WHO IS PAYING THE TAX - BY STATE

President Obama recently called for letting the Bush tax cuts expire for people who make more than $250,000 a year. Senator Chuck Schumer and Representative Nancy Pelosi had previously called for an extension of the tax cuts for those earning up to $1 million dollars, only to abandon that position in favor of President Obama’s proposal.

Recently, and for the first time, the IRS published state-level data on tax returns with adjusted gross incomes over $1 million for tax year 2010. Together with data on incomes over $200,000, we can finally take a look at who might win and who might lose as a result of President Obama’s tax proposal.

Here is what people need to realize.  Returns with adjusted gross income over $1 million a year were only 0.19% of total tax returns, but 22% of total taxes paid. Those making over $200,000 were 3% of returns, but nearly 50% of income tax paid.

The Tax Foundation just published a map that looks at the percentage of federal income tax revenue from each state that is paid by filers with incomes over $200,000. Such filers make up a small percent of the population but pay a high percent of total tax revenue. Given that President Obama proposes to let the Bush tax cuts expire for single filers earning over this threshold (and for married filers earning over $250,000) this map gives an idea of the states that would be most affected.

EMPLOYEE THAT DID NOT TURN IN EXPENSES LOSES A DEDUCTION

Here is a reminder to employees about taking business expenses as an itemized deduction on Schedule A:

According to a recent Tax Court case, any expenses that an employer would have reimbursed are not deductible even if they are legitimate deductable expenses. In the case, a taxpayer listed many business expenses on his tax return, such as the cost of overnight travel, meals and parking fees that were reimbursable under his employer’s policy. The taxpayer failed to complete his expense report on time, so he didn’t seek reimbursement. Since the company would have covered the costs, he can’t claim an income tax deduction for them (Stidham, TC Summ. Op. 2012-61).

A LESSON FROM WALMART STEAKS

Years ago, Folgers Coffee scored big with a series of ads taking the viewer inside various gourmet restaurants while a voiceover whispered "we're here at such-and-such snooty restaurant, where we've secretly replaced the fine coffee they usually serve with Folgers Crystals. Let's see if anyone can tell the difference." Then they interviewed diners, who expressed shock (and no small amount of embarrassment, I'm sure), when they discovered how much they liked the schlocky Folgers instant instead of the "gourmet" brand they expected. (This was way before Starbucks elevated our palates and made us all coffee connoisseurs.)

Now Walmart has paid homage to Folgers with their own ad promoting — believe it or not — Walmart steaks. "We're here at the famous Golden Ox steakhouse in Kansas City, where we switched their steak, with Walmart's choice premium steak . . . ." (If you haven't already seen it, click here to see for yourself — do it before you read the rest of this article.)

Back? Good. I want to make two points about the Walmart steaks, with lessons for your own business:

1. The Placebo Effect: Diners who gear up for a big night out at a fine steakhouse are primed for a great meal. They expect choice ingredients everywhere, and select service from a well-trained staff. And they'll probably be pretty happy, even if the experience isn't "objectively" all that great.

This effect has been proven time and time again. Most recently, researchers at Stanford University used MRIs to study Caltech grad students' brains as they swallowed five red wines priced at $5, $10, $35, $45, and $90 per bottle. They found that as the price of the wine rose, so did the activity in the subjects' medial orbitofrontal cortexes. (Apparently, that's the part of the brain that experiences pleasure — but just reading about it gives me a headache.) The "catch," of course, is that the subjects didn't drink five different wines — they drank three. The wine presented as costing $45 per bottle was really the one costing $5 — and the wine presented as costing $90 per bottle really cost just $10. D'Oh!

The placebo effect won't work just anywhere. Diners have to really expect a great meal for it to work. Nobody who shows up at the Squat-and-Gobble All You Can Eat Buffet expects a world-class steak. They're just happy they don't see marks from where the jockey was hitting it.

