The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the attempt by Congress to reduce the economic dislocation caused by the current pandemic. Taxes play a key role in the Act, along with several economic stimulus policies. 

Normally a new tax law requires time to figure out all the details. The Tax Cuts and Jobs Act (TCJA) of 2017 is still looking for clarifications on several issues, some of which are addressed in the CARES Act. COVID-19 had pushed economic decline into overdrive. The American economy has never declined at such a pace. Businesses and individuals went from good economic conditions to millions unemployed and many businesses forced to close. A draconian stimulus package was required.

The CARES Act is $2.2 trillion of federal stimulus. With no time to iron out the details, rumors are flying. Normally reputable sources of information are struggling to get facts out. Misinformation is rampant. This post, along with the accompanying Facebook Live event, will outline the facts as they currently stand. The facts might change is some situations. I will correct those errors in this post periodically so you have a reliable resource.  There are many instances where the only answer is: I don’t know. Because nobody does, even the people in charge of the programs. 

I broke this post into sections covering several of the most important points of the CARES Act. While I might touch on issues in the Family and Medical Leave Act (FMLA), it is not the focus of this post. This post has many links to reputable sources. Use them, as they will contain additional updated information.

 

Stimulus Checks for Individuals

A refundable tax credit is provided by the Act of $1,200 for individuals ($2,400 for joint returns). There is an additional $500 rebate for each child under age 17. 

There is a lot of confusion around who gets the recovery rebate and how much. 

  • First, Social Security recipients also get the rebate. The Treasury Department and the IRS got this wrong when they stated these people must file a tax return to get the rebate. The Act made it clear this was not required and after much drama the Treasury Department changed its positions; a tax return is not required.
  • Second, the rebate is not taxable income.
  • Third, the IRS will direct deposit the rebate into your bank account if you used direct deposit on your last tax return or Social Security check. Everyone else will get a check in the mail.
  • Fourth, direct deposit payments will begin the week of April 13th and continue until all who qualify get their payment. Checks will be mailed starting in mid-May and continue until all are issued. The IRS will use information from your 2019 tax return to determine if you qualify for a rebate (see details below). If you did not file your 2019 tax return, the IRS will use your 2018 return. If you file neither year, the IRS will issue the rebate once you file your 2019 return anytime during 2020. If you do not need to file a 2018 or 2019 return you can file a 2020 tax return where the rebate will be issued then if you qualify.
  • Fifth, the rebate is on the 2020 tax return to be filed in the Spring of 2021. The rebate is a refundable credit (you get the rebate even if you have no tax liability). If the IRS screws up and overpays you, you don’t have to pay back the over-payment. If the IRS underpays you, you get the remaining amount with your 2020 tax return.
  • Sixth, there is an issue involving children that might be rectified in a future bill from Congress. Children 17 and older and in college or school are still usually claimed on the parent’s return. The parent gets nothing (children under 17 are an additional $500 to the parent, $0 for those 17 and older) even if the child is in school or college, but if the child files their own return — and not claimed on the parent’s return — the child would get $1,200. There are several problems here. Technically, there are no dependents on a tax return since the TCJA. However, similar rules are still followed for education credits and the Child Tax Credit (CTC). It isn’t as simple as removing a child from the parent’s return. The child has to disclose on their return they are a Dependent of Another when they file. If the parent is providing more than 50% of their support the child cannot claim themselves. It is vital to review all the support rules. If your child provides more than half of her support they can claim themselves and probably qualify for a rebate. 
  • Seventh, if you owe back taxes you will still receive the rebate. The only exception to receiving the rebate is if you owe back child support. Back child support is first paid before any rebate is sent to you.

The rebate is based upon your adjusted gross income (AGI). Single taxpayers get the full $1,200 rebate up to an AGI of $75,000 ($112,500 for head of household; $150,000 AGI for joint filers) The rebate is reduced by $50 for every $1,000 of AGI above the threshold (the CARES Act actually says a 5% reduction for AGI above the threshold) until it is reduced to zero at $99,000 for single taxpayers without children ($198,000 for joint returns without children). The complete phaseout of the rebate is higher if you have a qualified child as the rebate is reduced $50 per $1,000 over the threshold, meaning you can have a higher AGI with children and still get a small rebate

Planning tip! While caution must be advised when it comes to not claiming a child in college when the child does not provide more than half of their own support, there is an opportunity for high incomers to plan their rebate.

If your income is over the phaseout level for 2019 — but not 2018 — it might be advantageous to wait until you get your rebate before filing your 2019 tax return. if the opposite is true (2019 income is under the threshold and 2018 is above) you want to file your 2019 tax return as soon as possible. The IRS will issue your rebate anytime during 2020 once a tax return is filed if one (2018 or 2019) was not previously filed or additional rebate is allowed. If both 2018 and 2019 are over the threshold you have one more chance to get the rebate. If your 2020 income is below the limit the unpaid rebate you qualify for will be added to the 2020 return.

Remember, if the IRS sends too much you do not have to repay it. 

Here is a calculator to estimate how much you can expect in your rebate check.

 

Tax Return and Estimated Payment Due Dates

This section is not in the CARES Act.

The Treasury Department extended tax season for 2019 tax returns until July 15, 2020. That means 2019 tax returns are now due July 15, 2020. Any balance due is due at that time without additional penalty or interest. Estimated tax payments are also due July 15th. That means the April 15th and June 15th estimated payments can be made as one lump-sum by July 15th without interest or penalty. 

 

Charitable Contributions

Prior to the TCJA the maximum deduction allowed for cash charitable contributions for individuals was limited to 50% of AGI. The TCJA increased this to 60%. The CARES Act increases this limit again to 100% for tax years beginning after December 31, 2019. In all cases, the excess charitable contribution is carried forward up to 5 years.

Corporations (regular corporations, not S corporations) move from 10% to 25% of taxable income as the deductible limit for charitable contributions, with the remainder carried forward up to 5 years.

The CARES Act also allows up to a $300 cash charitable contribution deduction above-the-line (if you do not itemize) for individuals. The $300 above-the-line deduction excludes donor advised funds.

 

Student Loans

Federal student loan interest and principle are suspended for 6 months, from March 16 through September 30, 2020. Private loans no not count! There are several exceptions. All Stafford loans, PLUS loans for educational costs (instead of for tuition), consolidation loans under FFEL and Perkins loans.

Suspended payments will not hurt your credit. Interest will not accrue during this time either. Automatic payments are cancelled. To make a payment anyway, it will need to be done manually. Payments during the suspended period are applied to already accrued interest first and then principle. If financially able, making student loan payments on federal loans will pay down the loan faster as interest is not accruing for 6 months.

There is also a provision for employers to pay up to $5,250 annually of an employee’s student loans tax-free. This provision applies to payments made from March 28, 2020 to December 31, 2021. This cap includes other employer provided educational assistance. This might be a powerful tool to reward employees for 2020 and 2021.

Note: Some of the student loan material came from sources I trusted mostly. However, I was unable to verify all the material. I will update soon when I can verify this information with certainty..

 

Unemployment Benefits

For those impacted by COVID-19, funding has been provided for unemployment benefits, even if you exhausted state unemployment benefits or normally do not qualify for state benefits (self-employed, excluded members of a small business, etc.) These benefits run from January 27, 2020 to December 31, 2020.

There is also an additional $600 per week for up to 4 months, along with state benefits. Once state benefits expire, an additional 13 weeks of unemployment benefits are funded by the federal government.

All unemployment benefits are managed through your state’s unemployment office. My office has heard from clients some states are not up to speed on this yet. It may take persistence to get all the benefits you qualify for.

 

Required Minimum Distribution

The required minimum distribution (RMD) are waived for 2020.

 

Retirement Plan Distributions

Retirement plan distributions prior to age 59 1/2 face a 10% penalty in addition to the income taxes on the income. The CARES Act allows individuals to take a distribution of up to $100,000 from a qualified plan without the 10% penalty. The income tax on the distribution is still subject to income tax, but can be paid 1/3 each year starting in 2020. If the distribution is coronavirus related the distribution can be repaid to an eligible retirement plan within three years to avoid the income tax on the distribution as well.

Some states also have an early retirement plan distribution penalty (i.e. Wisconsin). The state penalty usually reflects the federal penalty. However, each state may treat this differently. Many problems can exists if the state of your residence does not follow federal law. For example: Your state may subject distributions to income tax in the current year. Later repayments to a qualified plan might be treated as an excess contribution on the state level. It is vital you discuss these issues with a competent tax professional before using this provision of the CARES Act. There are many considerations from a state tax standpoint beyond the federal CARES Act.

 

SBA Economic Injury Disaster Loan Grants

Small businesses have many tools from the CARES Act to deal with financial problems stemming from the coronavirus. My office was inundated with calls about the $10,000 grant provided to all businesses. Actually, this is technically a loan grant that is forgiven and is not added to income when it is forgiven.

Clients calling about this are right. Most small businesses will qualify (I think). The question is: How long will it take for money to arrive? Your guess is as good as mine. I think it is a good idea for all businesses to file an online application found here

Will everyone who applies get $10,000? Probably not. But many, even most, probably will.

