Bradley Kirschner CPA: Reflections

It was in the Summer of 1960 when we first met, me an adolescent just beginning to learn the secrets of life, and she, older and of indescribable beauty. It lasted only a week, but was the beginning of a lifelong affair. I was able to visit her again the following Summer, but then a long lonely spell until fifteen years later I moved to Seattle to be closer to her. Our meetings became more frequent and more extended. I would relish in every opportunity to visit and be with her.

I knew I was not alone in my love of her. Several years after moving to Seattle, I experienced a group singing her praises with such passion that it brought tears to my eyes—tears not of jealousy, but tears of love knowing that I shared their love and passion. I knew I was in love, and still am in love in a way I have never known before.

I speak, of course, of Canada—the country and her people. It is this love that prompted me to become a Chartered Accountant in British Columbia as well as a Certified Public Accountant in Washington State. It is this love that caused me to encourage my wife to claim the Canadian Citizenship that is hers, although I have to admit I was quite jealous when she recently opened the envelope containing her Canadian passport.

A video slide show celebrating Canada’s beauty. (Requires Microsoft Powerpoint) The audio is in French, which I don’t understand, yet in hearing the song while looking at the images, in my heart I do understand.

The December 12, 2008 edition of the Seattle Post Intelligencer contained an article headlined “Task force suggests sales-tax expansion”http://seattletimes.nwsource.com/html/localnews/2008499727_educationtaxes11.html. The article suggests an expansion of the state and local sales tax to include amounts paid for services, including the amounts you pay me. From my client’s perspective, the costs of my services will increase by 9% for those residents of Washington. From my perspective, I will need to explain the changes to my clients and implement procedures to collect, remit and report on the sales taxes collected.

Will it happen? The article indicates that any expansion of the sales tax will be submitted to the voters in the form of a referendum. I think it is likely such a referendum will be passed by the voters, but I don’t think such as tax is likely before 2010.

A referendum is a created by the state legislature. The Washington State Legislature begins its regular 105 day session on January 12, 2009. If the Legislature were to approve a referendum, it probably would not be on the ballot until June. If such a referendum were to pass, sufficient time would need to be given for the Department of Revenue to design forms and communicate with those service provides would be collecting those sales taxes. Businesses would need to create procedures and modify software to properly account for the sales taxes being collected. All of this taxes time, which is why I believe that if there is a change, it will be effective in 2010.

I write this to raise your awareness. Nobody like to pay more in taxes, and no business likes to the add to the complexity to doing business. But we live in troubling economic times—times when we still need to fund education and basic governmental services. This may even be a “wake up” call to look at our overall taxing structure and determine if there is a better way to fund government.

Last night was an historic occasion. It was historic because we elected an African-American man to be the 44^th President of the United States, but that is not the reason I write this. It was historic because it represented a major change in the political direction of the Country, which implies a rejection of the past direction, but that is not the reason I write this either. As I listened to McCain’s concession speech, and Obama’s acceptance speech, I was struck with the hope and optimism that we can get beyond our partisan bickering and work together to live by the principles and ideals that made this country great. The speeches were not as inspiring as JFK famous “Ask not what you can do for your Country” speech, but they were close. I am hopeful

I deal in the world of taxes. In this morning’s Seattle Post-Intelligencer was the following letter. Reading beyond the partisan language this article raises an interesting and important question of tax policy:

We have heard about the economy and tax reform from both presidential candidates. I am a tax practitioner and I have created the following scenario. Couple A has investments generating "qualifying" dividend income of $100,000 per year, which represents $2 million of stock ownership. Couple B are both wage earners, each earning $50,000 for a total household income of $100,000. They each have mortgage interest of $10,000, a sales tax deduction of $1,597, property taxes of $4,000 and charities of $2,000.

Couple A pays $5,000 in income taxes and Couple B pays $12,000 (not to mention $7,650 of social security taxes). This is a simplistic example of economic policies of the Bush administration. The jobs they created? Maybe some domestic help at minimum wage (probably paid under the table). Wealth redistribution? Let's just say it has gone the wrong way for too long. I hope relief is considered for those who work for their income rather than those whose incomes work for them.

Couple A is NOT paying for day care, transportation, clothing or any of the other costs associated with working for a living. Couple B is struggling AND paying more in taxes.

Anne Griffin

Mukilteo

In my thirty-eight years of tax practice, I have seen the tax pendulum swing. Certain capital gains have always had a preferential tax rate. When I started, the maximum income tax rate was 70%-now it is 35%. While the maximum tax rate remained 70%, the maximum tax rate on income earned from wages or self-employment was reduced to 50%. Then the maximum tax rates were reduced over time, but were equal for all types of income, except for certain capital gains. Finally the maximum income tax rate on qualified dividends was reduced to be the same as that on certain capital gains, and the tax rate on certain capital gains was again reduced.

Capital gains have always enjoyed a preferential tax rate because they represent the gain in an asset’s value over time, often due to inflation rather than a true increase in value of the asset. In some countries of the world, capital gains are not taxed. Modern investment philosophy, at least until the current financial meltdown, has taken a “total return” approach to investment returns, treating the growth in value (capital gain) and the return on investment (dividends or interest) the same, which led to the reduction of the tax rate on dividends. Of course they are not the same. A capital gain is only taxed when the asset is sold, while the dividend is always taxed when it is received.

Ms. Griffin’s analysis invites us to again look at the equity of our tax system as we consider the disparity between how one’s income from his or her work is taxed as compared with how one’s investment income is taxed. The disparity is even greater for the person who is self-employed, as his or her social security burden is double that of the employee.

