Stimulating at a recession near you…

As a tax professional I am constantly being questioned by many of my colleagues, peers, and friends concerning this stimulus package everyone keeps talking about.  As many may already know, the bill was made law this past week  and a lot of people have no clue what it does or how it affects us.  Fear not, I have the perfect explanation, courtesy of an email my dad sent me earlier today.

Shortly after class, an economics student approaches his economics professor and says, “I don’t understand this stimulus bill. Can you explain it to me?”

The professor replied, “I don’t have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I’ll be glad to explain it to you.” The student agreed.

At the agreed-upon time, the student showed up at the professor’s house. The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, “First, go over to the deep end, and fill your bucket with as much water as you can.” The student did as he was instructed.

The professor then continued, “Follow me over to the shallow end, and then dump all the water from your bucket into it.” The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, “Excuse me, but why are we doing this?” The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn’t think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, “All we’re doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you’ll really have accomplished is the destruction of what could have been truly productive action!”

The professor put down his bucket and replied with a smile, “Congratulations. You now understand the stimulus bill.”

So as you can see from the explanation it makes no sense.  It is like a picture I once saw of Darth Vader using a water purifier to make sea water drinkable, it makes no sense…Darth Vader can’t drink water, and you cant pay debt by being in more debt…sorry all who read this previously, when I pasted the story, it was a bit mixed…

Debt + Debt x Debt x 45 = 0

So for a while now we have all been hearing about this whole government bailout for financial institutions.  Well, the dust has settled and the Obama administration has left its mark on history.  While no disrespect is intended, Obama sure has provided some “change.”

For starters, he changed the record for most money involved in a bill passed by the United States.  He will change the way some companies books look.  He will change the value of our dollar by freely throwing another $800 billion into our economy.  Sounds fun doesn’t it?

Recently a friend of mine put together a blog concerning the plans many politicians have with how to go about taking care of this financial crisis.  I will tell you right now, the worst way to reduce debt is by creating more of it, and at an exponential rate might I add.

One of the speculations of what will be done with all this money is the re-purchase of some bad assets, bad debts, bad securities, and liabilities.  This sounds great to the average person, however, such transactions can have very negative affects on a companies financial statements.  What is more is that these money hungry institutions are the reason why our economy is in the toilet.  That and our fun-loving consumers who think making $30,000 a year and spending $120,000 is a way of living.

My only concern with this idea of giving banks funds for bad assets as well as buying liabilities/securities that have gone bad is the balance sheet effects these transactions would have. What will most likely happen to most of these banks is a large extraordinary loss will be reported on their income statements due to the fact that their is no way in hell that the government will be willing to give them anywhere near the adjusted basis of most of those assets, which is what translates into a negative result for company’s balance sheets and income statements.

To explain what was said above, say ABC Bank has an asset on their books in which the adjusted basis (book value after depreciation) is $2 million.  Then say the government looks at this asset and says, “$500,000”, well now what happens to this $1.5 million difference?  See my point?  Let’s not forget what effects this will have on the stock market, granted, their is no logic that can explain that psycho ward, but say we were actually using logic to explain the stock market, this loss would be a bad thing.

The plus to that is with the new stimulus bill, these institutions would be allowed to transfer NOLs to all the way back to 2005.  NOL is the acronym for Net Operating Loss.  This refers to any net loss from a business for a specific year of business.  Usually, NOLs can be carried back two years and forwards 20 years, the beauty of this is you can use a loss from this year, to amend a prior year’s income, reduce it, and receive the tax benefit of a refund on the amount of your NOL.  Granted, the amount of the benefit is dependent on the tax bracket in which the company in, however, something is something.  Obama’s bill allows companies to take 2008 and 2009 losses back to 2005.

With most companies reporting in the red last year and this year, this may all turn out to be good on paper, however, all this does is further reduce government revenue and force us to rely more on debt as a means for financing our stimulus bills and really expensive inaugurations.

Obama’s Tax Plan

So I have to say, inspite of the fact that I never was happy Obama became president, as a tax professional, I like where his plans are going for tax credits and the like.  Obviously their are two sides to the coin and what might be beneficial to you and I, may not be so beneficial to the reduction of our budget deficit of infinity trillions of dollars.