The $10,000 is really “up to” $10,000 and treated as an advance. So don’t start spending before the check arrives. It could be weeks or months before funds arrive.

 

Delayed Payment of Employment Taxes

Employers can delay payment of the employer’s portion of the Social Security payroll tax. This does not apply to the Medicare portion of the payroll tax. 

As a recap: Employees have 6.2% withheld from their wages up to the cap for that particular year. The employer forwards this to the government, along with another 6.2% as the employer’s share of the payroll tax. It is the employer’s portion only that can enjoy a delayed payment. All of the employer’s Social Security portion of the payroll tax from March 12, 2020 to January 1, 2021 can be delayed. Half (50%) is due December 31, 2021 and the remainder by December 31, 2022. 

Self-employed individuals can take advantage of the same delay of payment for 6.2% of their self-employment tax. 

Note: If you receive any loan forgiveness under the CARES Act, including the Payroll Protection Loan Program, you are not allowed to delay tax payments under this provision.

 

Forgivable SBA Loans

Now we come to the elephant in the room. These so-called forgivable loans are shrouded in concerns. Just as the Treasury Department changed the rules on if Social Security recipients must file a tax return, the department changed the rules at least once on the terms of these loans to small businesses

These SBA loans are handled through your financial institution. As of Friday (April 3, 2020) some banks opened for applications. Here is a sample application. Many smaller banks are not ready to accept application. Bank of America in an email to my office outlined their procedures: notably, you must have a lending and deposit history with the bank. I have heard other large banks are easier to work with. 

Applications will start being accepted April 10th for independent contractors and the self-employed.

Payroll Protection Program Loans (PPP) have many details. Rather than make this post any longer, I will refer you to an excellent article in the National Law Review. We will use the National Law Review article in the Facebook Live. The video will be inserted into this post at the conclusion of the event. (See the video above.)

You should also review the SBA page on the topic. 

Here a few highlights to consider. These loan are not guaranteed forgiven! Too many people calling my office think this is guaranteed free money. It isn’t There are many rules to follow before they will forgive the loan.

  • First, employers can receive up to $10 million for 2.5 months of average payroll expense, including health benefits.
  • Second, this is in addition to the $10,000 advance Economic Disaster Injury Loan. 
  • Third, it only applies to businesses with 500 or fewer employees.
  • Fourth, the portion of the loan not forgiven must be repaid over a term no longer than 10 years at an interest rate of 4% or less.
  • Fifth, the amount forgiven is limited to payroll, mortgage interest, rent, and utilities paid or incurred over the 8 week period beginning with the loan origination date.
  • Sixth, if you lay off employees or reduce wages between February 15, 2020 and June 30, 2020, the amount of the loan forgiven is reduced proportionally. 

You are strongly urged to speak with your lending institution you intend to secure funding through for this program. You will need to provide additional information when you apply for the loan. This program is not as easy as the Economic Injury Disaster Loan Grants application. 

 

Additional Resources

In addition to the National Law Review article linked above, I strongly recommend the following resources:

CARES Act Summary by Foley (Pay special attention to the Employee Retention Credit not covered in this post.)

SBA Bridge Loans

SBA Paycheck Protection Program

SBA Disaster Loan Applications

Ward and Smith Review

Text of H.R. 748 known as the CARES Act (Caution: As a bill works through Congress many ideas are floated. Only the bill that became law counts. News reports frequently discuss items that “might” be in the final law. Again, read the final bill that became law for an understanding of the provisions.)

 

Stay safe, kind readers.

 


 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

  • Following the 4% rule is not enough when accumulating wealth.
  • The recent market decline brought on by the pandemic requires around a third more index fund shares to be sold to maintain spending patterns if you are in retirement and are fully invested at all times.
  • How much money you should keep in cash depends on where you are in the wealth building cycle. How close you are to retirement, or if you are in retirement, determines the appropriate level of cash that should be held.
  • The 4% rule fails too often if not coupled with appropriate cash levels.

 

Rules of thumb are an easy way to quickly see where you stand financially. Once you reach 25X your spending in liquid net worth (the 4% rule presented as a multiple of spending) you are assumed to have enough to retire under the 4% rule, regardless your age.

However, as we are seeing with the current market turmoil, the simple rule of thumb has one fatal flaw. If you reached your 25X goal a few months ago and decided this was the time to step away from traditional labor, you now face a withdrawal rate from your index funds a third higher than expected. This will reduce the account value early in the distribution phase, lowering the total amount you can get from the investment over your lifetime.

Another rule of thumb is to keep 6 months of spending in cash in case you become unemployed. Under a normal job loss or economic decline this would be a reasonable policy to follow. Unemployment insurance can provide additional cushion to the 6-month cash reserve.

Black Swan events (unexpected negative economic events such as the housing crisis or pandemic) throw the whole rule of thumb out the window. Black Swan events do not happen often, but they do occur every decade or so. Looking back at U.S. history, it seems something always happens every decade to knock the markets lower and slow economic activity. The 2010s are the only decade to avoid that fate and 2020 seems to be making up for the oversight.

Black Swan events are impossible to plan for, but you can manage your investments with the understanding something unknown will shake the market’s confidence every so often.  You can prepare contingencies to deal with unexpected market breaks, or take your chances and hope you get lucky… this time.

 

Determining Your Proper Cash Level

One of the hottest topics of discussion in consulting sessions with clients involves how much liquid net worth be held in cash. Emails and even social media requests from followers press on how much cash is the right amount of cash to keep on hand as a percent of investable money.

The 4% rule doesn’t consider a cash position. It just assumes you take 4% every year from your portfolio to live. If the market declines, the 4% rule says you either need to cut back on spending or risk running out of money before death. Cutting spending enough isn’t always possible. And when markets are down many goods and services become cheaper so you should be stocking up at these times.  The 6-months cash rule also falls short in many cases. A down market can last for years and selling at a low to fund living expenses is a painful exercise.

Where you are on your journey to retirement determines the amount of cash you keep on hand. Many times readers of this blog, and those who follow me on social media, think I am timing the market when I carry a substantial cash position. But that isn’t true. I have no desire, nor skill, at timing the market and do not waste any time trying to do so. I do, however, increase my cash position when the sun is shining and decrease my cash position when it rains. This isn’t a timing issue. As I near retirement and have substantial financial resources, I have no desire to maximize my returns. I already made it. No room for heroes anymore.

You are probably at a different part of the wealth creation cycle. Maybe you are older and well into retirement, collecting a pension and Social Security. Or just starting out.

The advice I give clients is based on their specific facts and circumstances. I will give you the same advice here based on where you are on your journey to retirement, early or otherwise. I will finish with my advice to clients already in retirement. You can use these guidelines to prepare for your retirement. Knowing the appropriate way to invest at each stage of the wealth creation cycle is helpful; looking to the next step in advance can be very motivating, knowing you will have plenty of financial resources once you do retire.

Before we start I need to define some terminology. When I say cash I mean money market accounts, bank deposits and CDs. Everything else is invested, meaning broad-based index funds, most notably Vanguard’s S&P 500 Index Fund (VFINX or VOO for the ETF) or the Vanguard Total Stock Market Fund (VTSAX). 

 

Starting Out: When you start out you have the fewest resources. Time is your best friend, however. The sooner you get money invested the sooner it can start growing. And time invested determines your level of wealth. Cash reduces the level of wealth years down the road, but keeps an unexpected expense from turning into a disaster that sends you back to square one. It is a delicate balancing act between investments and cash.

The problem with too low a level of cash is twofold. First, any minor emergency (flat tire, furnace repair, medical bill) and your financial plan is in crisis. Second, job loss or disability can destroy all the work done to-date.

Starting out is the riskiest place financially. By default you will be closer to the red line; income and savings are generally lowest when you are young and starting out. Six months of spending in cash is probably impossible. And if your employer matches contributions to your retirement account you need to find a way to contribute at least to the matching level.

If you are at day 1 you want to take a page from Dave Ramsey’s book (and workbook). His Baby Step #1 is to get $1,000 into a bank account for emergencies. It’s a good plan I agree with. If you have an employer retirement plan with matching, try to invest at least to the matching level as well. A good way to start is by adding $50 every paycheck or per month to your emergency fund until it reaches $1,000. When an unexpected bill shows up you have the funds to deal with the issue. Then start adding $50 or so each pay period to restore the emergency fund to at least $1,000.

The balancing act would be reasonable if all you had to worry about is building a reserve while you are earning starting wages. Add to that the expenses of starting out (furniture, transportation, home furnishings), a mortgage or rent and it can quickly become overwhelming. 

There is one advantage you have when starting out; you are young. With youth comes resilience. Starting a family, paying down a mortgage, building a retirement fund while working many hours to achieve these goals takes the vigor of youth. It can also wear you down.

Regardless your level of energy, financial problems can wear you out. That is why even a modest emergency fund, Dave Ramsey style, can be such a powerful tool to keep you on track. The real risk is job loss, medical issues and disability before you build your finances to a level where you can withstand larger financial assaults.

