Sunday, September 12, 2010

Bush Tax Cuts - To Extend or Not to Extend for the "Fat Cats"

Ahhh….tax regulation reform. Everyone’s favorite time of year. Unfortunately, the current administration is wanting to let the Bush Tax Cuts expire – if not all of them, certainly the ones for individuals making $200K or married at $250K. Gang…this is a really, really, really, bad idea and will hinder further growth in the economy. Don’t think so? Let’s look at an example:


Let’s say for example, myself and a partner open an LLC business to build homes. We sell 1 house per month at $250,000. By any standards, this would be considered a small contracting operation.

Now let’s assume that all expenses (before taxes) are $180,000 for materials, subcontractors, and we both take a salary of $30,000 per year and will split the profits at the end of the year. Here’s what we have so far:

Annual Gross Sales: $3,000,000
Annual Expenses: $2,160,000
Annual Profit: $840,000

Sounds pretty good so far doesn’t it? $420,000 per year – each. But we forgot something. We want to have a 4 month supply of operating expenses. Let’s face it – we’re in home building and the market can be hit or miss right? The lumberyard also wants us to pay for our materials in 14 days – so we need the cash reserves.

So, 4 months of expenses - $720,000 in the bank. Let’s do the math again:

Annual Gross Sales: $3,000,000
Annual Expenses: $2,160,000
Annual Profit: $840,000
Cash Reserves: $720,000
Balance for distribution to owners: $120,000

So we both get $60,000 in cash from the company and are on solid footing – each making $90,000. But hold on…..we haven’t paid our income taxes yet.

What is not being realized in discussing the “Fat Cats” making $200K or $250K per year is that we have an LLC…….

In an LLC, you report your share of the income from the LLC on your personal income tax form. Ultimately, a K-1 form will be generated and given to the owners. So our K-1 will show $60,000 right? WRONG!

The K-1 will show $420,000. Why? According to the IRS reporting guidelines, the profits are to be reported WHETHER OR NOT THEY ARE DISTRIBUTED! So our cash reserves are FULLY TAXABLE! And taxed at the HIGHEST tax bracket which the administration seems hell bent on raising..oh, sorry, letting expire. See, LLC’s are not taxed as an entity. You pay the taxes on your personal return.

http://biztaxlaw.about.com/od/businesstypesincometax/f/llctaxprocon.htm

LLC Owners must pay taxes on their distributive share of the profit of the company, even if they have not received a distribution of those profits.

So in this example, I’m a “Fat Cat” taking home Gross income of $90,000 per year. BUT I report $450,000 in income.

There’s a great delusion that letting this tax expire is on Wages….It’s not…It’s based on AGI or Adjusted Gross Income. So what is the point of opening this business? I can’t see one. Not to put $45,000 a year or less in my pocket.

Now that seems like a really good stimulus to me. Kill the guy who is trying to make a living and creating jobs.

This is certainly change…but seems to be lacking the hope…..

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8 Comments:

Anonymous Anonymous said...

Whens Chad moving?

October 10, 2010 5:25 PM  
Anonymous Anonymous said...

Nice write-up DickieH. Anonymous, who is Chad and what does he have to do with the Bush tax cuts?

October 11, 2010 12:33 PM  
Anonymous Anonymous said...

Chad Littlewood

October 11, 2010 3:34 PM  
Anonymous Anonymous said...

Not sure who Chad Littlewood is. What does he have to do with the Bush tax cuts?

October 11, 2010 4:11 PM  
Anonymous Anonymous said...

Trickle down voodo has not worked. We have lost more jobs since the actor prez because we reward the selling out of our country to the neocons and the global economy. They like a healthy military and use it when ever their interests are in danger but don't want to pay for it.

So I say give the rich more and cut the corporate tax loop holds, end the neocon wars etc...etc...

Give us all a tax break!

November 16, 2010 1:48 PM  
Anonymous DickieH said...

Uhh...I'm not sure where you got your figures, but according to the Bureau of Labor Statistics on total non-farm employees in thousands:

Reagan:
Jan 1981 - 91031
Dec 1988 - 106871
Add of 15,840
Avg gain of 1980/year

Bush I
Jan 1989 - 107133
Dec 1992 - 109415
Add of 2282
Avg Gain of 570/year

Clinton
Jan 1993 - 109725
Dec 2000 - 132485
Add of 22760
Avg Gain of 2845/year

Bush II
Jan 2001 - 132469
Dec 2008 - 134328
Add of 1859
Avg Gain of 232

Obama
Jan 2009 - 133549
Oct 2010 - 130462
LOSS of 3087
No average as not full years. I can break it down into months if you would like.

So much for Saved or created...

I struggle to see how we have lost jobs over the years based on actual statistical facts. Only in the BO administration have we lost jobs.

Reagan lost jobs in 82, Bush II lost jobs in 2001 & 2008. Obama lost jobs in 2009.

http://www.bls.gov/home.htm

November 16, 2010 11:05 PM  
Anonymous DickieH said...

And it gets worse when you look at the congress:

Split congress - Gain of 6,676
Democrat Congress - Gain of 9,123
Republican Congress - Gain of 21,879

Democrat House - Gain of 18,085
Republican House - Gain of 19,941

Democrat Senate - Gain of 6,837
Republican Senate - Gain of 31,189

These aren't typos. They are real numbers. Refer to the link above to actually do some homework and not take what Rachel, Keith, and Ed say.

But I'm sure you won't respond as I've set forth factual items rather than banter.

And I won't hide behind "Anonymous".

November 18, 2010 6:49 PM  
Anonymous fake name said...

Let me make a fake name up. Better now?

December 10, 2010 11:55 AM  

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