Hot Secretary, Get the President on the Phone. I Just Got Tired of Paying Taxes

[ChrisL68]

in a numbered list that your brain may be able to follow

1- accounting rules and regulations are written by accountants
2- accounting rules and regulations, written by accountants, increase in complexity year after year
3- accounting rules and regulations, written by accountants and increasing in complexity year after year, require more accountants to come up with ways to get around accounting rules and regulations, written by accountants that increase in complexity year after year
4- because more and more accountants come up with ways to get around accounting rules and regulations, written by accountants that increase in complexity year after year, more accountants are required to write accounting rules to stop accountants who have figured out ways to get around increasingly complex accounting rules and regulations that were written by accountants.

now, if accounting rules and regulations (written by accountants remember) didn't continually require more accountants to move numbers around in order to get around the increasingly complex rules and regulations (written by accountants remember) we could get somewhere. unfortunately big accounting has no interest in actually solving the problems because the more complex things are the greater the need for more accountants to get around the rules and regulations.

apparently you don't think any of this is a problem

1. Accounting rules for financial accounting are written by accountants. There has actually been a move to make that much more principles based than rules based. Regardless, due to the increasing complexity of business, there are many more rules than in the past. Again, accounting today has to contemplate transactions that didn't exist in the past.

Tax law is written by congress. The IRS has to contemplate regulations that interpret this law because there are so many variables that exist when considering tax code that if you didn't spell many of them out, it would be subject to interpretation to a much too great extent, which are loopholes the size of Kansas that the IRS would be forced to legislate in the courts.

Tax law by definition is detail oriented, rules based and complex. When you are subjecting taxpayers to involuntary forfeiture of property under the rule of LAW, then you have to have exact detailed methods to determine what is income, how it is determined, etc, etc, etc. Principles based tax law is a nonstarter.

2,3 & 4. You have a significant misconception about what most accountants do. Most of the time is spent complying with rules and laws rather than "trying to get around them". I am right now working on a huge transaction that will result in the company paying a huge sum of money that will almost all be taxed at the prevailing federal rate.

What you seem to be complaining about is mostly tax law, which isn't written by accountants. How do you suggest that taxing authorities enact simple tax laws that wouldn't be easily avoidable if the overly complex tax laws they enacted are avoidable?

At the end of the day, most laypeople have this idea that things didn't end up the way they are for a good reason. Like things could just be magically simplified and it wouldn't create loopholes the size of Kansas.

 

[buckets]

I mean don't all technical rules get more and more complicated over time unless there's a deliberate reset?

Tax law is dumb as shit and not logical and I don't think anyone would argue otherwise

 

[dartsndeacs]

There's tons of waste in accounting. Nothing worse than state taxes IMO. I coordinated the taxes all by my lonesome on a 50,000 page tax return. I had no idea what I was doing. 800 investors getting K-1's from 30 different states.

 

[DeaconCav06]

There's tons of waste in accounting. Nothing worse than state taxes IMO. I coordinated the taxes all by my lonesome on a 50,000 page tax return. I had no idea what I was doing. 800 investors getting K-1's from 30 different states.

MLP?

 

[dartsndeacs]

Oh, and all the investors were rollover claimants from a bankrupt ponzi scheme that had all invested in tax deferred realestate with basis issues dating back 30 years. Fun times.

 

[ONW]

Oh, and all the investors were rollover claimants from a bankrupt ponzi scheme that had all invested in tax deferred realestate with basis issues dating back 30 years. Fun times.

That sounds not fun. 1031 exchanges?

 

[dartsndeacs]

That sounds not fun. 1031 exchanges?

Yes, a buncha TIC investors all 1031'd into a single property. The manager had 100+ properties and started comingling funds, got indicted, then in bankruptcy that basis got transferred into a company with the 50 or so properties that got bought out of bankruptcy, but these investors got a piece of that new company, which had properties in about 30 states. So we had to teach composite state return laws to 800 investors over the age of 60 that all got defrauded so werent happy to begin with. And by we, I mean me. And I don't have a tax background.

 

[ChrisL68]

Yes, a buncha TIC investors all 1031'd into a single property. The manager had 100+ properties and started comingling funds, got indicted, then in bankruptcy that basis got transferred into a company with the 50 or so properties that got bought out of bankruptcy, but these investors got a piece of that new company, which had properties in about 30 states. So we had to teach composite state return laws to 800 investors over the age of 60 that all got defrauded so werent happy to begin with. And by we, I mean me. And I don't have a tax background.

That must have been fun getting all of those consent forms in order.

 

[ONW]

Yes, a buncha TIC investors all 1031'd into a single property. The manager had 100+ properties and started comingling funds, got indicted, then in bankruptcy that basis got transferred into a company with the 50 or so properties that got bought out of bankruptcy, but these investors got a piece of that new company, which had properties in about 30 states. So we had to teach composite state return laws to 800 investors over the age of 60 that all got defrauded so werent happy to begin with. And by we, I mean me. And I don't have a tax background.

How long did this take you to sort out? That sounds like an absolute nightmare.