That leads us to the next level.

 

Building Wealth: You will spend more time at this level than the starting out phase. A $1,000 emergency fund really isn’t enough, especially as you grow older and medical bills have a greater chance of messing up your plans. Job loss is a strong possibility at least once in your working career. The 6-months of living expenses rule now comes into play. The truth is, 6 months still isn’t adequate. An extended economic decline can put you into a bad position where you are tempted to add more debt or tap into a retirement fund to pay for day-to-day expenses.

In the wealth building phase you want to secure your finances to withstand as much as possible. Many people don’t keep an official emergency fund once they build a modest net worth. (This accountant never had any funds earmarked for unexpected expenses.) However, that doesn’t mean you don’t have a tidy stash of money tucked away to get you through an income drought.

These are the priorities in the wealth building phase:

  • Pay down and eliminate debt
  • Build a cash reserve for surprise expenses and to tide you through a reduction in income
  • Grow your retirement savings
  • Invest outside your retirement account (non-qualified accounts)

There is no fast way to accomplish these goals, but there is an easy way. Consistency wins the race. Paying a bit extra each mortgage payment will eliminate the mortgage years early; every paycheck should add to your retirement fund in good or bad stock markets automatically; merge your emergency fund into your other non-qualified investments and make investments automatic.

I use Vanguard. You can use Vanguard or any similar investment house. Retirement and non-qualified investments will grow as the years peal away. The tax advantages of retirement plans are the best deal in America for the middle class. Adding to your retirement funds with each paycheck is about the easiest and most painless way to dollar-cost-average there is.

Once you fill your retirement account it is time to build some non-retirement funds. Non-qualified investments can be an appropriate surrogate for an emergency fund. A modest $1,000 worked when you were starting out. As you build your wealth $1,000 is inadequate; you are no longer interested in borrowing money to buy a car or anything else for that matter. You need larger sums of liquid money to replace a car or repair a roof. Investing in a broad-based index fund is the perfect way to grow your non-qualified monies. 

This is where common sense comes in. As you grow your non-qualified account some money will be held in a money-market fund or bank deposit. When a planned, budgeted or surprise bill shows up you will have the resources to pay the expense immediately. To reach this financial position you need to add consistently, just like with your retirement account. You can make the investment automatic in your non-qualified account, the same as with your retirement account. Set up automatic investing with monthly contributions. Part of each payment should go into the index fund and some into the cash portion of the account. When the stock market is acting like the world is about to end again, put most of the new money into the index fund. If you are uncomfortable with the high level of the stock market, put most (not all) of the new money into the cash account. It isn’t a crime to have a lot of cash! Sleeping well is better.

If the economy sours you can always move cash into the index fund. Once you determine your income is not at risk and will remain steady or climb, you can lower the cash position. This is more art than science. There is no exact level of cash you must have. Rather, if you feel uncomfortable, there is nothing wrong with sitting on the sidelines. In fact, the more wealth you have the less likely you want to be 100% in equities all the time. Cash is always nice because it gives you the opportunity to invest when the right investment comes along. It is hard to buy a cheap income property if you can swing the purchase. And cash is always available for spending needs without worry about selling in a bear market.

My point is that you decide what is best for you. Almost everyone should have at least some portion of their portfolio in equities in the wealth building phase. The first goal should be to increase your liquid funds to around 6 months of expenses. This should provide an adequate cushion if things go south. Then get serious about growing investment accounts.

The greater your wealth the better able you are to weather a storm. As your non-qualified account grows, the 6 months of living expenses in cash are supplemented by dividends if the need become great enough. Dividends and capital gains should be reinvested into your index funds. However, rather than selling an investment when the market is down, consider diverting dividends and capital gains distributions into your cash account when the cash account begins to deplete. This will provide added cushion while you decide the best financial move if a recession hits the family income stream.

 

Nearing, Entering and in Retirement: The last phase of your financial life is when you approach, enter and are in retirement. The following advice works regardless the age you retire. Early retirement still requires a proper financial plan. My clients pay me a lot of money to tell them what you are about to read.

The 6-month rule is nowhere near acceptable once you enter retirement. Side hustle income, pension and Social Security keep cash flowing into the budget, but your maximum earning years are now part of history. And besides, even if you can go back to work, is that really the goal here? The goal now is to structure your finances to keep your financial life simple with as low a level of risk as possible.

There might be times when you still add to investments once you enter retirement. We will assume retirement is a consumption of wealth phase. This doesn’t mean your accounts lose value! Your level of consumption can, and ideally should, be lower than the rate of the investment growth. 

Outside cash, investments will fluctuate in value. Only the fluctuating investments provide a potential acceptable return. Cash provides a low, or even no, return and is earmarked for expenditures in the relatively near future. Selling index funds at or near market highs and consuming cash when index funds are not at a high is an easier strategy than you might think. 

Market timing is a sucker’s game. Dollar-cost-averaging when you were growing your wealth was not a market-timing call. The opposite behavior when consuming your wealth is also not market timing.

The stock market is always climbing with short down periods lasting from a few months, to a few years, to rarely a decade or longer. Selling at a market high does not mean the market will not be higher in the future. What I am saying is that selling at or near a current market high is easy to do. Look at the index level. Is it at or near a high? Then it is an appropriate time to sell if it meets the criteria discussed below.

Your cash position in retirement needs to be at least two years of spending! Preferably 3-4 years of spending. With 4 years of spending in your cash account you have plenty of money available to live without consideration for the economy or stock market levels. If the market declines, use the cash account to fund spending. If the market is at or near a high you can sell enough to cover your needs on a monthly or some other schedule. You can rebuild the cash position when the market returns to new highs if the cash account becomes depleted.

When the stock market has one of those wonderful moments where it predicts yet another zombie apocalypse, you have several options. Rather than reinvesting dividends and capital gains distributions, you can divert those to your cash account instead. This effectively stretches your cash account to cover more than 4 years of market decline. Only as a last resort would you be forced to sell below a market high and/or cut back on spending.

The stock market rarely goes down and stays down for more than 4 years. Anything is possible. With dividends mixed in, your cash position can extend to 6-7 years or more, depending on the amount of your investments in index funds. Virtually all situations become background noise then as you enjoy your retirement.

 

As you can see, a simple rule that works for everyone does not exist. When you are starting out it is unlikely you have the resources to have even 6 months of liquid cash available to cover a job loss or serious expense. The goal is to move from that risky early position to a more stable and secure level. Eventually you will reach that 6-months cushion. But then you need to keep pushing because your needs will change as you approach retirement. 

The more wealth you accumulate, the more comfortable you become with cash earning a meager return. Many people lose interest in remaining 100% invested all the time once they enter the 7-digit net worth arena. As the 7 figures keep climbing, cash looks better and better. Of course, virtually everyone should have some invested in an equity index fund at all ages. What I want to impress upon you is that in the early days of your wealth accumulation journey you will be nearly 100% invested all the time with a modest sum available for an emergency. As you approach and enter retirement it is not uncommon to have 20% of more of your investable funds in cash. Find your comfort level and enjoy the well-deserved retirement you worked so hard to attain.

 


 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Every crisis has its own flavor. The Cuban Missile Crisis was man made and did absolutely nothing unless a stupid decision was made where the end of the world happened. The Great Depression came on rather fast, the 2008-9 housing crisis was brought to a boil slowly until the pot boiled over. And now we have our first serious pandemic in 100 years. 

The rules have changes since the 1918-19 Spanish Flu. Today we know washing our hands with soap and water for 20 seconds and social distancing are powerful tools  to prevent the spread of the virus. Modern medicine is also far more advanced from the early 20th Century. Ventilators and drug therapies can help many survive long enough until their bodies can fight the virus on its own.

If only that was all it took to solve the problem. The stock market is down, reflecting the dim prospects for companies trying to turn a profit in a quickly declining economy. Decisions need to be made while you are under heavy duress. Should you sell an investment, or maybe buy? Is early retirement or collecting Social Security early a good move? How does your business survive if it has been deemed non-essential? The financial decisions you make today will have consequences for years to come.

You can make a difference.

These and similar questions have filled my days this past week. Here I am writing this on Tuesday and already helped this week a 64 year old man decide if he should take Social Security early. We weighed his situation, considered the likelihood he may earn over the income limit before he reaches full retirement age, put into perspective the cost if he does exceed the income limit and compare it to what his current needs are. He had to make the final decision; I just helped him see the full picture clearly. 

In less than one day my office helped a restaurant go from a breakfast joint shut down due to the virus to a restaurant delivering meals from early morning to late at night. By outlining his options he was able to go from down and out to vibrant business. It looks like his business will be bigger than it was before the pandemic on the delivery service alone!

These and other serious business and financial issues are superseding my normal work in the tax arena. Plus we have two new tax laws and a third on the way. People are confused and small business owners have plenty to worry about.

Today the governor of my state deemed my office essential. (Whew!) Tax returns have slowed from the pace expected this time of year if there were no pandemic and what comes in is all virtual. And people have until July 15th to get their return filed and any tax paid. Temporary employees have all been sent home, A skeleton crew remains to answer the phone, receive and send documents via mail and portal and prepare the returns, payroll and bookkeeping that does come in.