As we look at the hope and optimism of last night’s historic election, I pray that tomorrow’s actions will bring tax equity to the vanishing middle class of Americans.

When I started my own CPA firm, I faced the dilemma that faces most professionals at the start of their careers—how do I find clients—how do I sell myself—how am I going to earn enough to feed my family and pay the mortgage. A mentor suggested I join the local entrepreneur group. This group consisted of entrepreneurs seeking funds for their ideas, investors looking for the next “Microsoft,” and “hangers on” like me, other accountants, lawyers and consultants looking for that next client. I went to the monthly breakfast meetings, served on the board of directors, assisted in the review of many business plan submitted by entrepreneurs and for several years wrote the tax column for their newsletter. My efforts failed to generate a single client, but in hindsight were very beneficial for me.

One of the first questions I learned to ask is, “what is your exit strategy?” Looking at the end—the sale of the business, retirement, death, change of career, etc. has enabled to look at the big picture, and consider the impact of decisions to be made and how those decisions will affect the future.

Elsewhere on the website is commentary on The Eleventh Commandment. This article was written in response to plans created by myopic thinking—plans that seek to accomplish a short-term goal without considering the long-term consequences of the plan. It can be costly to assemble to components of planning team and to do the analysis, but it is far more costly to try to undo the damage caused by poor planning. On a more personal note, it is very difficult to tactfully tell a new or prospective client that there is no low tax way to undo the damage done because the previous advisors didn’t understand or failed to consider the big picture.

The sales person coming to call is an important part of being in business. Although the visits are often at inconvenient times, it is through the sales process that I learn about the products and services that are currently in the market place; it is how I learn what might be useful to me and my clients. I welcome most of those who call on me.

Most of my business clients know I believe in outsourcing payroll to a specialist. It will remove a great deal of grief from the business owner, which alone is worth the payroll processing fees, not to mention the relief from penalties. There are three major players in the payroll processing industry that focus on the growing business-ADP, which has a successful history in corporate America and is now focusing on attracting the smaller business, Paychex, which got its start serving the smaller business, and Intuit, the publisher of the hugely successful QuickBooks accounting program. Although I am a QuickBooks fan and am a Certified QuickBooks Pro Advisor, I tend to favor ADP and Paychex, because they each have a real live breathing sales person who will do what it takes to make sure their clients are happy. They also offer related Human Resource products, such as retirement plans and HR management.

The ADP sales person called on me the other day. I was discussing my Web site with her, and suggested I might include a link to ADP for those who are seeking payroll processing services. (I would also include a link to Paychex.) The representative responded a couple of days later and offered me a deal where I would receive a percentage of the revenue earned by ADP from referrals from me and my Web site. I was angry! I was offended! I hope that when I refer a service to my clients it is because I believe it is in my clients' best interest. I get compensated for the referral by having a satisfied client who continues to use my services and refers others to me.

Now Paychex isn't all that clean. Paychex is the recommended service of the American Institute of Certified Public Accountants, the national trade group of my profession. I strongly suspect that the recommendation was the result of some payments to the AICPA, rather than the AICPA surveying the market place and choosing the best.

Why say all this? I only hope my profession gets its act together and doesn't further tarnish its image by recommending products and services based on what's in it for them, rather than what is best for the client.

As a follow on to this discussion, I received a call from a representative from a New York based lender that offered me a commission for any loan made as a result of my referral—or he could reduce the cost to my client by the amount of what would have been the commission. I ponder this proposal. Is it the same as the payroll proposal, or am I offering a benefit to my clients if I refer them to this lender? I welcome your thoughts.

The original title of this section was Rants and Raves, but perhaps the new title is more descriptive. The web site is designed to provide information to clients, prospective clients and friends and to describe the qualifications of and the services provided by the firm. I hope it will also provide the flavor and uniqueness of the firm--that is the purpose of this section. I invite your feedback to brad@bwkcpa.com.

I write this reflection five days after Connor, my first grandchild was born. It seems like a good time to reflect on the future as it pertains by my profession.

The accounting profession’s reputation in both the United States and Canada has fallen on hard times of late—much of it deserved. The hallmark of being a Certified Public Accountant, or a Chartered Accountant, is our objectivity and independence. A Canadian colleague put it best, “truth spoken without bias.” Somewhere we have been subverted by our quest for more money, and by the leaders of our national organizations, the American Institute of Certified Public Accountants and the Canadian Institute of Chartered Accountants, in their quest to protect and expand their influence. We have lost site of our objectivity and independence.

There is a difficult line, sometimes, between our role of advisor and advocate for our clients, and being the independent and objective accountant offering an opinion on a company’s financial statements. It is a challenge to tell the truth without bias, when telling it might result in the loss of a client. We must rise to that challenge.

Accounting used to be a principles based profession. Principles, however, are difficult for one who was never raised to have principles, or who cannot resist the pressure to perform when it means compromising one’s principles. In response, we moved to being a standards based profession, where there are rules for everything. The problems with rules is that there are so many of them that it is virtually impossible for one to know all of them, and rules invite one to find the loophole in the rules to squeeze through. That has been the problem with so many of the corporate accounting scandals of the past few years.

We are finally moving back to a principles based profession, which I think is good. It means that I will have to be vigilant in looking at all my activities through the lens of maintaining my objectivity and independence, while still doing what is best for you, my clients. It means I have to say “no” more often to some who pass through my doors seeking my services. It means I will have to involve my clients more directly in accounting decisions that I formerly made for my clients. In the long run, it will involve working more closely with my clients and that, as Martha would say, is a good thing.