 

[Deacon Dog]

Accounting rules and regulations are written by accountants but, as often as not, prompted by the non-accounting investment community. The process allows everyone to comment on proposed standards, and what's useful to the financial statements users is given a lot of weight. One example is fair value accounting. A financial statement user may find it useful to know that an asset purchased for $200 and depreciated to $150 is worth $10 not because of a temporary market decline but because of a permanent devaluation. But this seemingly simple standard comes with a lot of complexity such as determining when it's appropriate to reflect market fluctuations on the balance sheet and how assets should be valued when no public market exists.

Replacing corporate income tax with some sort of fee is kind of like a flat tax argument: sounds reasonable on the surface but not so easy to fairly administer. How would size be measured? Neither gross revenues nor assets would be appropriate. For example, take two companies both with the same net income, but company 1 is a retailer with low margins and inventory such that its gross revenues and assets are inflated compared to company 2 which is a service business with very high margins that distributes most of its income such that it has relatively low gross revenue and assets. Would it be fair for these company 1 to pay a higher "fee" than company 2?

 

[deacdiggler]

well, since the milhouse plan is to get rid of the accounting rules since they're too complicated, we can just let retailers book their margin as revenue. kind of like a commission on the sale of each item of inventory. Voila: revenue cut by 99%.

 

[Wrangor]

This is the dumbest thread on the boards. So dumb that I just can't look away.

ChrisL is straight up murdering folks in here. It's an embarrassing intellectual blowout.

 

[Deacon923]

Taxing corporations based on size has been around forever. It's called the franchise tax. Calculation varies from state to state, but often calculated by reference to market capitalization, asset base in the state, gross sales, or some mixture thereof. it is usually a small part of the corporate tax burden. because it is state based, corps play all kinds of games to avoid paying it (like keeping their intellectual property i.e. the brand name "Wal Mart" in an IP holding company and licensing it to the subsidiaries in the states with franchise taxes, so they can both keep their asset base low and also deduct a licensing fee from their state income tax).

Anyway, the problem is not accounting. The problem is the Wall Street culture of financializing everything and incenting market actors to find ways to make money through clever manipulation of accounting and tax rules as opposed to creating some kind of value.

 

[ChrisL68]

Taxing corporations based on size has been around forever. It's called the franchise tax. Calculation varies from state to state, but often calculated by reference to market capitalization, asset base in the state, gross sales, or some mixture thereof. it is usually a small part of the corporate tax burden. because it is state based, corps play all kinds of games to avoid paying it (like keeping their intellectual property i.e. the brand name "Wal Mart" in an IP holding company and licensing it to the subsidiaries in the states with franchise taxes, so they can both keep their asset base low and also deduct a licensing fee from their state income tax).

Anyway, the problem is not accounting. The problem is the Wall Street culture of financializing everything and incenting market actors to find ways to make money through clever manipulation of accounting and tax rules as opposed to creating some kind of value.

You are correct. Many states have enacted laws requiring companies to add back related party intangibles and interest expense, so the benefit isn't nearly as great as it used to be.

And sometimes you can actually get whipsawed on net asset bases and have to essentially count the same investment twice for franchise tax purposes.

 

[deacdiggler]

Taxing corporations based on size has been around forever. It's called the franchise tax. Calculation varies from state to state, but often calculated by reference to market capitalization, asset base in the state, gross sales, or some mixture thereof. it is usually a small part of the corporate tax burden. because it is state based, corps play all kinds of games to avoid paying it (like keeping their intellectual property i.e. the brand name "Wal Mart" in an IP holding company and licensing it to the subsidiaries in the states with franchise taxes, so they can both keep their asset base low and also deduct a licensing fee from their state income tax).

Anyway, the problem is not accounting. The problem is the Wall Street culture of financializing everything and incenting market actors to find ways to make money through clever manipulation of accounting and tax rules as opposed to creating some kind of value.

I totally agree with this. This was Enron's entire business. It was designed to "make money" exploiting these rules.

On another point, it's interesting to see how different people view this argument. People who don't understand accounting think that it's because some shadowy cabal of accountants has created this monstrosity, while many of the accountants would be fine to go back to a simpler time where cost basis is king. The problem is that the old ways of accounting for things simply don't give investors the information that they want. For example, under the old rules of accounting, Time Warner would never have impaired its investment in AOL. Instead, goodwill would have sat on the books for decades and there wouldn't have been huge losses booked on the writedown of goodwill. Time Warner may not have ever had an incentive to get rid of AOL. Now, when you make a crappy investment in a target company, it's exposed in the year where the bottom falls out, and management can be held accountable. Is this more complicated? Certainly. But clearly it's a better representation of the company's actual performance.

Complaining about how complex the GAAP/IFRS rules are is like complaining about how you can't fix your own car anymore, since there are so many computerized gadgets involved. Yes, it's more complicated than it used to be, but the improvement in performance is totally worth it.

Finally - these rules are improving transparency and corporate reporting. Will they stop economic crashes? Hell no. If people choose to invest in businesses that lend money to strippers to buy $500,000 homes, then there is no amount of financial transparency that will stop them.