Rather than close the doors, I will do the most essential thing of all: help you, kind readers, make sense of the unknowns in our world today.

I have pulled back from consulting over the past year because it is a very grueling job, taking a large amount of energy. Doing too much only means I end up sick (breaking down from exhaustion versus an actual illness). That happened last tax season when I felt I could consult, prepare taxes, and keep a regular schedule of social media events informing people of the best tax strategies out there. (I went down like a sack of potatoes.)

Helping friends in need is what friends are for.

But things have changed. My work schedule has obviously declined. Therefore, I am opening the doors to more consulting sessions. If you contacted me before, please resubmit your request. We did get to some of the requests from earlier this year in the past few days, but tax clients took precedence.

Now that things have changed I will have available time to focus on dealing with the unique issues facing you. I will not tell you what to do, but I can build an understandable picture to help you make the best choices possible. If I can help you remove the emotions involved and focus on the facts of the situation, it should be financially rewarding with benefits that extend for years or even to the rest of your life. 

At the end of this post I will provide the link to my Contact Page. Read the rules for working with me and then outline your situation in your consulting request. If it is something I don’t think I can help with I will let you know and point you to someone who can help if I have someone in mind. If I feel I can add value my team will ask a few questions so I can adequately prepare for the consulting session. 

These sessions do not have to focus on taxes only. We can discuss retirement, buying or selling real estate or any other investment, personal struggles during this pandemic and more. I will always offer encouragement. It is so important you focus and think clearly as you make decisions during this crisis! I have helped clients for decades deal with the worst of crises. Nothing is off limits in consulting sessions while this pandemic is active. I will not give medical advice, of course, but I can help you make the best medical decision for you as you work thought your personal situation. We are in this together. We will take this rapid onset medical, investment and economic crisis head on. It will never be perfect, but we can make it better than it is now.

Finally, I struggled with how I should handle my fee for consulting. I decided to keep my normal fee so I can keep employees paid and moral high on the home front. All fees received that are not used to pay for salaries and other expenses related to consulting sessions will be donated to homeless shelters, abuse shelters and food banks in my local community. If funding permits, I will also donate to similar organizations supported in the past around the country. 

Here is the link to the Contact Page. I am eager to work with you. Let’s get started.

 

Required Reading 

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Fear is the most powerful weapon in war. Hitler deployed buzz bombs against London in an attempt to destroy resolve and heighten fear during World War II. It nearly worked, if not for the even greater resolve of the British people and their leader, Winston Churchill. 

Fear is such a powerful weapon that nations will go to great lengths in war to manipulate the news reaching the people. During World War I, only Spain had a reliable free press reporting the deadly flu ravaging troops and populations. No army wanted the world to know they were taking heavy causalities from what would later be called the Spanish Flu. Yet every nation, on the battlefield and at home, were taking a hard hit from the disease. The U.S. was particularly hard hit. But when the absence of daily news on the deadly flu was only to be found in Spain, it was felt it the virus originating there. The truth was far from it.

Today we are facing a similar, though less deadly, threat, and the disinformation machine is in high gear. This time the media seems to want fear cranked to the highest level.

 

Washing your hands with soapy water for 20 seconds or longer is the most effective way to prevent the spread of the flu virus, even better than hand sanitizers.

 

Since I have no formal medical training I will leave the medical advice to those qualified to give it. What I can do, as an accountant, is reveal the truth behind the never-ending statistics and how they have been manipulated to scare us at the highest level. COVID-19 is a serious health issue without a doubt. It spreads easy and fast with a heightened risk of death. These simple facts make it easy to scare people into clearing their savings account to stock up on toilet paper and other essentials. 

The level of fear has filled my email box from clients and readers worried about the state of affairs and how it will affect their finances. I have worked hard on social media to provide a steady voice in the whirlwind of conflicting data. It is time I issued a formalized response here to the elevated levels of fear people are experiencing and the risks people face with their investments and personal finances.

Understand, this post is not about specific advice: buy this, sell that. Rather, my goal is to help you control your emotions and control your response to fear mongering and market unrest. That is where real wealth creation finds a home. Buying the right investment does no good if you panic sell before value has been realized. Buying high to sell at a panic low is the surest path to poverty. With new feeds bloated with coronavirus articles it is easy to start thinking the world is about to end. I will show you below, nothing is further from the truth. This has happened before and we know how it ends. (SPOILER ALERT: It will pass and most people will be unharmed. Even the economic damage will be less than expected and will return to normal in a matter of time. It will later be determined that fear caused more damage than COVID-19 did.)

 

A Short History of Pandemics

Human history is filled with pandemics. Until modern times, diseases ran their course with little effective intervention from doctors. Illnesses ran their course and eventually died out. 

The common cold, flu and similar illnesses are also common throughout history. The 1918-19 Spanish Flu was a particularly nasty one. As many as 50 million people died. 

Things were different in 1918-19. World War I was coming to an end. Governments involved in The War to End All Wars kept the flu numbers a secret so as not to encourage the enemy or demoralize their soldiers in the field and the folks back home. Only the free press in Spain reported on the people getting sick and the number dying. That is why some thought it started in Spain, hence the Spanish Flu designation. (It didn’t. It probably started in northern China in 1917.) 

Pandemics of the past, even those from less than 100 years ago, had less economic impact than today. Supply chains now span the globe. Never before have businesses been so integrated and international in scope. Pandemics of the past killed and sickened people; COVID-19 is also wrecking havoc on the world economy.

Until recently, a nasty flu season was the only way anyone knew something was afoot. Modern medicine gives us a jump start on what to expect. We knew COVID-19 was headed our way because China alerted the world to the pending virus. SARS, the Swine Flu and the H1N1 variety of flu in 2009 are modern examples of pandemic scares. Most of these viruses never circumnavigated the globe, dying somewhere along the way.

And we come back to the Spanish Flu. Somewhere between 20 – 50 million people died from that flu. It came in three waves with the second being the worst. Then it just disappeared. Nobody knows exactly what happened, but the flu virus probably mutated again to a less deadly form. Doctors didn’t discover a cure, social distancing wasn’t a thing and unless you were sick in a hospital it was unlikely you were even quarantined.

The Spanish Flu did have one nasty trait that put it into the history books. Normally the seasonal flu kills the old, very young and those with a compromised immune system. The Spanish Flu killed adults in their prime; the people who usually get sick for a week or so at worst during flu season, but almost always recover. 

And that is the first problem with the fear surrounding COVID-19: it generally kills older people, similar to the normal seasonal flu. The very young are spared with only a few healthy adults susceptible. Those over age 60 are at most risk.

 

Unfounded Fears?

COVID-19 is a nasty flu bug for sure. It spreads very easy and has managed to circle the globe rather quickly. It also makes people very sick that normally only get mildly sick from the flu. Older people face a very high risk of death if they contract COVID-19.

The fears are not unfounded, but are exaggerated. The response has been way overblown compared to the risk profile of the disease. Let’s place this into perspective:

As of this writing, 7,158 have died with COVID-19. Read that last sentence very closely as it will be important in a bit. Here are the current numbers

No one is advocating clearing the roads due to the risks of driving. Many still smoke tobacco and eat an unhealthy diet that increases the risk of cancer, heart disease and stroke. Yet, one of the smallest risks of dying to-date is causing a panic.

HIV/AIDS caused fear, but no panic. All the mortality risks listed above are a concern, but not at a level that should be disruptive. So what is causing COVID-19 to create such disruptive panic?

First, when the seasonal flu is with us every year and tens of thousand die from it we adjust to the risk as a normal part of life. COVID-19 is new, novel. Novel in this case means people do not have a natural immunity to the virus yet. 

Second, COVID-19 spreads fast and very easy. People have not had time to adjust.

Third, people who normally do not die from the flu are. Not like the Spanish Flu, but an elevated percentage of healthy middle age people are dying from COVID-19. 

All three combined has caused rampant fear. New, fast and potentially deadly to people who normally do not fear the flu has generated panic. Then people extrapolate the numbers to the entire world population and get dizzy. Except it is a massive misrepresentation of the facts.

 

Misleading Numbers

News reports and press releases from world health organizations are very careful how they word their press releases. Mortality rates are extrapolated by the public from the fancy representation of the numbers, but the extrapolations are far from truth. 

People dying with COVID-19 are reportedly as high as 3.84%. When people read this they think it is the mortality rate. It isn’t.

Not everyone is tested for the virus. Those most ill are more likely to be tested and all people who are reported to have died with COVOD-19 have been tested. (Otherwise how would they know they died with the virus?) This leads to a misrepresentation. If only sick, or potentially sick, people are tested, the number that die from the virus is pulled from a population likely to have contracted the disease. That is like using a test from people likely to have cancer as a representation of the entire population’s cancer mortality risk. The mortality rate for COVID-19 is likely under 1% and even lower for the population at large. Only time will give us an exact, or close to exact, number. Using the data available, COVID-19 is more deadly that the seasonal flu most years, but not anywhere near as deadly as the Spanish Flu.

