Flash: Congress Tries to Recapture Bonuses Through Taxes

In what may prove to be one of the most asinine attempts at penalizing people for doing their jobs, each house of Congress has passed (or is considering) new bills that penalize companies that have received Stimulus (Porkulus) money and the employees receiving bonuses under contract.

If you missed the news, the House version of the bill (HR 1586) would impose a 90% tax on companies paying bonuses, and the Senate version would impose an excise tax of 35% each on the company and the employee, if the employee's household compensation exceeds $250,000. One would expect that state taxes would be at least 10%, thus taking away the entire bonus and returning it to government coffers, under the House version.

What the American people are not being told is that most of these bonuses are required as part of compensation packages that were negotiated and signed long before any bailouts occurred. The companies are legally obligated to pay these bonuses, and in some cases, the bonus comprises the majority of an employee's compensation.

The original Stimulus Package contained a provision that would have kept bonuses from being paid by Stimulus Package recipient companies. However, the Obama Administration didn't think that it would be legal to do this, so they removed the limitation from the package, over the howls of Republican lawmakers.

Now, the Administration is pushing for this new tax. Here is my question, "If it would have been illegal to block the bonuses, where is the legality of passing an ex-post-facto tax on this money?"

People have decried executive compensation models for decades. However, the reality is that companies cannot attract top performing executives without these compensation packages. The talent will simply go to another company that offers a better incentive package. This means that the companies that are already failing and that are desperately looking for new leadership will not find many takers.

Regardless of what version of this bill finally passes, look for a number of class-action lawsuits to be filed on behalf of the affected employees. The government will probably spend more money defending itself against the lawsuit than it would raise in new taxes. Since the government already owns 80% of AIG, it seems that Congress should be able to call a special Shareholders' Meeting, elect new Directors, and then voluntarily refund whatever amount of assistance they deem appropriate.

This is just a case of buyer's remorse, and it penalizes the wrong people. Should executives get a bonus for running a company into the ground? Of course not. However, in the AIG example, over 400 people are receiving bonuses. I have to think that not all of these people are in senior management positions of executive-level responsibility. Many of these people are probably regular working stiffs, who depend on this bonus to round out their incomes each year.

I have worked in businesses where I received a bonus based on what I accomplished during the year. I would always work hard to ensure that I qualified for my bonus. If the guys at the top screwed up the company by not doing their jobs, why should I get shafted, when I did the job I was hired to perform, and earned the bonus for which I was eligible? What if this was you?

I invite and welcome your comments.

Business Depreciation

Since we are now nearing our annual day of reckoning (aka Income Tax Filing Day), it only seems appropriate that I take on a tax issue on which I often receive questions. Today, we will be discussing Business Depreciation, which is a tax mechanism that offers various ways for a business to apply the cost of capital assets against the earnings of that business.

This edition of "Personal Finance for Real People" sponsored by:

First things first, let's get the legal stuff out of the way. I am not a Certified Public Accountant. Therefore, I implore you to seek the services of a CPA or Enrolled Agent prior to making any decisions based on what you are about to read here. I make no guarantee, warranty, or representation for the information that appears herein. I do believe that everything here is accurate, but please seek the advice of a qualified, licensed professional before acting on this information. I provide this information only as a general guide to depreciation. This is not a complete detail of all the ways that depreciation applies, so please do not regard it as the end-all information-wise.

What is Depreciation (and for that matter, Amortization, Accretion, etc.)? According to Wikipedia, "depreciation is a term used to describe any method of attributing the historical or purchase cost of an asset, across its useful life...." Amortization relates to the depreciation of intangible assets, such as Goodwill, Patents, and the like. Accretion generally relates to changes in bond or stock prices that occur as the result of a particular transaction. This post will focus on depreciation.

Property that can be depreciated includes leasehold improvements to your business establishment, business equipment and machinery, vehicles and boats, structures owned by your business (i.e. buildings), and other fixed assets. You may not depreciate land, inventory, or equipment that is leased (i.e. rented), unless the equipment is intended to be purchased via lease and buyout. Capital assets purchased and disposed in the same tax year are also not subject to depreciation.

The US Internal Revenue Service allows several methods for computing depreciation. A complete source of information regarding depreciation may be found in IRS Publication 946. Step one is to determine the useful life of the asset. Each asset to be depreciated must have a useful life of more than one year. If not, you would simply expense the item and be done with it.

For those items that have a calculable useful life of more than one year, these would generally be depreciated, unless they are excepted items as mentioned above. There are other exceptions, so be sure to review IRS Publications and speak to your tax professional for advice specific to your situation.

Over the life of the asset, you will need to know three basic pieces of information: The date the item was placed in service, the cost basis of the item, and the estimated useful life of the item. From this information, you can calculate depreciation using one of several methods, including Straight Line, MACRS (General or Adjusted Depreciation Systems), Income Forecast, and Units of Production. It is not only possible, but probable that you will employ different methods of depreciation for your fixed assets (i.e. Some could be subject to MACRS, while some are Straight-Line).

For tax purposes, in addition to the depreciation methods listed above, under Section 179 of the Internal Revenue code, a business may write-off up to $125,000 under this section (for 2007), with some exceptions. If the business is located in an Enterprise Zone, this deduction may be increased, and some property is only partially eligible for Section 179 treatment (such as an SUV).

Depending on the type of property, the recovery period may be as short as three to as long as 25 years, with real property recovery periods being 27.5 or 39 years. Some property can be lumped together with similar property, with only the lump sums reported to the IRS each year, but other types of property must be listed (itemized) on your tax forms. Examples of listed property include passenger automobiles, specified commercial vehicles (including aircraft), computers and peripherals, and certain other property.

It is important to keep accurate records of the business use of all property, but especially with respect to vehicles and business property that could also be used for non-business purposes, such as a laptop computer in an employee's possession or a cell phone intended for business use.

If your business has capital assets, be sure to treat them properly with respect to the IRS' rules for Depreciation and Amortization. If you have questions about the proper treatment of assets on your books as well as on your tax return, be sure to consult a qualified, licensed tax professional in your area. If you prepare your own taxes, using TurboTax or another program, be sure to carefully follow the instructions included with the program, and carefully enter the information for each asset.

That's all for this week. Happy filing!