US Mortgage Collapse predicted 8 years ago by Canadian CPA Tax Instructor

Written by on September 20, 2008 | General

Deja vu finally took full effect for me this week!  So much so that I pulled out my Certified Public Accountant (“CPA”) reciprocity course notes from 2000 to see if I could track down the name of my instructor who called it!  

In 2000, I took the US CPA reciprocity exam for Canadian Chartered Accountants who at the time were flooding down to the US to bolster the tech accounting ranks during the boom. The CPA US tax instructor was actually a Canadian tax specialist who also knew US taxes and therefore a very fitting instructor for the course.  The material was focused on the differences between the two tax systems and as such he couldn’t help but evaluate the pros and cons of each. 

There was one adament issue that he emphasized that I remembered crystal clear- the deductibility of US mortgage interest against other forms of income (ie. salaries) will one day come back to haunt the US economy!

Fast forward eight years and the American economy is facing one of the most serious economic challenges of the last 70 years as a result of … a mortgage meltdown! 

Here’s the problem and I saw it first hand as the controller of a Bay Area biotech company with employees coming to me regularly with mortgage renewal paperwork and W4 withholding calculations, etc.   This tax rule that allows people to deduct mortage interest “home equity indebtedness” against other forms of income such as salary coupled with the capital gains exemption for personal residences (not different in Canada) is a bona fide tax planning exercise!  To capitalize on it fully, you have to maximize your debt (buy as much house as the bank will let you) and pay it down as slowly as possibly!  

As a result, the Mortgage companies in the US have come up with some pretty aggressive mortgage strategies over the years… it seems like a collective effort to minimize paying the IRS! 

Anyone see the obvious problem with this…?  I just googled this and I see a splattering of this issue out there but you won’t hear too many American’s talk about it.  Who would dare challenge a tax law that so clearly benefits so many homeowners in the US… until it’s too late that is!?

Accounting buddies out there who took the CPA course… who was the instructor I’m talking about as I can’t seem to figure out who it was as he deserves a pat on the back!

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BC Technology Startup in Journal Entries!

Written by on September 14, 2008 | Accounting Best Practice, Technology Startups

 
Note: All numbers & GST calcs are approximations and tax issues should be discussed with a qualified professional tax advisor!

Incorporate Business 
Dr. Incorporation Costs $1,000
Cr. Accrued Accounts Payable $1,000

Open bank and put in consideration for founder’s shares and some working capital
Dr. Bank $5,000
Cr. Shareholder’s loan 4,999
Cr. Common shares 1
 
Go to NCIX or Apple World and buy shwanky computer on credit card.  Go home and sign up for 30 day free QCDocs and crank out your first expense report using CSV download- Hey nice policy it reminded me to get my mileage and parking in there!!)
Dr. Computer assets $3,745
Dr. GST receivable 210
Cr. Shareholder payables $3955
Dr. Mileage & Parking expense $33.65
Dr. GST receivable 1.35
Cr. Shareholder payables $35
 
Few weeks later the legal bill for incorporation shows up… dam they never mentioned those Ministry of Finance charges and PST… what’s up with that… lawyers in the States don’t have to put up with that!?
Dr. Incorpation costs $250
Dr. Accrued Accounts Payable 1,000
Dr. GST receivable 119
Cr. Accounts payable $1,369
 
Set yourself up with payroll and bootstrap doing SR&ED eligible work for a while making monthly payroll remittances only.
Dr. R&D wages $5,000
Dr. Payroll expenses (just CPP if you own more then 40%)) 233
Cr. Shareholder payable $3,782
Cr. Due to Receiver General 1,451
 
Cut a cheque by the 15th of the next month to pay the Receiver General and pay the lawyers tab
Dr. Due to Receiver General $1,451
Dr. Accounts payable 1,369
Cr. Bank Account $1,451
Cr. Bank Account 1,369
 
Oh no cash running low better go convince Family, Friends or Angel you met at Bootup Labs to finance your build.
Dr. Cash $50,000
Cr.  Common Shares or Convertible Note (See Top 10 list)? $50,000
 
Carry on doing development only taking out what you need to live and file your tax return with SR&ED.  Remember to use QCDocs to track your time for SR&ED and bills/etc. along route so you can get Tandem Accounting to crank out some QB’s financials in a flash and shoot to Rolfe Bensen, Entrust or Strategix to crank out a T2 and T661for you.  Might call Ed Levinson who sits across from me at Bootup or Nick Arden somewhere along the line to tee up S
R&ED writeup!
Dr. SR&ED Receivable $22,825 (or there abouts)
Cr. Research and Development contra expense $22,825

Get a cheque up to 6 months later if you clear audits, etc. if applicable.
Dr. Bank Account  $22,825
Cr.  Cr. Sr&ED Receivalbe $22,825

Note: if you raise more money and do other stuff like marketing, business planning, etc. you will get the full benefit of the Proxy method for SR&ED and get even more money back!  Investors will be impressed that you can get extra mileage out of their investments and recommend you to their richer friends and you get more money.

Eventually you build some skookum tech and you get aquired by Google for obseen cash and you and your investors each walk away with at least the minimum $750,000 tax free capital gain for having developed such a successful qualifying small business corporation.

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