Another misleading statistic comes from the wording in news reports and press releases from health organizations. They are careful to say someone has died “with” COVID-19 rather than “from” or “because of” COVID-19. This is a serious reporting issue.

Think of it this way. If someone is healthy and contracts COVID-19 they might have mild or no symptoms. But if they die in a car accident before the virus is cleared from their body they died “with” COVID-19. The virus had nothing to do with the death, but is recorded as a disease that the person had when they died. 

It is not uncommon for someone to have several contributing factors to their death. Rarely, if ever, do we medically say someone dies of old age. Instead, we list a variety of ailments that contribute to the final cause of death. Cancer and pneumonia  are common causes of death in people over 80. The flu is also a big contributor. Somehow we can’t bring ourselves to say they just got old and died. We need a reason. And that can lead to problems at times like these.

This counting of every death where COVID-19 is present misrepresents the full facts. The patient may have died from other causes at the same relative time anyway. This happens when people get old, and COVID-19 strikes hard at the old, as do many flu strains. This misrepresentation allows for an inflation of the COVID-19 numbers which heightens public fears.

 

Emotions in Check

People at risk need to take precautions. Because young people can carry COVID-19 without getting seriously ill, it is important to take steps to prevent the virus from infecting older family members inadvertently. That is the real risk with COVID-19; the unknown causing fear.

It is proper to take a break from all but necessary gatherings. The economy will take a short-term hit. It is scary, but not as bad as the media would have us believe. Social media blows it up even worse that the traditional press. Shame on us!

In the modern world this means supply chains will be disrupted. Business will slow and some industries will be very hard hit. The stock market is predicting a doomsday scenario.  It isn’t that bad! For those who are patient and control their emotions, now and in the near future is a good time to increase equity holdings. Keep adding to your retirement plan at work. Dollar cost averaging only works if you keep the regular investments going when the market is down, too.

I know it looks bad right now. Not everyone will contract COVID-19. Most who do will only experience mild illness. The older you are the more important it is to seek medical attention as your mortality risk increases rapidly with age. 

The way the numbers are playing out the number of deaths from COVID-19 will be somewhat higher than a normal flu season. However, the fear it induces will keep more people at home and off the road. It is possible the fewer number of people who die in road accidents as a result may be more than all the deaths attributable to COVID-19. 

That would make this the first flu strain to reduce the number of deaths by a greater number from other causes than those who die from the virus. Technically, a negative death rate. Again, technically, all factors combined, it could be the least deadly flu strain since the invention of the automobile.

It’s all a matter of perspective.

 


 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

There is an adage on Wall Street many have repeated over the years and more so in the last month:

BUY THE DIP.

What so many forget is another Wall Street adage similar to the first:

BUYING THE DIP WORKS UNTIL IT DOESN’T.

I have warned this is not over yet so don’t get too excited about buying the first decline.

My opinion is unchanged. Unless something drastic changes, the events put in motion will play out until their logical end (the end all panics end in).

Most readers of my blog have never experienced a prolonged decline in many markets at once. It has been 12 long years since things were really ugly. This will be the first REAL test of the FI and FIRE communities. Unfortunately, most leaders in these communities have also never experienced a real market panic when they had meaningful money invested.

By now I hope I convinced all of you to never invest with borrowed money. If you followed this advice it will only be a time thing before normalcy returns. Before the clouds clear, however, the news feeds will be littered with end of the world predictions. Unemployment will rise, markets will fall, the economy will slow or even decline. This has all happened many times before.

My advice to you, kind readers, is turn off the news feeds. The coronavirus will be fine without you watching its every move. Oil prices are going to decline heavily. Enjoy even cheaper gasoline prices in the interim.

If you didn’t sell at the high (you didn’t) don’t try to out guess the market now. Stand pat. Let the world around you panic as it always does. You, my good friends, are smarter than that. You will not be moved by a decline in your investment account balance. That is only a temporary thing unless you lock in the loss.

I was beginning to believe the coronavirus was the black swan event that would finally trip up this long bull run. It seemed strange because the coronavirus is bad, but not that bad. The economic damage could be sharp, but short lived.

The oil price war between OPEC (mostly Saudi Arabia) and Russia is the real black swan event I was waiting for. This has a real risk of causing serious damage.

If oil prices stay where they have fallen to (I’m writing this Sunday night, March 8th, 2020 when oil prices dropped into the upper 20s and gasoline futures dropped over 20 cents a gallon), U.S. shale companies are in deep trouble with massive debt and no way to work out of the problem. 700,000 jobs are on the line and several million more in halo industries serving the U.S shale oil industry.

Not all these jobs will be lost. But if even a reasonable percentage are lost the decade long economic expansion will come to an end.

Remember, the end of one economic expansion only paves the way for the next leg up.

I don’t know where the next economic advance comes from, but there are some strong indications. In 2008-09 shale oil was the one bright spot in the economy as oil prices were high. Oil will be an economic drag this time around.

Where will the next massive spike in economic growth come from? I have several guesses. Elon Musk made EVs cool and reliable. I expect the next economic surge will include a massive transition from ICE vehicles to EVs.

Solar, wind and other alternative sources of energy have the promise of huge economic growth. Even larger economically is storage technology. Batteries and other storage technologies for solar and wind will be nice areas to watch in the decade ahead.

After all this time the final frontier might be the biggest source of economic growth going forward. Virgin Galactic, SpaceX and Blue Origin will compete for space travel dollars. Space holds the promise of opening an economic boom never witnessed before.

So when the news feeds tell you the world is coming to an end, don’t believe it. None of this is new. Old guys like me have seen this before. The history books go even further back with stories of boom and collapse. It is the nature of a capitalist system. You have to take risk to build a better tomorrow and sometimes that leads to some short-term pain.

Stay well, my friends. And vigilant. Fear will rule in the weeks and months ahead. Do not allow your emotions to rule your common sense.

 

Note: I originally wrote this for a Facebook post for my followers. I removed that post shortly thereafter and pasted it into this post. I felt it was too important to leave this as a social media post that will gallop into the distance rapidly. 

You can read more about past market panic in this book. 

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

All too often we install the security cameras after we are burglarized; start carrying pepper spray after an assault. Business owners, large and small, face heightened risks in our modern world and reactive security plans do not cut it. A proactive plan can prevent the breech before it ever happens.

Small business owners, income property owners and even people with a side hustle need to have a security plan. It’s not only a big business problem. Some businesses are required by law to have a security plan. For example, the IRS requires tax professionals to have a written security plan that is updated annually. Those selling securities or insurance, banks and other financial institutions have similar requirements. 

Whether your industry requires a security plan or not, you must have one. In this post we will start with a short discussion on security plans for tax professionals and accountants because that is the demographic this blog serves. I will then share where the detailed security plan nearly failed in my office and how we shored up our procedures to protect employees and clients. Then we will discuss implementing a security plan for your business, regardless the field you are in. I will point out the benefits of a security plan for even as innocent a side hustle as dog walking. If you never need to test your security plan in real life, all the better. But if fate comes knocking I want you, kind readers, to be prepared so risk is reduced. 

I’ll close this post with a side hustle opportunity.

 

Security Plan for Tax Professionals and Accountants

I will start with my industry because we are a prime target due to the information we handle daily. Too many tax offices are light on the security issues over cost concerns. Security isn’t always a heavy expense, though tax offices are finding security a rising expense. Avoidance is the most expensive choice. A security breech virtually guarantees the death of the small tax or accounting practice as trust is forever lost.

The IRS requires a minimal security plan for offices preparing taxes. As a professional I take exception with minimal effort in any area of my business. However, small tax practices, as well as those with a side hustle, should consider the IRS plan as a starting point for building a security plan.

Protection of data is the number one issue businesses need to address. Tax preparers handle large amounts of sensitive data; data security has to be a top priority. 

Protecting data is not just about a secure computer system. Training ALL employees on procedures for handling information requests is a must. Malcontents look for the weakest link in a firm to extract data or to access the corporate computer systems. Untrained employees are the weakest link. Once trained, you need to test your employees to determine additional areas needing more training. 

Information, regardless how minor, must NEVER be disseminated without a proper power-of-attorney on file! Remember, the POA doesn’t mean all data is available, only that which has been authorized. 

Measures should be taken so no one else in the office can overhear a personal conversation. A dedicated conference room with sound absorbing material on the walls is valuable if you have a room for such a purpose. Office doors should be closed when confidential conversations are in progress.

Data security is the real issue here. Safeguarding your data is vital. One data breech and your practice can be gone. The cost to recover for a small business is too large in many cases to survive the attack.

The IRS has guidelines in this matter. Your data security plan should:

  • Include the names of all program managers. This would include outside IT companies used to secure your data.
  • Identify risks to customer data.
  • Evaluate the risks and current safety measures.
  • Design a program to protect said data.
  • Once the plan is created it must be implemented and updated.

The data security plan in my office runs over 30 pages and covers every conceived risk to client data with redundancies built into the system. Protecting the client is the highest priority in my firm.