2. The Walmart Effect: Walmart steaks are actually perfectly fine beef. They're USDA "Choice," which is the same cut you'll find at mid-priced steakhouses like Outback or Longhorn. (The top 3% of beef, with the most marbling, is graded "Prime." That's the stuff you'll find "dry aged" at elite steakhouses, often drenched with butter, and sometimes served with a side of Lipitor. The next 55%, with "slightly abundant marbling," is graded "choice." That's the stuff you grill at home, and it's really pretty good. Finally, there's USDA "select," which usually winds up ground into burgers.)

The problem, of course, is that everyone knows Walmart is cheap. And nobody associates "cheap" with "good." Nobody expects good steaks at Walmart. So how does Walmart get around our prejudice?

Well, here they resort to a classic "dramatic demonstration." Showing happy diners enjoying Walmart steaks. It's just like "Vince from Sham-Wow" telling the camera guy to follow him as his miracle shammy soaks up a spill.

The downside of this approach is that while Walmart tells us their steaks are "surprisingly good," at least some of us still focus on the "surprise" more than the "good."

To sum up: 1) the "placebo effect" actually lets us sell downscale stuff at an upscale price; however, 2) the "Walmart effect" actually keeps us from selling upscale stuff in a downscale environment.

Still skeptical? Ask yourself this — would you have nearly as hard a time believing steaks from Target are good?

Here's the bottom line for your business. If you position yourself as a premium provider, clients may not even realize if you occasionally drop the ball. But if you position yourself as a discounter — if you give yourself a reputation for being cheap — clients will have a hard time believing you're good!

PBA SYMPOSIUM

The Professional Beauty Association (PBA), which I have been a long supporter of, asked me to speak at the Symposium in Vegas a couple of weekends back as a breakout speaker. It was a great conference and well attended.  I enjoy getting to see some of our many clients and associates that attend also.  Since I was a MBA judge for NAHA again this year, I was fortunate enough to attend the NAHA awards- always a highlight of mine and my wife, Maggie!

If you are not a part of the PBA, please consider joining. Here is a summary paragraph describing their mission.

The Professional Beauty Association (PBA) is made up of salons and spas, distributors and manufacturers dedicated to improving their individual businesses and the industry as a whole. Members benefit from the business blueprints, statistical reports, benefit providers, education, networking opportunities, and discounts for the shows produced by PBA. For more detailed information about the benefits that you can receive as a member of the Professional Beauty Association or to join, please go to www.probeauty.org. Please feel free to contact info@probeauty.org or call (800) 468-2274 or (480) 281-0424 for more information.

QUICKBOOKS SETUP ERROR & HOW TO FIX IT #1

Since many of you use Quickbooks over the next few weeks I am going to throw in some Quickbooks tips.  I hope that you find these useful.

As we say here at my firm: Garbage in = Garbage out… so proper setup is crucial. Here is 1 QuickBooks setup error that we see the most AND how to fix it.

Chart of accounts

Account list not appropriate to reporting needs: If you are unsure if your chart of accounts is appropriate for you and your business, do a Google search. Chances are you aren’t too far off base or not as far off as you thought you were.

Redundant or duplicate accounts: You don’t want a bloated Chart of Accounts, you want a lean mean account machine so LESS is MORE! And let’s be honest here, you don’t REALLY need two or three accounts for, let’s say, telephone expenses.

Here are a few alternatives for you:

Since it is most likely that your telephone expenses are paid to different vendors, if you want to know how much you paid in cell phone expense versus what you paid in office phone expenses – you can either run a Vendor Transaction Report or run a General Ledger Report for the account in question and sort it by the vendor paid.

If you must separate them, make them sub-accounts of a main account – for instance, Cell Phone Expense & Office Phone Expense would be sub-accounts of Telephone Expenses.

If you find that you have duplicate accounts, you can merge them.

