Saturday, November 15, 2014

Lemons and Lemonade

GE was the first major company to consciously make their tax division a profit center. They have hired an army of the finest tax attorneys, lawyers, and former IRS executives money can buy to maximize the use of the existing tax code to their shareholders’ advantage. They are doing a pretty good job. In 2010 GE reported $14.2 billion in profit. They paid nothing in taxes. Instead GE claimed a tax benefit of $3.2 billion. In order to achieve these miracles GE files annual tax returns that run over 57,000 pages! As of April 2014 there were “only” 73,954 pages in the entire U.S. tax code.

I have used these facts to fuel my private rants about the insanity of our existing tax code, but this blog is not about cursing the darkness. It is my desire to encourage my readers and myself to keep on keeping on, trying to find a way to financial freedom in spite of the obstacles, even those shrouded in darkness.

GE is playing the game by the rules and winning. Given the amount of negative press the company gets for paying nothing in corporate income tax on $14 billion in profits, it is safe to assume that their tax return is one of the most carefully audited returns in the country. As an American, I play the game by two sets of rules. The first set of rules is the financial realities of the present moment. I am limited by the laws of our land and our current economic reality. The second set of laws is more stringent. They are found in Holy Scripture and hopefully in my heart.

How can you use the rules and your current situation to find a winning edge? As the old school motivational speakers ask, “How can you turn your lemons into lemonade?” Look around you. Someone is playing your game and winning. How are they doing it? What can you learn from their example? How can you apply what you have learned to your life?

I remember back in the early-mid seventies when I was earning something on the order of $9,000 a year, my wife’s cousin, a professional photographer and artist, managed to get a $10,000 federal grant to photograph tombstones in Southern cemeteries. My first reaction was anger. I was appalled at this waste of my tax dollars. Fortunately it didn’t take me very long to realize that my wife’s cousin was a very smart woman who found a way to game the system to her advantage. Instead of hating on her or the many ways our Government finds to waste taxpayer dollars, I decided I should listen to her more closely. Maybe I could learn something of value from a person who was finding a way to follow her dreams.

From her I learned art is a business. She consciously developed a network of acquaintances and customers that would allow her to connect with the right people in her industry, ultimately landing one woman shows in New York galleries. Of course she had to use her talents to produce a high quality product, but I learned that talent and a quality product is not enough. An artist either needs to be a businesswoman or find a good business manager to achieve success and financial freedom.

What could an individual investor learn from GE? Back when I bought my first home I received contradictory information from calls to the IRS on how to fill out my tax return, so I went to a local CPA. He smiled when he discovered that after buying the house, I rented it back to the people living in the house until their new home was complete. I just converted rental property into real property, earning a $3,000 deduction. At that point I decided it would be foolish for me to attempt to file my own tax return when I could hire a professional to do it for less than $200. My tax returns are more complicated than they were in 1987. It costs considerably more than $200 to complete my tax returns for the Feds and two states. Last year my combined forms ran 82 pages. I am a plain vanilla investor. I buy mostly index funds and conservative dividend paying stocks (including GE). I seldom sell anything. My taxes should not be that complicated, but they are. I consider the money I pay my CPA one of my best investments. Look at how seeking professional advice before paying taxes is working for GE. Benefit from their example.

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