 

[Wrangor]

Taxing corporations based on size has been around forever. It's called the franchise tax. Calculation varies from state to state, but often calculated by reference to market capitalization, asset base in the state, gross sales, or some mixture thereof. it is usually a small part of the corporate tax burden. because it is state based, corps play all kinds of games to avoid paying it (like keeping their intellectual property i.e. the brand name "Wal Mart" in an IP holding company and licensing it to the subsidiaries in the states with franchise taxes, so they can both keep their asset base low and also deduct a licensing fee from their state income tax).

Anyway, the problem is not accounting. The problem is Human Nature.

FIFY

There is no human institution that humans will not intentionally exploit to maximize one's own personal interest. From welfare, to tax systems, to government contracts, to non-profit work, to you name it. It doesn't matter how noble or fair the institution is created to be, it will be exploited.

(This is not specifically to 923, but made in general to posters coming at ChrisL)One can certainly make an argument that simpler accounting rules will make for a safer system, but if you are going to make that argument, then make it. Don't demonize the people who are involved in the current system. We have a lot of crazy accounting rules in farming mainly because our crop carries over in grain bins to new calendar years, we have pre-pays on inputs, amongst other weird quirks of our industry. We have government programs like CRP and ARC and in general we need people a lot smarter than us to tell us what to do. So I really appreciate our accountants, and they are good people who are trying to do their job to the best of their ability. Just like any profession, the vast majority of the people in the profession are just doing a job. When you see an opposing opinion start to assign motive, you know they are operating outside of common sense. Which is why I applaud ChrisL for his responses. on this thread. I don't often agree with him, but he has pretty patiently answered a lot of really leading, stupid questions, and done so informatively and succinctly enough for the average poster to understand.

 

[2&2 Slider To Leyritz]

I've brought this up before and haven't received a substantive rebuttal. Why not move toward upfront corporate fees based on the size of the corporation rather than some measure of revenue?

It depends what you mean by "size", but that is basically what business personal property taxes are. It is used all the time as the basis for tax at the County level. NC also imports that same reporting requirement into their corporate state income tax returns.

As has been noted, however, is that it has absolutely nothing to do with cash flows or a company's ability to pay the resulting bill. Even at the local level with relatively low tax rates, that asset-based tax bill is enough to cause many small businesses to teeter on the brink of insolvency because it has absolutely no bearing on revenue or ability to pay while still making a profit.

 

[Wrangor]

Taxing based primarily on size would also encourage businesses to minimize their size and take efficiency over maximum growth (some companies do this already, but many choose to grow in size and scope as they grow in profit - Amazon would be a great example of this). The easiest way to minimize your overall overhead and size and maximize profit is to shed labor. Taxing based on a company's size would be the equivalent of a jump to conclusions mat.

 

[Deacon923]

I agree, taxing based on size is not a good idea. When you have too many disadvantages to being big, it hurts the overall development of the economy and small business especially. You see this in some of the European countries especially Italy and France, where a lot of worker protections and other costs kick in at 40 or 50 employees. As a result when you look at businesses in those countries you have an abnormally large cohort of businesses with 49 employees. There are huge incentives to avoid growing to 51 or 55 employees; unless a company has a guaranteed opportunity to make money they will try to stay small unless they can make a big jump from 49 employees to, say, 100 or more in order to get a big contract.

I can see an argument to be made for a more robust franchise tax (or something similar) on very large companies. They have plenty of cash to pay, even if they are losing money in a given year, and their size gives them a lot of influence in the economy and politics as well as implicit government backing in some cases. But you want to avoid doing anything that will impact entrepreneurism or make the overall tax code even more complex than it is now, and it's hard to figure out how to do that.

 

[Wrangor]

I agree, taxing based on size is not a good idea. When you have too many disadvantages to being big, it hurts the overall development of the economy and small business especially. You see this in some of the European countries especially Italy and France, where a lot of worker protections and other costs kick in at 40 or 50 employees. As a result when you look at businesses in those countries you have an abnormally large cohort of businesses with 49 employees. There are huge incentives to avoid growing to 51 or 55 employees; unless a company has a guaranteed opportunity to make money they will try to stay small unless they can make a big jump from 49 employees to, say, 100 or more in order to get a big contract.

I can see an argument to be made for a more robust franchise tax (or something similar) on very large companies. They have plenty of cash to pay, even if they are losing money in a given year, and their size gives them a lot of influence in the economy and politics as well as implicit government backing in some cases. But you want to avoid doing anything that will impact entrepreneurism or make the overall tax code even more complex than it is now, and it's hard to figure out how to do that.

Good post. I can see your point with the franchise tax, but not sure about adding more taxes right now with Obamacare still looming over all of our businesses' collective heads. Your point about 49 employees is one of the exact reasons why ACA was so dumb. You are seeing the same kind of 'strategy' to deal with ACA. Once you get to 50 you are required to give healthcare. So you have part time employees and other management strategies to avoid enormous penalties. Business doesn't thrive in those conditions because you are reacting to factors that have zero bearing on the true success of your company. You are just trying to manage and survive. ACA needs to be killed, and the sooner the better.