I’m Making Them Birds

While you can't just paint over all your mistakes or confusion, you can choose how you let them affect your mindset. Photo by Suna

This post originally appeared on the Hermit Haus Redevelopment website on 2018-10-06 .

Starting with Why: Every day in business, you encounter things that annoy, frustrate, or confuse you. I wanted to talk about how I've chosen to accept some of the things I cannot change.

One of the more frustrating points about running a business is that you can either know what it’s really worth or keep accurate books for taxes. And never the twain shall meet.

Businesses are punished on their balance sheets for being good negotiators. At the same time, they are required to take totally fallacious “expenses” while being forbidden from taking real ones. Here’s a few examples:

• Cost basis
• Depreciation
• Capitalized expenses

Cost Basis

We recently bought an asset from a motivated seller for much less than its appraised value. We got our loan based on the appraised value, but we are required to book the building at the purchase price. As Zacks explains:

Under corporate accounting standards, when a company acquires an asset, it puts that asset on its balance sheet with a value equal to its "historical cost" – what the company paid for it. If it's a fixed asset with a limited lifespan, such as a building or a piece of equipment, the company gradually depreciates that asset over time, which reduces its balance sheet value. Even if the company has good reason to believe that an asset has risen in value, it still cannot increase that asset's "book value," the value reported on the balance sheet.

So we have a $120-thousand building we have to book as an $80-thousand asset. And we have an $85-thousand loan against that asset. So our books show us with $5-thousand of negative equity instead of $15-thousand it positive equity. Our books show us making a stupid purchasing decision instead of a really good one.

Depreciation

Now factor in depreciation. Nobody doubts that assets (be they machines or real estate) eventually wear out. Rather than qualifying that wearing out, businesses are required to take what I like to call “stylized depreciation.” (“Stylized” sounds so much better than “fictional.” Doesn’t it?) I think the real term is “standard depreciation.”

The IRS assumes a 39 year life for commercial buildings and a 27.5 year life for residential rentals. For the asset I mentioned above, we’re required to write down 1/30 (2.654%) of the $74-thousand valuation of the building—not the land—every year until we eventually show no value for the asset except the cost of the raw land at purchase. And remember depreciation affects value. So our building will be worth about $1,900 less every year. It will show negative equity for 10 to 15 years.

We must really suck at business! We don't, but that's the story our books will continue to tell about this building.

The only good thing I have to say about depreciation is that it also reduces my net taxable income. Maybe not as much as my actual expenses would if they were not capitalized, but every little bit helps.

Capitalized Expenses

Capitalized expenses are pretty much what they sound like—expenses businesses are required to show as assets. Sometimes that makes sense. One of the first things we’re going to do with our new building is to spend about $6K on a new HVAC system. That’s money we have to spend (an expense) but it also pays for an asset that should last a few years—probably longer than its depreciation period. That means it increases the value of our building until it doesn’t. (I don’t know how long that is, which is why we pay a good CPA firm lots of money every year. Luckily, I think that counts as an expense.)

But sometimes it doesn’t make sense to capitalize expense. All or the settlement costs, including legal fees, we paid to buy that building are capitalized. We spent the money on a one-time service with no ongoing value, but nope! That’s an asset, not an expense.

All these (and other) factors encourage businesses to churn their holdings. If you hold a building long enough, it looks like you are broke no matter how much the building is actually worth. But if you churn your holdings, you can make it look like your business is growing, even if you pay too much.

As I write this post, I’m wearing a T-shirt with a picture of Bob Ross painting. The caption talks about repainting mistakes to make them into birds. So rather than get all “Back in Black” about these accounting idiosyncrasies that make it so hard to know how well my businesses are doing, I’m making them birds. I like birds. Birds make sense.

Tracking Mileage: Two Apps Reviewed

You can summon the power of the Cloud to save on your tax bill. I tell you which app works best for me and why. Image by: Bitmoji

This post originally appeared on the Hermit Haus Redevelopment website on 2016-05-04.

Everyone pays taxes. Business people can deduct expenses related to generating the income their business produces, including expensing a corporate or personal car used in the business. In fact, most companies reimburse their employees' car expenses. So you don’t even have to own a business to be reimbursed for or deduct the use of your car in your or your employer’s business.

But the IRS requires you to keep records of how and when you used your car, and most of us are not very good at remembering to keep track of that. So most people under or over report the use of their car. Both are bad. If you under report, you’re paying more in taxes than is fair. If you over report (meaning you can’t substantiate your usage), you could face penalties in addition to the loss of deductions if you are audited.

Historically, I have erred on the side of caution and under reported. That is, I reported only what I remembered to document.

Wouldn’t it be great if your smart phone—something you have with you all the time—could document your car use for you? Apparently, some clever programmers thought the same thing. In this post, I’ll review two apps that keep track of your mileage for you. It’s no big secret; I wasn’t satisfied with the first one, so I bought the second one. I’ll talk about them in order.

Disclaimer Time!

Both of these are iPhone apps, but they are also available for other platforms. Since the iPhone is almost idiot proof, it’s what I use. I can’t tell you if the Android or Windows versions of these apps are available or if they differ from the iPhone versions. Future versions of these apps may address some of the shortcomings of the versions I review here.

