Chapter 50

April 13, 1979

Ted Brooks peered over his half rim glasses to examine Tim and Benny. They had opened their books for him so that he could prepare their tax forms. Their records were first rate and he enjoyed working with them, although the quality of their books was due more to Cathy’s efforts than either of the two young men. It was hard to believe that two guys so young were worth so much. He had watched them slowly grow the net worth of their businesses.

He looked over the page that listed their assets. The first item on the list was a 1935 Chevrolet Standard Phaeton with an insured value of $35,000. The second item on the list was a 1940 Ford Truck with an insured value of $7,000. The third item was the office property with a house and an outbuilding with an insured value of $48,000. The fourth and fifth items were two other vehicles which were estimated to be worth a $1,000, each.

Their rental from their office property was bringing in $3,000 a year. They were getting $500 a month as payment for the office cleaning business which was a nice little $6,000 a year. There had been the home they flipped for a profit of $6,000 (it was the only thing they had to pay capital gains taxes on that year). There were the two loans for $15,000 which they were paying to Two Guys Working. There were contracts for $66,000 to rebuild 7 homes, of course 5 of those homes had been finished by now. Two of them had been paid in the previous tax year to the tune of $20,000 each. There was the revenue stream from the software which had brought in $29,000 the previous year. There was even a nice little $8,700 from painting curbs over the summer.

He estimated the worth of their company at $530,000 based on the revenue and assets. That didn’t take into account that huge well of money that was in the investment account. The end of year value of that was a very nice $96,000. They had been lucky that Robert had been honest in how he had operated. All purchases and sales had been under the banner of the corporation that he had created so it had paid taxes. He had treated their $500 as an initial investment which hadn’t had any returns. Until they took something out, they didn’t owe any taxes on it.

There was one other little asset that was tucked away. That was a $1000 investment in the stock market they had made back in 1976 which was now worth $3,000.

They had written paychecks to themselves for a total of $6,000 each for the year, but they’d had to deal with the profits from the LLC. Their company had made a lot of money and they’d had to integrate that into their income for the year. They had to pay taxes on a profit of $48,000 for the year. That was split between them at $24,000 each. It was getting harder and harder to hide that kind of profit.

Personally, they were doing quite well financially beyond what the business was bringing them. They each owned two houses. Benny’s houses were valued at $38,000 and $18,000 (until repaired). Tim’s houses were $29,000 and $18,000 (until repaired). The difference in value higher priced houses was that Benny’s house was a 3 bedroom while Tim’s was a 2 bedroom.

He said, “You each had an income of over $30,000 last year. You both still owe $420 for the year. Fortunately, you’ve been mostly on target on your quarterly estimated taxes so you’re not going to get hit with any penalties. You were only a $1,000 off on your estimated total income for the year.”

“I can’t believe it. We already paid $8,000 in the quarterly tax estimates,” Tim said.

“Now we have to come up with an additional $420. That hurts,” Benny said.

“I wish I could have saved you more money, but you guys are making a lot of money. You’re moving into the higher tax brackets. You hit the 45% tax bracket and are heading for the 50% tax bracket.”

“I can’t wait for Reagan.”

Cathy asked, “What about Reagan?”

“Never mind,” Tim said.

Cathy wrote the checks and handed them over to Ted. The check would be submitted with their form. Ted stuffed everything into an envelope and then handed it back to Cathy. Everything was packaged up and ready to mail to the IRS. Last year’s taxes were completed.

“Now about your first quarter estimated taxes,” Ted said.

Cathy handed over the forms she had filled out. Ted looked them over. He went over to the books and double checked the entries on the forms. Benny and Tim watched him double check Cathy’s work.

“Okay. It looks good to me. All you need to do is write the checks and we’ll get this submitted.”

“Are you kidding me? We’re getting robbed,” Benny complained.

“What do you mean?”

Cathy just rolled her eyes. She’d heard them both complain about how much they were going to have to pay.

“We were hoping that it was wrong.”

“It’s not. You owe $2650 each.”

“It’s got to be wrong,” Tim said.

“Based on what you’ve made during the first quarter, you’re each on target to hit $34,000 this year. Your final taxes will be $10,300 and you’re going to have to pay the maximum social security tax at the self-employed rate.”

“What can we do to keep more of our money?”

“You need to incorporate.”

“We don’t want to do that. It’s too much paperwork.”

“Then you need to buy something for the company with the money.”

“Like what?”

“Well, you can buy a new office for your business and convert the one you have to a rental property. I’d suggest a small office building.”

“I don’t know if we can raise the money for an office building.”

“You can borrow against the worth of your company.”

“We can’t borrow that much.”

“Sure you can,” Ted said.

“How much are you saying we can borrow?”

“Your company is valued at $530,000.”

“No. It’s around $150,000,” Benny said earning a head nod from Tim.

