Reuters Money

Even financial gurus make money mistakes

I bought Lehman Brothers.

There, I said it. My dark secret, finally out in the open. Watching financial stocks drop like stones in the fall of 2008, I figured it was a classic case of investor panic. After Lehman went from over $90 to under $10, I almost felt bad at getting such a bargain. After all, it couldn’t go to zero, right?

And then it did. My modest investment was wiped out, and I couldn’t even stand to look at the Wall Street Journal for a long time afterwards. My point is that even personal-finance journalists, doling out our sage advice, can make bone-headed financial decisions. Really big ones.

That in mind, I asked a few of the nation’s top personal-finance commentators about their own missteps that they’d love to forget. You might enjoy the schadenfreude, of reveling in others’ misery. But hopefully you can also leverage these lessons to avoid similar screw-ups in your own life.

Think of it as a financial group therapy session. Because hey, we’re all human.

Beth Kobliner, author, Get a Financial Life: Personal Finance in Your Twenties and Thirties.

When I was first offered a job as a writer at Time Inc., I was just 22. I remember having an interview with then-managing editor of Money magazine, Landon Jones. That afternoon, he called me up at my office and offered me the job with a starting salary of $30,000. I was thrilled! ‘Yes!’ I shouted into the phone. ‘Sounds great!’ I could finally afford to move out of my parents’ place in Queens and move into Manhattan, into a one-bedroom on the upper, upper East Side.

Raw deal: Why Groupon might be bad for business

When Fan Bi wanted to get the word out about his new company, Blank Label, he instantly thought of popular daily-deal sites like Groupon and LivingSocial. By offering a healthy discount for custom-designed dress shirts, “it wouldn’t cost us anything up-front, and we’d get all these new customers,” Bi remembers. “It sounded like a no-brainer.”

So he signed up with the deal site BuyWithMe, offering $100 gift certificates for $50. Only thing is, the discount worked a little too well. Almost 250 customers snapped them up, and after the deal site took its cut, “we were losing around six dollars a shirt,” he says. “If we’re losing money on every single order, it’s not even worth doing.”

It’s a common refrain from merchants who are testing out the increasingly popular daily-deal sites. For customers, as long as you actually cash in the coupon, it’s often a terrific bargain; for business owners, it can be a riskier gamble than they realize.

According to a new study by researchers at Houston’s Rice University, such promotions lost money for more than a quarter of businesses surveyed, and less than half said they would run such a deal again. “Consumers are getting a heavily subsidized product or service, so for them it’s a great deal,” says Utpal Dholakia, a Rice management professor and author of the report. “But businesses are hoping that those buyers will come back again and again, and by and large, they’re not achieving that goal.”

Indeed, for business owners, there are a number of potential mines that could blow up in your face. If the discount is too deep; if the deal site’s take is too large; if the duration is too long; or if those new customers never come back to pay usual retail prices, then you could be seriously endangering your bottom line.

That’s what Olivia Trevino found out. When Trevino offered Groupon discounts for electrolysis treatments at her Seattle skin-care shop, the hundreds who signed up made her think twice about ever doing a daily deal again. “I can’t just give stuff away,” says Trevino, whose commission-based staff started to grumble about the swarming hordes of bargain-lovers. “I have to pay my staff, and make a little money myself. How am I supposed to pay my bills and my rent?”

To be sure, there are strategies you can employ to make sure you’re not sunk by an overly popular promotion. A few tips from the experts:

Self-employed? When to graduate from sole proprietorship

When Darin Edmonds started Waterproofing Solutions, Inc. earlier this year he knew making a go of it wouldn’t be easy in a struggling economy. But he was determined to get things off on the right foot, and to him part of doing that was putting a wall between his personal and business assets by setting up a Subchapter S Corporation.

“When I began in this business 21 years ago it was okay for me to start out as a sole proprietor. At this stage in my life, when I have personal assets to protect, that’s no longer a sensible option,” says the 46-year-old Corona, California, contractor.