Unused accounts: During the setup process, QuickBooks can (and will) generate a Chart of Accounts for you. Sometimes, it creates accounts that just don’t make any sense for you and your business. No big deal. Here’s what you do. If you notice that there are accounts that you have never used and you will never use, you can do one of two things:

(1) if you are unsure and just want it to “disappear” for now, make the account inactive but if you are absolutely positive that you will never use the account, you can
(2) delete it

As I’ve heard it said, standing in a garage, doesn’t make you a car… knowing a bit about QuickBooks and being able to navigate it, does not make you an accounting expert. Don’t be afraid to look ask for some help.

I WON A CAR, HOW DOES THAT IMPACT MY TAXES?

Q: I recently won a car. How does this impact my taxes?

A: Congratulations on the win of the car. The fair market value of the vehicle will be ordinary income to you. There really isn’t too much you can do to reduce the tax consequences.

The following are some of the items involved:

• You will want to watch the fair market value of the vehicle that is reported on the 1099. Sometimes the value reported on the 1099 is considerably higher than the actual fair market value. This is especially true in the case of a vehicle where the sticker price is considerably higher than the real value. I would consider comparing the 1099 value to the Bluebook value. If there is a big difference, we might want to re-discuss this.
• You do not need to worry about any penalty for underpayment of estimates as long as the amount that you have withheld from your paychecks is greater than last year’s tax liability. If this is the case, you should not have to worry about underpayment penalties.
• If you are not in alternative minimum tax (AMT) and itemize deductions, you might want to consider paying your state income tax prior to the end of the year. This will allow you to have that itemized deduction in the 2012 year as opposed to 2013. In addition to this, there is some discussion of changing the tax code and eliminating the state income tax deduction. If this should happen, it would be best if you could pay that this year. It’s hard for me to give advice without seeing your actual tax situation regarding the AMT.
• This is considered gambling winnings so, therefore; should you have any gambling losses you should keep track, in that, they would be deductible. Keep documentation of your losses. There is a court case where tickets were disallowed because there were foot prints on the tickets. You will need to show that you actually had cash withdrawals to support the deduction.

Again, congratulations! Drive the new car proudly.

INVESTMENTS DO BETTER WHEN CONGRESS IS OUT OF SESSION

I just received a flier from Edward Jones Company talking about the performance of stocks and bonds under Democratic or Republican rule.

I found it interesting to note that the study found:

“more than 90% of the capital gains in the Dow Jones Industrial Average from 1997 to 2004 took place when Congress was out of session”

SHILLER’S FAVORITE FINANCIAL IDEA

The following article is from the July Forbes magazine. I thought you may be interested in what Robert J. Shiller, an economist at Yale University, view is on the American government. He predicted both the Internet and housing bubbles.

The American government should go public- literally. Here’s how it could work: The federal government would issue a trillion shares against our $15 trillion GDP and sell them to the public in an IPO. These so-called Trills would pay dividends in perpetuity or until the government decided to buy them back. Trill investors probably would accept relatively low dividends in expectation of future GDP growth, meaning America could refinance its debt at better rates. “Governments need to end their historic reliance on debt financing. Issuing shares in GDP is analogous to corporations issuing equity.” Shiller says. “Substituting Trills for conventional debt helps deleverage the government, something whose importance has become clear with the European debt crisis. Had European countries financed themselves with Trills in the past, there would be no crisis today.”

NEED TO INCREASE RETAIL SALES

In analyzing our clients financials and talking to salon owners at the salon shows, it appears the trend is that service sales seem to be holding but that retail sales are down. There are several reasons for this; diversion, over the counter products, recession, people being more careful with their money, etc. At the same time it’s up to us as owners to put systems in place to help our team with sales.

Recently I met Carol Phillips, who is a retail sales specialist. If you ever get a chance to see her at any of the shows, I would suggest that you drop into her class. She also has webinars and DVD’s that are available for sale. You can view Carol’s website at www.beauteesmarts.com