This blog makes my firm more visible so I take added measures. This can be a large burden for small tax firms and those just beginning. Drake Software (the commercial tax software I use in my office) has produced an excellent tool for building your required data security plan. The Drake template is a comprehensive plan useful for most firms. I will not show any details of my actual plan as it contains proprietary information and publishing the safeguards would give scammers too much information to attack my firm. 

The Drake Software Tax Office Security Plan can be had here without cost:

Drake Software Tax Office Security Plan and Sample (1)

The template is also an excellent tool for any small business or side hustle handling client information.

 

Personal Safety

Now I want to turn to another area that needs consideration: personal safety. In my office I have taken steps to protect my employees from personal harm should a client become aggressive or in the event of a robbery. Workplace violence is real and a common fare in the news feeds. Proactive is the only way to go.

As much thought and effort as I have put into safety and security measures, we still had an incident earlier this tax season we all can learn from and the reason for this post.

Let me first share the post I made in a Facebook private group for tax professionals before I share my solutions:

This is NOT a rant! Rather, this is how to handle a difficult situation safely and correctly.

A client from 20 years ago returned. He was a bit weird in his recordkeeping, wanting us to only scan what we needed and give his stuff back before he left and before we prepared the return. He also wanted us to put documents back in the envelopes they came in.

Not a normal client, for sure, but nothing that would cause too much strife. We can humor a client if they want documents back in envelopes and scan documents and return them prior to preparing the return.

He picked up his return last night and it was reviewed with him. However, he didn’t give us all the tax documents — he was too concerned with his filing system than with accuracy. He discovered the error last night after he left.

He is waiting at the office this morning. An employee who always comes in early to get the office organized before opening was confronted by this client. He tries to push his way into the office.

Let me be clear. This is a female employee with a man pushing in behind her where she would be caught in a small locked foyer area if he succeeded. (We have double doors, double locked for security.) The employee was scared out of her mind obviously.

She managed to keep the client out. She called the police and then called me.

We had some snow last night and I live 20 minutes away in good weather. The snow made the highways worse than the side roads so it was slow ride in.

The police came and made it clear he did something unacceptable. The client left before I arrived.

When I got to the office I heard the employee’s story and believed her story. The client forced his arm into the door so she couldn’t close it and tried to force his way in. If he would have succeeded it would have been tight quarters and even more frightening for the employee.

The client told the employee he was going to get her fired.

I called the client and got his story. His story was he did nothing wrong, of course. Well, until I reminded him I have many security cameras inside and outside the building and that I would review them later today. Then he changed his story, saying he might have tried to force his way in.

I told the client he is fired. I will not cash his check and will not file his return. He is no longer welcome at my establishment.

My employee absolutely did the right thing in calling the police first and me second.

The employee will NOT be fired or even reprimanded. She did everything by the book. No employee of mine should ever feel unsafe in my business. EVER!

It ended with one less client. But no one client is worth it: rude behavior, threats, mistreating employees, cheating on taxes. We are professional people. You should always feel safe at work and home. My office took time this morning to review with all employees the course of action if they ever feel unsafe. The client doesn’t always come first; my team does. Without my team I can’t serve clients.

 

To start, if this happened at a bank there would have been an arrest. But the police, like much of the public, don’t consider most businesses all that important so they act as if nothing bad has happened until it gets very serious.

Another point to make is that the client hounded my employee that he would get her fired. Threats and intimidation don’t work with me. That is instant ground for removal from my client list.

This isn’t a good policy for tax offices only either. Personal safety is “the” priority always! If you have a side hustle walking dogs you might not need a data security plan, but you do need a personal safety plan. Your plan needs to consider procedures if you or someone else is bitten by one of the dogs in your care, if a dog escapes or if you are attacked by another person while walking dogs. Your plan might include carrying pepper spray and a mapped out route for walking dogs where there are plenty of lights and people present. Safe places along the route should be identified in advance.

The incident in my office revealed one large flaw in my security plan. Employees came in the front door — the same door clients come in. If a client arrives early they can be to the front door before the employee. This is bad. Many early arrivals have no appointment and need to wait until the office is ready to open. Unfortunately, not all have this level of common sense.

I mentioned if this happened at a bank the client would have been arrested. Pushing into a bank behind an employee outside business hours would bring a heavy response from police. But the police didn’t take it as seriously because we did something very different from banks. Bank employees have a separate entrance where it is more difficult for a client to get to as fast as the front entrance. 

My office has side doors! After a review with employees, we set a policy that employees will now use a separate side entrance at all times. If this policy had been in place, my employee would never have had the problem outlined above.

 

When to Build Your Security Plan?

We can be proactive or reactive. My office’s detailed data plan is an example of good proactive planning. The side door policy for employees is an example of reactive planning. Proactive would have been better.

Tax offices are required by law to have a data security plan. It makes sense to include a personal safety plan for employees at the same time. 

Regardless your business or side hustle, or the size, you need a security and personal safety plan in place. If you handle data, you need a data security plan. Everyone needs a plan for handling the myriad scams and spam calls. Data security and personal safety plans are a must.

The Drake outline is a comprehensive plan for tax and accounting firms. It also is a good starting point for other businesses. 

But it is only a starting point! Your data security and personal safety plans must be reviewed and updated regularly to be effective. Even the best plans have no value if not implemented. And even the best implemented plans will have holes as I found out this tax season. This is not a “set it and forget it” activity.

Security plans must evolve. Society changes, risks change, new risks are discovered. Your security plan must be proactive with the ability to be reactive when a flaw is discovered. 

Businesses face greater challenges than ever before. Not long ago the greatest risk was burglary. Now, scam artists from anywhere on the planet, have an equal shot at harming your business. 

Protect your data, protect your clients and employees. Backups and layers of security measures are the brave new world we live in. We can navigate these waters, but it takes effort. 

And my clients, my employees, are worth the effort.

 

If interested in a side hustle idea, consider security planning for businesses. Here is some additional reading on the subject:

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Two major tax increases are about to crush middle class Americans. The first tax increase has already been passed into law and will soon go into effect. The second massive tax increase is more sinister. The amount of the increase has yet to be determined, but we can get a good idea how much will be pried from your wallet if you don’t take steps to defend your wealth.

The Tax Cuts and Jobs Act of 2017 (TCJA) lowered taxes for the vast majority of individuals and regular corporations. There were a few losers. Taxpayers with high state and local taxes (SALT) found their deductions declining faster than rates fell causing a sharp pain behind their left eye on April 15th.

Other taxpayers feeling the pain of a tax increase include truckers, sales people, artists and others with work related expenses. Unreimbursed employee business expenses were eliminated. Truckers (and others) no longer can deduct their work expenses. The TCJA hurt a large number of hard working Americans. Even the mortgage interest deduction was slightly curtailed. Not as many felt that sting, but all the same, the TCJA was uneven in reducing taxpayer liabilities.

Regular corporations saw the biggest benefit. Corporations now have a flat 21% tax rate. Except for corporations with less than $50,000 in profits, this was a tax cut.

Small business owners fared well, too. The qualified business income deduction (QBID) lopped off 20% of profits from the taxman. Income property owners also benefited from QBID, but with a different formula. 

Here is where is turns ugly. Regular corporations saw a permanent cut in rates; individual tax cuts were only temporary. Truckers might find the reversion back to 2017 tax rules in 2025 a reprieve. The bulk of taxpayers, however, will see a serious tax increase. 

 

Planning for the Inevitable

Rumors have surfaced that a Tax Cut 2.0 is in the works where the temporary tax break for individuals would be extended another 10 years to 2035. The treasury will suffer a $1.4 trillion reduction in tax collections over the time period involved if this is the case. Regardless, the proposal will not pass prior to the election and once the election is past, promises are less likely to be kept.

I place the odds of taxes reverting to 2017 laws at 80%. That assumes taxes are not hiked earlier after the election when the new Congress sits with whomever wins the White House. The odds the temporary tax cuts for individuals get extended to 2035 is less likely at 20%. More on this in the second tax increase discussion below.

Several tax planning opportunities exist under the temporary rules. The amount of long-term capital gains taxed at 0% is much higher right now. Those affected by the SALT limitations need to throw out old tax theory until rules revert back to before the TCJA. Tax brackets are lower and extend to higher income levels. These and other changes from the TCJA mean you must be multi-year tax planning or you will seriously overpay your taxes.