Whether they are running a small side business, investing in real estate, or are established professional service or trade professionals like Edmonds, go-it-alone, self-employed individuals typically start out as sole proprietors because it’s easy and relatively uncomplicated. Under a sole proprietorship — or general partnership if there is more than one owner –a business can get started simply by hanging out a shingle.

By contrast, while separate business entities such as limited liability companies or Subchapter S Corporations can shield personal assets and offer potential tax benefits, they also come with more paperwork and cost. Edmonds paid nearly $3,000 to have a legal professional set up his corporation and file the appropriate paperwork with the state, and will need to pay state annual fees as well. His accounting costs are also likely to be higher. “The peace of mind is well worth it,” he says.

Not everyone needs to form a separate business entity, says Johanna Sweaney Salt, a certified public accountant and partner at Kaufman Schmid Gray & Salt in Claremont, California. “There isn’t a lot of trouble a portrait photographer can get into, and there is always professional liability or umbrella coverage as a backup,” says Sweaney Salt, who nonetheless cautions that people should consult an attorney on such issues. “A lot of business owners complicate things when they really don’t have to.”

Others believe that those who don’t cordon off business and personal assets face a potential legal minefield, even for seemingly low-risk businesses.

“Let’s say you’re a sole proprietor owner of a printing shop who sends an employee out to get some office supplies,” says Phoenix, Arizona attorney Richard Keyt, whose firm sets up an average of over 450 businesses a year, most of them LLCs. “If that employee runs a red light and hits someone, your personal assets could be used to satisfy any legal judgment.”

“Locavesting”: Capitalism for Main Street

You’ve heard of eating local and shopping local –  now a new book urges you to take the same approach to your portfolio.  Locavesting: The revolution in local investing and how to profit from it guides readers through the idea that investing in local businesses, instead of faceless conglomerates, can not only benefit your local economy, it can boost your bottom line, too.

The book, by freelance journalist Amy Cortese, evolved out of a story she wrote on local stock exchanges in the wake of the financial meltdown.

“People were coming up with new ways to funnel more investment capital to the locally owned companies that create jobs and healthy communities and are too often ignored by the financial establishment,” she says. Locavesting is about restoring the bonds between investors and companies. “It’s capitalism for Main Street.”

Cortese gives Reuters an inside look at the world of locavesting and how you can get started.

The book really exposes the cracks in today’s financial system — how does it highlight the need for “locavesting”?

I think what the financial crisis did was strip bare the inner workings of Wall Street and expose just how greedy and self-interested it had become. And there was a stark contrast between what was happening on Main Street — where people were out of jobs, homes were being foreclosed, small businesses couldn’t get funding — and here you had the big bailout, and shortly afterwards, Wall Street came roaring back. It really exposed, for a lot of people, the dichotomy of Main Street versus Wall Street. And a lot of people, myself included, were looking for alternatives. The fact was, Wall Street was not taking care of Main Street — and neither was government, really. So if something was going to happen, people had to take it upon themselves.

Early in the book you pose the question, “What would the world look like if we invested 50 percent of our assets within 50 miles of where we live?”  Any ideas?

Kill the mortgage deduction and give it to entrepreneurs

Somehow I don’t think President Obama had the home-mortgage interest deduction in mind when he mentioned the U.S. tax code before the U.S. Chamber of Commerce this week.

Yet winding down and eliminating this write-off for homes would be good for business. It’s unfair, doing nothing to revive the housing market and can be put to better use shifting it to entrepreneurs to create jobs.

Most of the job creation in the U.S. economy comes from small businesses, which typically have no public shareholders to sate and are not primarily interested in fattening pay packages of overpaid executives.

The home mortgage deduction needs to go because it doesn’t make housing less expensive, either. If anything, it makes homes more expensive because the subsidy inflates prices. Most homebuyers don’t even itemize to take advantage of it. Nixing it would make homes more affordable.