Having told them that figure several times, Cathy said, “That’s your assets on hand. That doesn’t factor into account how much you could sell it for. Two Guys Working is a very profitable business. You’ve got contracts that will bring in a lot of money. You’ve got the software that’s raking in big bucks.”

“Okay,” Benny said grumpily.

Tim said, “We don’t need another office. We barely use the one we have.”

Ted studied the two young men for a moment. He said, “Okay. Let me explain it in simple terms. The amount of money you guys are making exploded last year and, unfortunately, you didn’t take the steps necessary to save yourself on taxes. I told you that you need to restructure your business. Make it pay the taxes rather than you.”

“We like our company as it is,” Benny said with a frown.

“It’s not working. You’re at the 45% tax bracket. If you want to stay an LLC, you need to drop down a couple of tax brackets in a way that lets you convert that money into some kind of asset. Buying a new office is one way. Another way is to buy another company car or two. You’ve got a van and truck. You could use a new sedan. It would serve a business function that the van and the truck can’t. Each thousand you drop off your income is $450 in taxes that you don’t have to pay. If you buy a car for $6,000 dollars, that would save you each $1,350 in taxes. If you buy two, you can each more than double your savings. Your individual income will drop down to $28,000 and your tax bill will be roughly $7,500 plus the maximum social security. If you don’t do it, your income will be $34,000 and your tax bill will be $10,200. That’s a significant difference.”

Tim said, “I guess I should have let the company buy the Jeep for me.”

“It’s too late now,” Benny said. “What else can we do?”

“Benny, you can also get the business to pay for your college tuition. It’s an education expense relevant to your software activities. Tim, you can work on getting licensed by taking a course or two. There’s another couple thousand you can save. You’re spending it anyway, you might as well get a benefit out of it.”

“I suppose we can do that,” Benny said.

“You both can travel to engineering conferences and trade shows. There’s got to be trade shows in Las Vegas, Hollywood, Orlando, or Washington. Go there and take some time sight seeing. Your trips would be tax deductible. That includes travel costs, food, lodging, fees, and some out of pocket expenses.

“All of that is a stop gap measure. Every time you start making more profit, you’re going to have to buy more things, hire more people, or pay more taxes. One day, you’re going to run out of things to buy for your business. You’re a couple hundred dollars from hitting the 50% rate. The year before last you were at the 34% rate. Last year, you were in the 40% tax bracket. This year, you two are headed towards the 50% tax bracket.”

Knowing what was planned, Cathy said, “In a year or two, they’ll be headed towards the 70% tax bracket.”

Ted looked over at Cathy with surprise. Reaching that tax bracket required them to make over $102,000 a year. She had uttered that statement with the kind of confidence suggesting that she knew exactly what their plans were and believed they would be successful. He asked, “How? Why?”

The price of silver had slowly climbed to where it was hovering around $7.50 an ounce. It had been $6.02 on the first of the year. They had bought into it when it was $5.00 an ounce. Somehow, they were making more money than what the basic change in price suggested. They kept meaning to talk to Robert about why it was performing better than anticipated, but it just kept getting shuffled off to the side when more important things arose.

“They’ve got a capital gains opportunity that could easily net them capital gains of $700,000 on an original $500 investment along with what they’ve added to it since their initial investment.”

Ted couldn’t believe what he was hearing. They expected to turn $500 into $700,000! That was incredible. He looked from one to another wanting to see if any of them lacked confidence in their plan. They were each just looking back at him as if that kind of return was normal.

“You are going to lose 70% of that income unless you do something now.”

“What can we do? The tax game is rigged,” Tim said.

Ted said, “Benny and Tim, you have to change to a corporation. It’ll pay a tax on profits and you’ll have to pay personal income tax on what your corporation pays you, but it will allow you to reduce your overall tax burden, without reducing the income to the company. You’ll be able to pull more money out of corporation for your use.”

“Benny what can we do?”

“I don’t know,” Benny answered with real frustration in his voice. In one of the few times, he used a swear word, “I’ve racked my brain thinking about it. There’s nothing I can do to understand it, that doesn’t require selling my soul to the devil himself. I just don’t get it.”

Cathy said, “Benny, I don’t understand. You’re brilliant. You can solve nearly any problem we bring you. Why can’t you get a handle on taxes?”

“It’s ugly. I read that tax book and the structure it creates in my mind is warped and twisted. There’s nothing beautiful about it. Nothing. Absolutely nothing is beautiful about it. It’s nasty like a disease ridden whore. I feel unclean just reading the material. It can’t be understood because there’s no underlying structure that gives it symmetry, order, or a cohesive form. It is not rational. I honestly believe it can’t be understood.”

“Okay,” Cathy said she tried to get the conversation steered away from taxes. “I see. You still need to...”