Here are some of the things you need to consider when reviewing your long-term financial planning as it involves taxes:

  • Forget old rules of accelerating deductions and delaying income. It doesn’t work for individuals in most cases anymore. Preserve those deductions as long as possible in anticipation of the old rules kicking back in where they have more value.
  • Business owners need to forget the above rule as well. QBID has turned that philosophy on its head! Business owners — and to a lesser extent, income property owners — want to accelerate income and delay deductions, especially when the end of the temporary tax cuts approaches. Business owners get up to a 20% non-cash deduction on profits under current tax law. 
  • Truckers, musicians, sales people and anyone else with large amounts of unreimbursed employee business expenses needs to think of ways to delay some of those expenses. I understand it is hard to delay many of these expenses and here is an alternative. You must always be aware of any costs you can defer. If you can slip it far enough into the future the expense might reduce future taxes, whereas, they have no current tax benefit.
  • Pay property taxes as late as possible without incurring a late fee. Preserve as many SALT deductions as you can. At some point these expenses will potentially regain their larger deductibility. Pay at least $10,000 of SALT since that amount is deductible if you normally itemize. Otherwise you want to push out as many SALT expenses as possible for as long as you can. Once again, the idea is to preserve as many deductions as possible for when they could regain deductibility.
  • The 0% tax bracket for long-term capital gains is very high at this time. Tax loss harvesting might be the worst idea at this time. Tax gain harvesting has some powerful incentives while the TCJA remains in effect for individual taxpayers. Locking in gains at 0% or even 15% could amount to serious tax savings.
  • Be sure to consider the other effects your actions will have on your tax picture. While you might enjoy a 15% long-term capital gains rate with tax gain harvesting, you also need to consider the Net Investment Income Tax issues if you take this to higher income levels.
  • Lower income taxpayers also need to consider Social Security benefits. Accelerating income might increase the amount of Social Security benefits subject to tax.

There are many additional tax planning options under the TCJA. I encourage a serious conversation with a qualified tax professional to maximize your benefits. (Wait until after tax season before jumping every tax professional you know so they can get their tax season work completed in a timely fashion.)

Virtually nobody is thinking long term with these tax issues. Nearly every client in my office is getting advice that will affect them in future years and the dollar amounts are not small. Consulting clients find I am drifting strongly toward multi-year tax issues. Saving money today is not enough! How much you pay in tax for all years is a far better planning strategy!

 

The Second Secret Tax Increase

The first tax increase discussed above is fairly easy to plan since the rules are defined, at least for now. The rules might change, but the concepts will remain static. Under current tax laws businesses want to accelerate income in most instances and defer expenses to maximize QBID or the lower corporate tax rate. Individual taxpayers want to push out certain expenses to the future where they might have some benefit.

The second tax increase is harder to quantify and involves some logic and deduction. We know the tax increase is coming, but the timing and amount is uncertain.

Estimated federal government revenues for the 2019-20 fiscal year are estimated at $3,644.8 billion; outlays are projected at $4,745.6 billion. (See tables.) This leaves us with a projected deficit of $1,100.8 billion. This gets added to the credit card, aka the national debt which is now over $23 trillion. The actual deficit will be different, of course. It could be better or worse. In any case, the amount of debt being added is huge and these are economic good times. What happens when the economy slows?

At some time the party will end. I refuse to call an expiration date because many people much smarter than I am have called it wrong up until now. What we do know is this cannot go on forever. Eventually the price will be paid. Inflation or lack of confidence in the government’s ability to repay the debt will effectively end the party. If the government can’t support the debt the house of cards collapses.

The national debt in and of itself is not bad. If the debt rises at less than the rate of economic growth the debt would actually be getting easier to support. Unfortunately, the debt is rising faster than economic growth currently. Therefore, the national debt, as a factor of GDP, is growing. That is unsustainable. The only question is: When will it end? And will we regain fiscal sanity before the forces of nature enforce it upon us?

A closer look at the federal budget will outline the seriousness of the issue and why it will end sooner rather than later. 

We have an estimated revenue for the federal government of $3,644.8 billion this fiscal year. We will assume this number holds true for our examination and no recession makes an appearance. Most of the revenue comes from personal income and payroll (Social Security and Medicare, aka, FICA) taxes. (Table 5)

We need to make some logical conclusions on where the nation’s finances are headed and the likely consequences. The real question is: How many bills can be paid with $3,644.8 billion of revenue?

Looking at Table 6 we see the biggest expenses for 2020, in order, are: Social Security, national defense, Medicare, health, income security and interest on the debt. If we drop income security to zero and forget every other item on the spending side of the budget we can balance the books! Of course that means TSA is gone. Just think! No more waiting in line to enter a plane. Very convenient. No more Ag Department. Yeah, food will go unregulated. But the corporations will take care of that just fine. Right? No more R&D, no more housing or FHA loans, no student loans, no development, no international or wall on the southern border, no energy, no immigration policy. It would be funny if not such a serious issue.

All that remains are Social Security and Medicare, national defense, health and interest on the debt. Obviously we can’t cut spending close to enough to balance the budget. Well, unless you want to cut Social Security and/or Medicare. But do we still collect the payroll taxes for these expenses if we no longer provide the benefit? So Social Security and Medicare are a nonstarter. 

We could default on the debt and refuse to pay the interest. But, that would destroy American banks and insurance companies. Also, we would never have the ability to borrow again regardless the crisis, so we probably should pay the debt.

Maybe we can cut national defense? Is there anyone in the room who wants to cut the military the amount needed to balance the budget? We could save some by reducing waste. Unfortunately, there isn’t enough waste to cut to solve the budget deficit problem in more than a token amount.

Then we come to health. Well, America has such an enviable health care system it can take come cuts. We are the most expensive in the world and no longer rank in the top 25 in most surveys of health. Besides, a little coronavirus never hurt anyone. Again, this is no joke. We could make meaningful changes to medical care to reduce federal spending and for individuals as well. Still, it will not be enough to stem the red ink.

Obviously this does not work. We can’t cut government spending enough to come close to balancing the books. And all the money printing hasn’t given us economic growth above 3%. The only remaining variable is taxes. Whether we like it or not, they will eventually go up in the near future. (For the record, I like lower taxes. Don’t take my conclusions as wanting higher taxes. My job is always to help clients pay the least tax by law.)

How much will taxes have to rise? We don’t have to cover all spending. If the national debt climbs at a slower rate than economic growth the debt becomes easier to manage in the same way Bill Gates can manage a million dollar mortgage better than someone in the middle class. 

If we assume (I know, I know) inflation hovers around 2% and real economic growth does the same, we get nominal economic growth of around 4%. Yes, that means the national debt can grow around $920 billion per year without the national debt becoming a larger burden compared to the size of the economy. 

There are two issues with my simple analogy. First, it assumes interest rates never climb and forgets about the unfunded liabilities (Social Security and Medicare, most notably) facing the federal government in the near future.

A $300 – $500 billion tax increase could solve the budget problems for the foreseeable future. We would still run large deficits, but if the economy kept growing it would not be a serious issue. The national debt looks big because we are largest economy on the planet. 

There is no doubt sovereign debt is climbing worldwide. U.S. debt is also piling on rapidly. At some point, under the current system, we face a fiscal crisis. A recession throws my modest proposal out the window and balloons the debt fast. Taking steps while the world is wonderful and kind economically makes sense to this weary old accountant.

Taxes will go up. The federal government has shown no desire to stop spending. Individuals received a temporary tax cut only. And still, to fulfill all the promises the government has made will require more money. And you can’t just print it out of thin air unlimited. At some point Uncle Sam will eye your wallet.

There are 6 tables for your review in this post. You can come to your own conclusions with the data. I spent a lot of time playing with the numbers. I will be interested in your prediction for future tax rates and the steps individuals can take to reduce the bite. You can read more about how the federal budget works here.

 

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Business owners are in trouble. Income property owners, too. The demands of running a business or managing investment properties has reached an all-time high and banks are demanding more detailed financial statements than ever before. And therein lies a side gig opportunity with high income potential.

Every tax season my office sees hundreds of financial statements prepared by the client or their staff. You can’t imagine the mess most are in.

The client always thinks they are doing an awesome job of keeping their books. . . until they need a loan and the bank is less willing to decipher their books than the accountant.

The ability to read a financial statement is a powerful wealth building skill. You can detect fraud, analyse an investment and manage business liquidity. 

Banks will not spend time trying to figure out a mess. It is easier to pass. If the funding required is significant pristine records are not an option.

In short, reading a financial statement is a requirement for wealth building and business management. The financial statements tells you how the business is doing and the direction it is heading. Often, the financials will indicate problems before they are apparent in the real world. These festering problems are easier to fix when they are still small.

Reading financial statements are a good opportunity for you to generate extra income. It can even be a high-paying full-time business. Understanding how money works requires you to understand how money is recorded and that means financial statements. The number of business owners looking for help in securing a loan is a business opportunity that starts with the ability to read financial statements.

Buyers of a business are investing serious money and definitely need help understanding the value of the investment. Real estate buyers the same.

Accountants and attorneys are an obvious choice. However, many do not handle this kind of work. As a specialist, you can solve a business owner’s financing problems while earning an excellent income.

We will now review the three most common financial statements: the balance sheet, income statement and cash flow statement. The examples used are filled with errors I see in my office frequently. You can find more errors than I discuss as I added plenty.

By understanding common mistakes business owners make you can become familiar with the issues and become a value added service. Good financial statements (good records) are not an expense! Clients seeking help improving their records will be more profitable and therefore, a long-term client.

 

The Difference Between an Income Statement and the Balance Sheet

This may come as a surprise to you, but very few people know the difference between an income statement and a balance sheet. And don’t get me started on the cash flow statement.