As Alan Mallach, senior fellow at the Center for Community Progress, wrote in this space: “It is one of the most regressive parts of the tax code, since it affects all house prices, including the price of houses bought by lower-income home buyers, who rarely itemize and get little benefit from the deduction.”

Mallach cites one study found that “barely 10 percent of homeowners earning less than $30,000 take the deduction, but they pay higher prices for their homes to benefit more well-off homeowners. On top if this, it is projected to add $120 billion to the federal deficit next year.”

Will getting rid of the write-off deep-six the already flagging U.S. home market? Mallach noted that Italy pared its residential housing deduction in 1992 and maintains a higher home ownership rate than the U.S.

Will businesses take advantage of tax rules to buy new equipment?

If you run a business, and haven’t been paying attention to the depreciation rules in the tax bill, now’s the time to take a look as there are quite substantial tax incentives for buying new property that you can take advantage of this year and next only.

The so-called “bonus depreciation” rules, which allow businesses to expense part or all of their purchases of new assets immediately, rather than depreciating them over many years, have been extended and expanded. For the rest of 2010 and through 2011, bonus depreciation is set at 100 percent; in 2012, the bonus depreciation goes back to 50 percent, and, after that, it’s slated to disappear.

At the same time, the amount of property that small businesses can write off under Section 179, which permits them to expense rather than depreciate certain assets, has been increased to $500,000 in 2010 and 2011. It will revert to lower levels after that date. Unlike bonus depreciation, which businesses of any size can choose, the Section 179 rules apply only to small businesses.

This may sound complex, but it can amount to a big benefit for a business that needs a new phone system, new computers or the like. By front-loading the tax benefit, it makes the initial cost of buying that new equipment seem less than it would if it had to be depreciated little by little over many years.

Over the past decade, Congress has repeatedly allowed faster depreciation of assets. The bonus depreciation rules, for example, once applied to only 30 percent of the new asset’s value, then to 50 percent. The current rules, permitting 100 percent bonus depreciation, are the most advantageous to date, and are designed to spur business spending during the economic downturn.

“I think there will be a lot of businesses that take advantage of it,” says Bill Fleming, a managing director in the personal financial services division of PricewaterhouseCoopers. He says that while he was giving a recent presentation about the new 100 percent bonus depreciation rules, one of the businessmen in the audience ran out of the room to bring in his controller; the company, he says, had been thinking of buying a new phone system, but had been holding off to see what would happen with taxes.

Before the tax compromise, Fleming says, business owners were questioning why they’d want to accelerate those writeoffs. After all, a deduction is worth more when tax rates are higher—as many expected they would be—than when they are lower. The math on depreciation for those scenarios is enough to make a person’s head spin.

from Entrepreneurial:

Tax cuts for the rich bad for small business

-- Lew Prince is managing partner of Vintage Vinyl, an independent music store in St. Louis. He is also a member of Business for Shared Prosperity, which has circulated a petition against extending the Bush-era tax cuts. The views expressed are his own. --

As a small business owner for more than 30 years, I have to be reality based.

I budget and make decisions that consider both short- and long-term realities. My company wouldn’t last a week if we kept repeating mistakes.

The Bush tax cuts for the richest Americans were a big mistake. We should let them expire, not repeat the mistake by extending them. It’s an illusion that it will be easier to end them after a two-year extension.

High-end tax cuts haven’t trickled down as job creation. President Bush had the worst job creation record since 1939. The only thing trickling down was economic meltdown, foreclosures, unemployment, business closures and budget cuts.

Contrary to myth, my tax rate doesn’t affect hiring. If I think I can do more business, I hire more workers. The costs of finding, hiring and paying new employees are business expenses. They’re deducted up-front from our taxable income.