So everyone knows, I am majoring in accounting and plan on gettting a Masters in Taxation.  I work for a Liberty Tax Service, but consider myself to know more than the average tax professional.  To put it in other words, I spend my free time going on a tax forum at About.com and posting responses to people’s questions.  I also tend to read IRS publications and receive emails whenever tax laws are updated, yeah I am crazy.

Of course Obama’s tax laws are of the utmost importance to me, and recently doing some research on his latest act, The American Recovery and Reinvestment Act (HR 598), I was actually pleased with what I saw.

I obviously don’t want to go into any major detail because I could sit here and go on and on, however, I wanted to highlight the major changes that I found important.

Among some of the changes included increases to credits like the Hope Tax Credit, the Earned Income Credit, the new Homeowners Credit, the Child Tax Credit, and a few other things as well.  I found these important as far as credits were concerned especially since one of them directly affects me.  Obama wants to change the Hope Tax Credit (which is one of the educational credits given), and allow students to include the cost of books as qualifying expenses for the purpose of calculating the credit, in addition, he also wants to increase the credit and make 40% of it refundable, which to me is huge as this credit is nonrefundable and generally only benefits a person if they have any tax liability after all deductions have been taken.

One of the major tax changes that I especially enjoyed was the Marking Work Pay Tax Credit.  With this credit, a person receives a $500 credit for the first 6.2% of earned income and this credit would either reduce the amount of FICA taxes withheld throughout the year, or appear as a refundable credit on the person’s tax return.  The wording may seem a bit deceiving, like most tax laws do, but it would greatly benefit most people, as its phaseout doesn’t start until your Adjusted Gross Income reaches $75,000.

Other things like the revised Net Operating Loss Carryback rules are a big help for  businesses.  The new law would allow businesses to carryback 2008 and 2009 losses 5 years, rather than the current 2 year limit.  What this does is allows companies that had profit in the years of 2003-2008, to reduce their previous profit with losses they may have seen as a result of the current economic downturn, which would in turn yield a refund to them, and a hefty one for most as the corporate tax brackets start at 15%.

 Granted these are just some of the credits, but you get the idea, most of the changes are just like he said, help the middle to lower classes.  Of course this is the positive side to the argument, because remember that every credit we receive is money the government doesn’t see in revenue, which you may not care to much about, however, that doesn’t help our deficit.  We’ll save that conversation for another day.  Below is the article with the information, in case you get bored… Oh and if anyone ever has any tax questions, I offer a free consultation if needed.

The cost of this new tax act you ask?  A mere 550 billion dollars….chump change if you ask GM, Ford and Chrysler….

Link

The first post…

So after much debating and thought, I finally decided to start my own blog.  Thanks to Jorge who inspired me to go forward with this.  Seeing as this first post is being made in class, listening to my Jewish Business Law professor speak about his life rather than speak of relevant topics, this post will probably be short and sweet. 

Topics that I may blog on will range from politics (don’t expect in depth stuff, not a fan of the politics) to business topics with an emphasis on accounting from time to time, and taxes, of course.  In fact if anyone ever has any questions concerning taxes, this would be a good place to ask.  If I don’t know the answer usually I’ll go to the IRS for the answer.  

God this professor talks so much garbage.  Am I not supposed to be learning about business law and ethics, no he would rather go off on some tangent and talk about his friend the doctor and some case he had with him back when the dinosaurs roamed the earth (yeah this guy is old).  

So is it just me or is everyone making to much of a big deal about Tim Tebow and his bible verses?  So anyone who doesn’t already know knows, I am a born again Christian and proud of it.  Seeing as that might make my opinion biased, just take it for what it is.  If I remember right, doesn’t the first amendment say we have the freedom of speech?  And isn’t the law “separation of church and state” not “separation of church and sport”?  I don’t say this from the stand point of a person who thinks Christianity should be shoved down your throat, more so from the stand point of a person who is simply seeing someone express themselves the way they see fit, and seeing as it isn’t hurting anyone, nor is it causing some massive riot, it shouldn’t be considered a giant public issue being heavily scrutinized by sports writers.  Their is nothing you can take away from the guy.  He is a great college QB, great person, great philanthropist, big time football icon, and he happens to wear a bible verse under his eye.  Somehow, that small 2 inch mark under is eye, is greater than his 3 years of success.  

Any way, hope you all enjoy future posts and look forward to seeing both good and bad comments.  Don’t hesitate to comment.  I don’t care if its critical or if its supportive, just post it.  Happy Sarcasm!