I see clients recording entire loan payments as an expense on the income statement. For some reason they know loan proceeds are not income because they don’t want to be taxed on that money. However, when it comes time to pay the loan they think the whole payment is an expense (and deductible). It isn’t!

Loan proceeds go on the balance sheet, of course, as a long- and/or short-term liability. If you require detailed records for a business sale, purchase or bank loan, you will need to separate a loan into long-term (amounts due in over one year) and short-term (principle due in one year or less). If the business is small the owner may not want to separate the loan into long- and short-term. In those instances the loan should be recorded as a long-term liability. (The correct way is to list long- and short-term. In no way do I feel the shortcut of listing all loans as long-term acceptable.)

Loan payments have three entries in a general journal: cash out of checking (balance sheet), principle portion of the payment (balance sheet) and interest payment (income statement). As all accountants know, only the interest is an expense. 

If you can clean up this one issue you will save more businesses than you can imagine. If your client is making this mistake you may need to junk the entire set of books and start over. The books are a mess and in no condition for a banker or the tax accountant. (Tax accountants deal with this all the time and if the books are bad enough and the client unclear in explaining what they are doing, taxes can be wrong as well. If you give your tax accountant clean records she will save you money in taxes versus wasting time trying to ferret out what your numbers really are.)

 

QuickBooks Does Not Make You an Accountant

The biggest mistake business owners make is thinking QuickBooks makes them a good bookkeeper or accountant. This is about as true as saying TurboTax makes you a tax professional. If you believe that I have some cheap ocean front property to sell you in Montana.

The only thing QuickBooks lets you do is dig the hole faster unless you understand basic accounting. 

As we review the following financial statements you will see some of the crazy things tax professionals see every tax season: balance sheets with equipment and no accumulated depreciation and negative numbers where they don’t belong. (Yes, I know contra accounts happen. But negative petty cash?)

I gathered financial statement issues from multiple sources and introduced as many issues as I could in one set of financials. I started with a sample account QuickBooks provided in an older version to construct this monstrosity. I have seen worse unfortunately, but this will do for our needs. 

Do not focus only on the errors. Keep a keen eye on issues the financials expose. Getting the books in order before presenting to a bank is vital. Once the bank (or investors) start expressing concerns over the financials they start to lose confidence. Deal with the weaknesses of the financial statements before presenting. You still need to provide honest information and it must be clear. Having answers prepared in advance can make or break a deal.

The same rules apply from the other side. As a buyer of an income property or business you will be looking with the same jaundiced eye at the financials. If the books have errors it becomes difficult to trust the investment is solid.

 

Balance Sheet

You can click all financial statements in this post to open in a second, larger window.

Novices always want to start with the income statement. The income statement is too easily doctored to give a false picture. Assets and liabilities are the place you want to start, especially if concerned with the value of the business..

The above balance sheet has the head-scratcher of a negative petty cash account. In effect, this means the petty cash account is overdrawn. Someone will need to explain that one to me. 

The other account issues that make no sense is a negative loan to John Doe, a negative bank loan for equipment, negative accounts payable and receivable, and negative payroll taxes due. You might be amused by this, but half or more of all business financial statements I see each tax season have these types of errors.

To be fair, QuickBooks (QBs) is a disaster when it comes to payroll. Payroll taxes payable need to be adjusted periodically for some reason on the balance sheet. QBs even has a neat tool to make the adjustments. The rest of the payroll module is accurate, just the balance sheet has this slowly roaming error that needs periodic correction.

I’m not sure how you get a negative accounts receivable and payable. 

This balance sheet has too many loans to friends. Don’t loan money to your girlfriend from the business. Take a distribution (if allowed) and give a personal loan to your girlfriend. Better yet, don’t be your girlfriend’s banker. It never works. I see that in the office, too.

Under fixed assets we have office equipment listed without any accumulated depreciation. Land isn’t depreciated, just about everything else is. Was depreciation expense missed, too? Yup.

All these errors are the result of incorrect accounting entries. The loan to John Doe shows up as a liability because I treated it as paid from a payroll deduction. John is an employee. It takes fancy footwork to get the books this bad in QBs.

Financial records this bad are unsalvageable. You will need to start over. Fixing this mess would take more time than building a whole new QBs file. You could have a full-time business just setting up QBs files for businesses. If you never turned a client away you would have an army of employees hired to keep up. There is that much to do. Almost all records kept internally by the client are in need of attention. And if you think this balance sheet example is bad, you are wrong. This is typical. The only matter is the degree of issues involved.

I intentionally excluded the equity accounts to save time. 

 

Income Statement

You can click all financial statements in this post to open in a second, larger window.

There are plenty of concerns on the income statement, sometimes referred to as the profit & loss statement. 

There is a large amount of non-taxable revenue listed. This should be clarified and listed below sales for aesthetic reasons. I’m concerned this could be “other income” or a refund of some sort that should be listed under Other Income at the bottom of the statement or treated as an adjustment to an expense. 

Auto expense requires explaining. Was the IRS mileage rate or actual expenses used. If the mileage rate was used there is an opportunity to add the depreciation portion of the mileage rate back into income for lending purposes. (What condition is the vehicle log for tax purposes? Were personal miles mixed in?)

Contributions were really donations to charity. Sometimes a business can deduct donations as a sponsorship. Personal donations to church are not a business expense and should not come from the business account. 

Miscellaneous expenses are high and need to be accurately classified. 

Payroll and payroll expenses should utilize sub accounts. The officer’s wage looks fine (if this is an S corporation) compared to net income, but the type of business may change that determination. Removing contributions and a few other items from the expense column could leave the reasonable owner’s wage requirement a bit light (for corporations only).

The SEP/IRA is a concern. Is this a retirement account run through payroll or an IRA contribution for an owner paid out of business funds? It needs to be cleaned up or clarified. Payroll with sub accounts would be ideal to address the lack of clarity.

The business portion of Social Security is listed, but is the wrong percentage. The Social Security portion of FICA is 12.4%; half paid by the employee, half by the employer. The Social Security expense of $5,562.26 is more than 10% of the officer’s wage of $53,800. The employer’s portion is only 6.2% and there are no other wages listed on the income statement!

Payroll expenses are listed as $18,909.25. Is this employee wages? It would explain the FICA issue. This would need to be cleaned up/clarified before presenting to a bank or buyers.

Finally, utilities are not an “other expense”. This needs to be moved up with the regular expenses. The sales tax adjustment also needs addressing.

 

Cash Flow Statement

You can click all financial statements in this post to open in a second, larger window.

The cash flow statement is my favorite. I want to see where the money is coming in and going out. This includes loan proceeds and retirement of debt. If the statement is accurate it can tell you a lot about the health of a company. As you can see, this is not an ordinary business.

If the balance sheet and income statement were clean I would have confidence in this cash flow statement. However. . . 

We discussed several issues on the income statement and balance sheet which reflect here. The item I want to point out is the shareholder distributions. Added to the officer’s wage, we get the total cash the owner received from the enterprise in 2018. 

Even with terrible books we are still able to get a vague idea how much the business is disbursing to the owner. The odds are pretty good the owner received a $53,800 wage and $35,950 in distributions. Cash was negative at the beginning of the period (unbelievable) and around $34,000 higher at year-end (believable if the rest of the books were not a mess). Messy books means the business probably throws off close to $90,000 in cash to the owner, more if contributions are not really a business expense. If the books were clean we could add the $34,000 increase in cash for the year since I don’t see any lending activity.

 

Analysis and Opportunity

Obviously this was an extraordinary mess used to illustrate multiple recordkeeping issues. Many businesses have books this bad, if they have any records at all. A thriving business can fail due to mismanagement of recordkeeping. Poor records can cause a business to over-pay taxes, lose bank funding and result in a lower sale price of the business at the end of the owner’s career.

Warren Buffett has said many times Accounting classes were the most important he attended in college. I agree. Without a fundamental knowledge of accounting it is difficult to build serious wealth and almost impossible to run a successful business. With a sound understanding of accounting and financial statements you are qualified to manage most businesses and investments, including finding the true value of the asset.

You don’t have to be a banker or financial analyst to use financial statements. Investing in a stock is investing in a company and should be treated the same way as buying an entire smaller local firm. Buying income property successfully requires understanding financial statements to make a sound decision. You want to know the rent history and expenses, plus required deferred maintenance, before making a decision to buy or pass.

Since most roofers are good at roofing and poor at keeping accurate records, you have a powerful side gig opportunity to make a difference in your community while earning above average income. 

All business eventually need funding. Your ability to read financial statements allows you to consult with clients at a higher level and to gain desired result. You can handle the raw data entry if you want or farm it out to a bookkeeper. Regardless, you lead and give directions. 

Done right, you and your clients will profit.

 

Coda

So how can you start reading financial statements as a side gig or person use if you don’t know how already? You could always take a college or technical school course. Or, you can self-study. Here is a good book to get you started. It will cover 99% of what most people will ever need. Note you will still look things up from time to time. It is the nature of the skill. The linked book is a good reference source. 

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.