We won’t heal our economy by repeating the toxic policies that are harming it.

from Entrepreneurial:

Extending tax cuts eliminates uncertainty

-- Kelly Phillips Erb is a small business owner and practicing tax attorney at the Erb Law Firm in Philadelphia. She is also the author of the popular Tax Girl blog. The views expressed are her own. --

Let’s get a few things straight from the start. I don’t like the so-called Bush tax cuts. I don’t believe in trickle-down economics. And I don’t think it makes good fiscal sense to make the tax cuts permanent.

Yet, as the calendar creeps closer to December 31, I find myself in support of extending the tax cuts.

I know, it doesn’t appear to make sense, but there is a reason. You see, as a small business owner and an attorney who counsels many businesses, I can tell you there is something worse than the fear of higher taxes: the fear of the unknown.

That’s what we have right now.

Uncertainty can paralyze a business. Do you hire new employees now or later? Order more product or wait and see? A certain amount of planning is necessary to ensure that any business runs smoothly. Right now, that’s fairly impossible.

A recent Turbo Tax survey indicated that a majority of taxpayers are not engaging in year-end tax planning due to the uncertainty in the law.

1099 tax rule may bring big pain to small business

The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as for services. That sounds like a technicality, but it’s got small business up in arms.

Here’s why it matters, and what you need to know.

What exactly is the rule, anyway?

The new rule requires all business to file 1099 forms for goods as well as services, if those goods cost over $600 annually (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did. The rule is slated to go into effect in 2012.

Who will it affect?

It will affect all businesses, including sole proprietors, consultants, self-employed people and freelancers, who are considered businesses for tax purposes, but may not think of themselves that way. It also will apply to charities and other tax-exempt organizations. The National Taxpayer Advocate, based on Internal Revenue Service data, figures that it will affect 26 million sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farms, 1 million charities and other tax-exempt organizations, and likely more than 100,000 federal, state and local government entities. All told, that’s more than 38 million taxpayers and taxpaying entities.

Tax rule change causes big small-business ruckus

In the big tax fights of this year, the coming changes to who must get 1099 forms would hardly seem to rate. But for the vast majority of small businesses, these new rules will hit far harder than the estate tax, despite political posturing on that front.

The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as services, if those goods cost over $600 (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did.

As someone who is considered a small business for tax purposes (as are all sole proprietors, consultants and self-employed people), I can’t help but think what this might mean for me. If I buy a new laptop, I’d better get the taxpayer ID number for Apple or Lenovo (depending on if I go Mac or not) and send that form off to wherever their tax department is located. And if I think I might spend more than $600 on pens, notepads, paper and the like at Staples over the course of the year, well, I’d better get their taxpayer ID number, too, and send them a form.

The 1099 form isn’t so bad if you’ve got the data, but the recordkeeping quagmire seems pretty clear. Will businesses that occasionally offer their employees pizza in a conference room need to get the local pizza place’s taxpayer identification number, then track the cost of all those pies to see if they amount to $600? Will truckers be required to send 1099s to the service stations where they fuel up? What about a company’s payments to the electric company to keep the lights on in the office? “It is a tremendous new administrative burden, and it is so senseless,” says Steve Henley, a national tax practice leader at CBIZ MHM, an accounting and financial consultancy.

The theory, of course, is simple: All that paperwork should help close the “tax gap,” the chasm between what Americans owe in taxes and what they actually pay. And  this provision is expected to bring in $17 billion over ten years, which would help offset the costs of the health care bill.

No surprise, the National Federation of Independent Business and a slew of other small-business groups have called for the provision’s repeal. During the debate over the recently enacted small-business lending bill, efforts to get the 1099 reporting requirements repealed failed, though it seems likely that they’ll be modified in some way before 2012.

Already, Internal Revenue Service Commissioner Douglas Shulman has said that the agency will exempt transactions done with credit or debit cards. (A separate law that goes into effect in 2011 requires card processors to file reports to the IRS.)