Both apps provide usable mileage reports and estimates of your mileage deductions. I paid the full subscription price for both apps, and I have no investment in either company.

Mile IQ 1.7.1

The terminal points of the trip are all that appear. In this case, Barrington Oaks is in North Austin. Oak Brook sometimes shows up as Austin or the neighborhood name.

When I first started using Mile IQ, I was impressed. I would have finally an automatic, accurate record of my business miles. The app works very well at the basic level of detecting when you start moving and when you stop. But the more I used it, the more dissatisfied I became:

• Categorizing trips is easy. Swipe the map right for business, left for personal. Those are you only options.
• Mile IQ only tracks your starting and ending locations. Then it calculates the most direct route between them, regardless of the actual route you traveled. Worse, if you start and end at the same location as you often do when driving for dollars, it doesn’t think you have gone anywhere, so it doesn’t record the trip. The way Mile IQ calculates your mileage almost guarantees you’ll underreport despite using the app to capture your data.
• The app only records the name of the city where you start and stop—not necessarily the city you would think and not necessarily the same name for every trip. This idiosyncrasy makes it easy to misidentify trips because you don’t recognize your terminal points. The map is shows isn’t detailed enough to help you identify the points either.
• In Texas, there is only one season: construction. Roads are always under construction, which backs up traffic—especially on two-lane roads that are reduced to one lane for miles during rush hour. I’ve had Mile IQ break up a single trip into three because it logged each time I had to wait for traffic to clear. (Unfortunately, there are times when even the Googles can’t route you around construction.)
• But my biggest problem with the app is that the IRS requires you to list the business purpose of each trip. Mile IQ has no way to record that in real time. Instead, you have to wait until you can download an .CSV file and manually add the purpose to each recorded leg of each trip. If you can identify the leg by its esoteric termini. If you can then remember why you stopped in BFE three times on the way from Burlington to McNeil on a day you thought you traveled from Cameron to Austin. [I did find out later that you can add notes to each leg, but I don’t know where these notes show up on the reports.]

Basically, Mile IQ has a lot of unrealized potential. Unless it drastically improves, stay away from it. It will waste your time and money while taxing your memory in the false promise of making your life easier.

Taxbot 6.2

You can see the actual route I drove was not the most direct. And the bathroom break mid trip did not force me to explain if I went #1 or #2.

A salesman at the AT&T store who sold me a replacement iPhone told me about Taxbot. He said he had used it for his sideline business selling health supplements, and his accountant loved the report it provided at the end of every year. I was intrigued. Not only did Taxbot overcome all of the shortcomings of Mile IQ, it also tracked income and expense. But I’m getting ahead of myself.

• Taxbot uses more bandwidth, because it tracks your actual route, giving you an accurate measure of the mileage you traveled, including round trips.
• As you categorize each trip as business or personal, you can enter the business purpose, the company name, and the vehicle you drove.
• Taxbot has a longer wait to determine the end of a trip, so it may actually combine trips for different purposes. To overcome this minor irritant, you can tap an End Trip button if you need to. I’d much rather do that than explain that I was stopped in traffic three times on the same trip leg.
• Besides all that, Taxbot lets you record income and expense transactions. You can even attach pictures of your receipts to the transaction. (I haven’t actually figured out how to get these pictures back, so I’m still keeping manual duplicates.)
• The only problem I encountered was that it failed to recognize the paid subscription from the iTunes Store. But it’s hardly the only app that has problems in that regard. A quick call to support straightened the biling out.

At twice the price ($9.99/month or $99/year), Taxbot provides eight times the value of Mile IQ. If you don’t save many times over the cost, you’re either too organized or not working hard enough. Now if it only talked to Quickbooks.

Taxes

Taxes hurt, especially when you can’t plan for them. Photo source: Bitmoji

Let me tell you how it will be

There’s one for you, nineteen for me

‘Cause I’m the taxman, yeah, I’m the taxman

—George Harrison

I got a property tax bill in the mail today from DeWitt County for the Yorktown farm. Property taxes in Texas are usually due by the end of January. This is February. Surprise!!

Without going into too much detail, let me just say that the bill is well into the five digit range. And because they would normally have been due a few days ago, I just took advantage of an investment opportunity, so I don’t have that kind of free capital. I don’t like to let my money be anywhere near as lazy as I am. I want it to work for me.

“I’ll get you…and your little dog, too. You’ve got to pay your taxes. Pay! Pay!” Photo source: Villains Wikia

There are a couple of bright spots on this dung heap. First, the county admits they were late getting the tax bills out (because they were “understaffed,” they said—whose fault is that?). Because of that, they are allowing until the 27^th to pay the taxes “without penalty.” That would be nice if people (other than my dad) left that kind of money lying fallow in a moldy bank account somewhere. Now I have to find it.

The real bright spot is that I “paid myself first,” as Robert Kiyosaki puts it. I put my money to work in an investment that will earn far more than the penalties I’ll incur for paying the property tax late. And since there are a half dozen separate bills, I can string the county out paying them off over time as more money come is.

This situation worked out much better than if I had paid the taxes before the opportunity came along.