Many of you reading this can remember where you were when you had “the talk” with your parents. Some kids figure it out on their own; other more responsible parents (innocent of this charge) take the issue head-on by sitting down and talking with their kids. I’ve heard that some parents use charts and some even go to a class (with their kids!). I haven’t checked, but I’m pretty sure there must now be “an app for that”—parenting made easy, courtesy of Steve Jobs.
After collecting myself, we pulled into a parking lot and the talk ensued—quick, succinct and to the point. I didn’t have much time and I was going to do a brief overview with the full talk to occur later that evening with her mother who really has some strong feelings about the topic. “Do your friends talk about it?” I quickly asked, and sensing the concern in my voice, she politely said “no.” Thank goodness, I thought to myself, but she went on. “I heard you and mom talking about it last night” (uh-oh) “and mom was talking about it with the neighbor on the phone too.” (WITW!) “I think I heard her talking about it out loud after watching the news, too.” I was slack-jawed.
As you can imagine, this parent was overcome by youthful awareness and the pressing questions surrounding taxes.
Since that fateful ride in the truck and the parking lot crash course in taxation, I have been strafed with questions about why adults pay taxes, who made taxes, how are they collected, what are they used for, do we ever get them back…and the list goes on and on and on. Curiosity has also spread through the family. We have what is referred to in the world of geese as a gaggle of children. They are inquisitive and the conversation migrates quickly (and at times resembles honking), is painfully direct, and typically not restrained by common sense. Although my wife and I are affectionately referred to as “tax hawks,” I struggle to explain all the nuances of the how’s and why’s of taxes, especially the rates.
About the time of the initial “talk”, my state was in the throes of a tax bill that would not only raise taxes, but would introduce new taxes on professional services (since that time, the professional services tax has been stricken from the proposal). I was explaining what that meant as a lesson since one of the children is learning percentages in math class. We did the math and it was interesting to hear the banter back and forth between siblings.
The part my children thought was really fun to listen to was my explanation of personal income and tax rates. You can image the stunned look on my daughter’s face when she said, “Uh dad, you mean some people pay half of their income in taxes?” (Take that percentage of a weekly allowance in exchange for basic “services” provided in the house and watch the reaction.) “Yes,” I said, “but it’s different for you because you wouldn’t have to pay tax because you fall below the state and federal limit.” Without flinching, her response was classic. “But when I get older and I get a good job, will I pay half?” I gave my typical (non-classic) response—“Its depends.”
Recently there have discussions about revenue increases in a proposed California state budget. This is combined with a recent case which challenged the 50% exclusion on QSBS corporations, meaning that they pay only half the regular California tax rate on the gain (about 4.5 percent instead of 9 percent). This would be a crippling retroactive tax for business generators (read “job creators”) that are a vital piece of California’s economy. What’s even more troubling is that many entrepreneurs go for years foregoing market income (and in some cases, any income at all) and will have a massive tax event upon exit (think liquidation event, sale, merger, IPO, etc.) I have no idea what the current status of this situation is as it will likely be subject to litigation for some time as well. Even if you think that you have your tax structure in order, that isn’t necessarily the case. (Anything that has the word “retroactive” in it has to be looked at with some suspicion.)
It’s never too late to have “the talk.” As a matter of fact, if you haven’t had a review on your existing and future tax outlook, there is no better time. Many changes are on the horizon for you and your business regardless whether you are an entrepreneur in a pre-revenue company or an existing company that is facing new government mandates for health insurance. Or you could be thinking about selling your company in the near or distant future. Guess what? Planning now, even if a sale is not in the forefront of your mind, may be the best thing that you ever did for yourself, your company, your employees, your shareholders, your stakeholders—and maybe even that youth in the backseat of your truck who asks, “Dad, I have another question….”
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