about a new product or service. If it's a construction business looking to hire a PR agency, for example, but the agency has most of its contacts within the restaurant industry, it's not going to be as fruitful.
Determine How External PR Will Function
For a public relations campaign to be as effective as possible, it needs to be expertly integrated with a business' marketing and sales plan. Is the marketing, sales and PR done in-house currently? Will the marketing and sales be done in-house, but the PR work done by an agency? These are some important questions to ask before outsourcing.
If an external PR agency is used, it's wise to ask what types of services they offer and how they'll work with the organization's staff. For example, if a team at a PR agency is assigned to the business, will there be an individual at the PR agency within that team that serves as a liaison for the business? Otherwise, multiple contacts might lead to confusion.
Lastly, what will be the scope of PR services performed? Will the PR agency exclusively introduce the business' experts to journalists at media outlets? Or will the PR agency work in conjunction with the business' in-house marketing team to collaborate with or create social media posts and mailers, for example?
The Importance of Setting Goals
Whether PR work is done in-house, externally or through a combination, one way to monitor effectiveness is by setting metrics. While goals can be tailored easier within an organization, there are different types of goals that organizations can strive for when having public relations work done externally.
An example goal is how will the organization's reputation be managed. This concerns how the business is perceived by those outside the organization. For example, if a pizza shop recently suffered a rash of crimes or a few customers publicized that meals made them sick, there may be a goal to increase the number of customer visits. This can be accomplished by a PR campaign to educate the public on steps the pizza shop has taken to secure the shop or how better food handling practices are being employed.
This type of goal can be measured by how the public relations staff educates the public on the organization's commitment to improving. Does the agency publish social media posts depicting staff wearing hairnets and gloves while preparing food? Is a recently issued health inspection certificate showing the pizza shop passed inspection posted for visitors to see?
The public relation's efficacy could be measured by an increase in foot traffic or by asking customers if the PR campaign encouraged former customers to stop by again. If customers reported seeing the social media campaign and it led them to give the shop's food and service another chance, that's a measurable way to determine if the public relations goal was met.
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